FHLB Merger Talks May Stir Up Controversy: 'It's too soon to anticipate what their reaction will be to a transaction or structure that hasn't even been determined yet.'.

CHICAGO -- The Federal Home Loan Banks of Chicago and Dallas have started preliminary talks to assess "the benefits and feasibility" of combining their business operations into a yet-to-be-determined joint structure. Mirroring financial market trends, this first-of-its-kind effort in decades may pave the way to new developments within the FHLB system, if what skeptics see as an unlikely agreement succeeds.

President and CEO of the FHLB of Dallas, Terry Smith, and president and CEO of the FHLB of Chicago, Mike Thomas, noted in a joint press release that they are engaged in discussions which focus on "identifying whether and how a combination would produce advantageous results and improved value for members of both organizations and the affordable housing needs of their communities, while also supporting the ongoing strength of the Federal Home Loan Bank System."

It appears, however, there is no clear vision on what kind of joint operation could result from the talks.

Nancy Schachman, spokesperson for the FHLB of Chicago, told MSN it is too soon to comment.

"These are preliminary discussions, there's no structure, there's no plan, there's no agreement," she said. "We don't really know what the structure will be. No. I could say that our two banks initiated the conversations. It's really too soon to say what structure, if any, will result."

Both banks are cooperatives owned by member community development financial institutions in their FHLB districts with comparative assets (as of March 31, 2007) of $53.3 billion for the FHLB of Dallas and $87 billion for the FHLB of Chicago, representing over 900 and about 850 member institutions, respectively.

"If a combination provided an opportunity to enhance our financial performance in a way that's different from what we could do on a standalone, then that would be good. We really want to see whether it is beneficial in providing value to our members, since we are a cooperative, we're owned by our members."