Atlanta Fed CEO Richard Dorfman: ‘This is the proverbial 100-Year Flood’

Atlanta Business Chronicle - by Joe Rauch Staff Writer

"This is the proverbial 100-Year Flood," said Dorfman.

Dorfman minced no words Wednesday night, speaking as the keynote presenter at the CFA Society of Atlanta's annual Montag Lecture Series.

Dorfman provided a frank assessment of the current market and how the financial and housing crises have converged in the last two years, culminating this week with government bailouts of mortgage guarantors Fannie Mae and Freddie Mac, the federal government buying a 79.9 percent stake in the country's largest insurance company and the collapse of two major U.S. investment banks more than century old, respectively.

He said the only difference between the historic decline of the U.S. economy during the late 1920's and 1930's and today is the "social dislocation and tremendous job losses," associated with the Great Depression.

The shock to the financial system, he said, was comparable in both periods.

Dorfman serves as one of 12 CEOs in the Federal Home Loan Bank system. Congressionally chartered, but privately run, the banks are a lender for commercial banks, credit unions and mortgage companies nationwide. The Federal Home Loan Bank provides liquidity to banks, who borrow against mortgages they use as collateral for the loans.

Those borrowing banks also serve as shareholders for the home loan banks.

Dorfman described a financial system slowly shaking itself apart, despite government intervention, because investors have lost confidence in the most fundamental of questions: What is the value of an asset?

That crisis, he said, began at a basic level -- Homebuyers acquiring homes they truly could not afford long-term.

"This was caused by the astonishing ease of buying houses that weren't truly that cheap," he said.

That, in turn, spread across the system as investors lost confidence in the balance sheets of companies who bet heavily on real estate-related loans and securities.

Dorfman also lamented the billions in investment dollars worldwide sitting on the proverbial sidelines, unwilling to invest in real estate or publicly-traded securities. He views that capital as the key to any long-term recovery, but has no solutions for how to court that capital to invest.

"What are the magic words that will shoot off the starting gun and start this Great Race again?" he said. "I don't know the answer to that."

In the interim, the Federal Home Loan Bank's business, while more challenging in this uncertain market, continues forward.

The Federal Home Loan Bank of Atlanta is the second-largest of the nation's 12 home loan banks, trailing only the Federal Home Loan Bank of San Francisco in size.

He noted that in October and November 2007, as the real estate crisis worsened, the Federal Home Loan Bank of Atlanta loaned $53 billion to banks throughout the Southeast.

"We did it in stride and it went almost unnoticed," he said.

On Wednesday alone, Dorfman said the bank had received numerous requests for loans from institutions ranging from a few million to "multi-billion" in size.

The bank was continuing to lend, eschewing innovation or changes with customers.

Instead, Dorfman said, the bank is re-committing to its most basic purpose: Providing liquidity for banks.

But, Dorfman noted, the Atlanta home loan bank is in the midst of a balancing act.

It must preserve its pristine balance sheet for shareholders who the bank's management has a fiduciary responsibility to serve, but those shareholders are also the only borrowers the bank has.

"Our bias is to lend, but not to endanger what we've built for our shareholders," he said.

To begin any recovery, the market will need consistent economic policy from private sector market leaders and public regulators, but is caught between two extremes, Dorfman said.

Rapid foreclosures, he said, will allow the markets to more quickly assess the values of real estate, re-establish confidence and begin correcting itself sooner.

But that comes at the social cost of families being removed from their homes in droves.

"Foreclosure is the ultimate weapon, but not necessarily the weapon of choice for lenders," he said, cautioning it wasn't necessarily the ideal mechanism for ailing banks to automatically fix their own problems.

The ultimate course to find the bottom, Dorfman said, "is always imperfect and daunting," but stressed regulators and the market need to establish some consistent course of action.

"What we need is consistency and enough time, vigor and intelligence to carry it out," Dorfman said. "If this is managed from a political rocking chair, we'll never get to the bottom," he said.

Dorfman recalled a story from the late 1980's, when a fellow partner at Lehman Bros., was living in San Francisco during one of the major earthquakes that rocked the city.

The man was on the sidewalk when the earthquake struck, tossing him 20 feet in the air.

"It psychically hit his fundamental belief in the safety and security of the Earth under his feet," Dorfman said. "I have to think the same bedrock of belief is gone from the markets."

All contents of this site © American City Business Journals Inc. All rights reserved.