Certain statements in this annual report on Form 10-K, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are forward-looking statements. These forward-looking statements generally are identified by the words “believes,” “projects,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from those expressed, contemplated, or implied by the forward-looking statements or could affect the extent to which a certain plan, objective, projection, estimate, or prediction is realized. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. A detailed discussion of the risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included under “Item 1A-Risk Factors” at page 26.29.

The Federal Home Loan Bank of Des Moines (the Bank, we, us, or our) is a federally chartered corporation that is exempt from all federal, state, and local taxation except real property taxes and is one of 12 district Federal Home Loan Banks (collectively, FHLBanks)(FHLBanks). The FHLBanks were created under the authority of the Federal Home Loan Bank Act of 1932 (FHLBank Act). On July 30, 2008 the passage of the “Housing and Economic Recovery Act of 2008” (Housing Act) amended certain provisions of the FHLBank Act. Prior to the passage of the Housing Act, the Federal Housing Finance Board (Finance Board), an independent agency in the executive branch of the U.S. Government, supervised and regulated the FHLBanks and the Federal Home Loan Bank’s Office of Finance (Office of Finance). With the passage of the Housing Act, the Federal Housing Finance Agency (Finance Agency) was established and became the new independent Federal regulator of the FHLBanks and the Office of Finance, as amended (thewell as for Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac). The Finance Board will be abolished one year after the date of enactment of the Housing Act, which will be on July 30, 2009. During the one-year transition period, the Finance Board will be responsible for winding up its affairs. The Finance Agency’s principal purpose is to ensure that the FHLBanks operate in a safe and sound manner. In addition, the Finance Agency ensures that the FHLBanks carry out their housing finance mission and remain adequately capitalized. The Finance Agency establishes policies and regulations governing the operations of the FHLBanks. Each FHLBank Act), primarily to serveoperates as a sourceseparate entity with its own management, employees, and board of reliable, low costdirectors.

The Bank’s mission is to provide funding and liquidity for financial institutions engaged inits members and housing finance.associates. The FHLBanks serve the publicBank fulfills its mission by enhancing the availabilitybeing a stable resource that can make short- and long-term funding available to members and housing associates through advances, standby letters of funds for residential mortgagescredit, mortgage purchases, and targeted communityhousing and economic development through their member institutions.activities. We serve member institutions and eligible housing associates in Iowa, Minnesota, Missouri, North Dakota, and South Dakota by providing loans, or advances, to those members and purchasing mortgage loans.Dakota. Regulated financial depositories, community development financial institutions, and insurance companies engaged in residential housing finance may apply for membership.

We are a cooperative. This means we are owned by our customers, whom we call members. All members must purchase and maintain membership capital stock in the Bank as a condition of membership based on the amount of their total assets. Each member is also required to purchase and maintain activity-based capital stock to support certain business activities with us. State and local housing authoritiesassociates that meet certain statutory criteria may also borrow from the Bank; while eligible to borrow, housing associates are not members of the Bank and, as such, are not requiredpermitted to and cannot purchase capital stock. All stockholders receive dividends on their capital investment when declared.

The majority of ourOur net income is attributable to the difference between the interest income we earn on our advances, mortgage loans, and investments and the interest expense we pay on our consolidated obligations and member deposits.deposits, as well as any gains and losses on derivative and hedging activities. We operate with narrow margins and expect to be profitable over the long-term based on our prudent lending standards, conservative investment strategies, and diligent risk management practices. Because we operate with narrow margins, the Bank’s net income is sensitive to changes in market conditions that impact the interest we earn and pay.

We do not attempt to maximize our return on equity. Our capital stock is not publicly traded and does not change in value. It is purchased by members at a par value of $100 per share and can beis redeemed by members at $100 per share. We typically pay out the majority of our earnings as dividends, retaining only what is necessary to support safe and sound business operations.

A portion of our annual earnings is used to make interest payments on debt issued by the Resolution Funding Corporation (REFCORP). REFCORP debt was issued by the U.S. Treasury to resolve troubled savings and loansloan institutions in the late 1980s and early 1990s. Additionally, by regulation, we are required to contribute ten percent of regulatory income each year to the Affordable Housing Program (AHP). Through the AHP, the Bank provides grants and subsidized advances to members to support housing for households with incomes at or below 80 percent of the area median.

The turmoilyear ended December 31, 2008 presented many challenges to the Bank and its business model as a result of the credit and liquidity crisis which began in 2007. Historically, the mortgageFHLBanks’ credit quality and credit marketsefficiency have led to ready access to funding at competitive rates. This was proven during the last sixfirst nine months of 2007 created an increased demand for the Bank’s advance products by our members. The Bank system maintains a AAA credit rating and the Bank maintains an individual AAA counterparty credit rating. The Bank, with its efficient access to capital markets and AAA credit rating, responded seamlessly to the sudden increase in demand for advances. The Bank ended 2007 with a record advance balance of $40.4 billion. This compares to an advance balance of $21.9 billion at December 31, 2006. The Bank also took advantage of developments in the mortgage-backed securities (MBS) market. Poor sub-prime mortgage credit performance kept traditional investors out of the market and therefore, in order to raise funds, counterparties were aggressively selling highly rated agency MBS. These purchases increased the Bank’s asset-to-capital (leverage) ratio as well as investment income. Investments at December 31, 2007 were $9.2 billion compared with $8.2 billion at December 31, 2006. The Bank’s MPF program remained competitive during the market crisis2008, as the Bank beganfunded record levels of advances to experiencemembers. However, growing concerns regarding the credit crisis intensified in the last four months of 2008 as a slow down in mortgage prepayments as well as increased originationsresult of continued losses reported by financial institutions, mergers and bankruptcies of financial institutions, and the placement of Fannie Mae and Freddie Mac into conservatorship creating uncertainty regarding their GSE status. In response to the continuing credit and liquidity crisis, during the last six monthsfourth quarter of 2007. Consolidated obligations increased2008 the U.S. Government announced several programs to prevent bank failures and support the increase in assets. At December 31, 2007 and 2006 consolidated obligations were $56.1 billion and $37.8. Foreconomic recovery. These programs ended up having a detailed analysis ofnegative impact on the Bank’s financial conditioncost of funds and resultsour advance balances. The impact of operations see “Item 7 — Management’sthese actions and potential future actions on the Bank and the FHLBank System as a whole are further discussed in “Management’s Discussion and Analysis”Analysis of Financial Condition and Results of Operations” beginning at page 109.41.

