IDB Caught in Mortgage Mess

Donors are questioning the Inter-American Development Bank's judgment after an internal report revealed that the bank lost $1.9 billion on mortgage-securities and other investments.

"The main source of these losses is the IDB's exposure to structured securities (asset-backed and mortgage backed securities) that grew to approximately 60% of the portfolio during the last decade," the IDB's Office of Review and Evaluation concluded in its report, which was submitted to the IDB board of directors in December.

The loss isn't a fatal blow to IDB: In 2008, the bank's investment portfolio totaled $15.9 billion. But it is unclear how exactly these "paper losses" - losses anticipated once an asset is sold - will affect IDB's lending and credit ratings at a time when the bank is helping borrower countries handle repercussions from the ongoing financial crisis, and planning initiatives such as the creation of a so-called "quick-dispersing financing facility" to help shore-up the liquidity of Latin America's banking sector.

The bank's donors are starting to question why IDB so aggressively invested its portfolio in the housing market, while the World Bank, Asian Development Bank and others kept such investments to a minimum.

In a Feb. 5 letter to the IDB, Sen. Richard Lugar said, "The reported scale of the IDB's investment portfolio losses of $1.9 billion, 10 to 100 times higher than the losses of the other development banks, is of grave concern."

Online publication Pro Publica reported that Lugar summoned bank officials to Capitol Hill last week to explain the implications of these losses on IDB's lending and how the bank would prevent such risky decision-making in the future.

If anything, this is another example of how all players in global finance (including their regulators) contributed to the current mess by not questioning the fundamental value of these investments. The irony is that a "lender of last resort" may now be wounded at a time it is most needed.

About the author

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    Oliver Subasinghe

    Oliver joined Devex in late 2008 as an international development correspondent and researcher. He previously served as a microfinance fellow for Kiva in Kenya and Uganda. During his tenure, he worked with Kiva’s field partners to improve their operations and governance. Oliver holds a master's in business from the College of William & Mary.