Our membership is diverse, including both small and large commercial banks, insurance companies, savings and loan associations, and savings banks, and credit unions. In our five-state district, our membership includes the majority of institutions that are eligible to become members.

Our membership level has stabilized as the number of new members has been offset by exiting members due primarily to mergers and acquisitions. Eligible non-members are primarily smaller institutions that have, thus far, elected not to joinbecome a member of the Bank. Therefore, we do not anticipate a substantial increase in member institutions or that additional members will have a significant impact on the Bank’s future business.

The following table summarizes the Bank’s membership, by type of institution, at December 31, 2008, 2007, 2006, and 2005.2006:

At December 31, 2008 and 2007, and 2006, approximately 9190 percent and 8991 percent of our members were Community Financial Institutions (CFIs). CFIs are defined by the Gramm-Leach-Bliley Act of 1999 (GLB Act) to include all Federal Deposit Insurance Corporation (FDIC)-insured institutions with average total assets over the three prior years equal to or less than $500 million, as adjusted annually for inflation since 1999.inflation. Pursuant to the passage of the Housing Act, the CFI definition was amended to include those institutions that have, as of the date of the transaction at issue, less than $1.0 billion in average total assets over the three years preceding that date (subject to annual adjustment by the Finance Agency Director based on the consumer price index). The expansion of the CFI limit to $1.0 billion added 30 members to the total members eligible for the CFI designation. Institutions designated as CFIs have access tomay pledge certain collateral types not available tothat other members are not permitted to pledge, such as small business, small agri-business, and small farm loans. For 2008, CFIs are FDIC-insured institutions with average total assets equal to or less than $625 million over the prior three-year period. In 2007 and 2006, the average total asset ceiling for CFI designation was $599 million and $587 million.

The Bank manages operations by grouping products and services within two business segments: Member Finance and Mortgage Finance.

The Member Finance segment includes advances, investments (excluding mortgage-backed securities (MBS), HFA, and non-mortgage investmentsSBA investments), and the related funding and hedging of thesethose assets. Member deposits are also included in this segment. Member Finance income is derived primarily from the spread between the yield on advances and investments and the borrowing, member deposit, and hedging costs related to those assets.

The Mortgage Finance segment includes mortgage loans acquiredpurchased through the MPF program, MBS, Housing Finance Authority (HFA)HFA, and SBA investments, and the related funding and hedging of thesethose assets. Mortgage Finance income is derived primarily from the spread between the yield on mortgage loans, MBS, HFA, and HFASBA investments and the borrowing and hedging costs related to those assets.

Each segment also earns income from invested capital. We allocate invested capitalCapital is allocated to the Member Finance and Mortgage Finance segments based on a percentageeach segment’s amount of the average balance of the business segment’s assets; the remaining capital is then allocated to Member Finance.stock, retained earnings, and other comprehensive income.

We use consolidated obligations and derivatives in both segments as part of our funding and interest rate risk management strategies. Accordingly, these products and services are discussed on a combined basis. See “Products and Services — Member Finance and Mortgage Finance” at page 15.17.

For further discussion of these business segments, including total assets by segment, see “Net Interest Income by Segment” at page 4652 and Note 18 of the financial statements and notes for the years ended December 31, 2008, 2007, 2006, and 20052006 at page S-61.S-64.

We carry out our housing finance and community lending mission primarily through our program of advances. We makelending funds which are called advances to our members and eligible housing associates (collectively, borrowers) on the security of. These advances are secured by mortgages and other eligible collateral. Eligible housing associates include certain approved borrowers, as more fully described under the caption “Housing Associates” within this section.

Members and housing associates use our various advance programsproducts as sources of funding for mortgage lending, affordable housing and other community lending (including economic development), liquidity management, and general asset-liability management. Advances are also may be used to provide funds to any CFIby CFIs for loans to small businesses, small farms, and small agribusinesses. Additionally, advances can provide competitively priced wholesale funding to small CFI members who may lack diverse funding sources. Our primary advance products include the following:

The FHLBank Act permits us to make advances to eligible housing associates. Housing associates are approved mortgagees under Title II of the National Housing Act that meet certain additional criteria, including: chartered under law and have succession; subject to inspection and supervision by some governmental agency; and lending their own funds as their principal activity in the mortgage field. Because housing associates are not members, they are not subject to certain provisions of the FHLBank Act that are applicable to members and cannot own our capital stock. The same regulatory lending requirements that apply to our members generally apply to housing associates. Because housing associates are not members, eligible collateral is limited to Federal Housing Administration (FHA) mortgages or Government National Mortgage Association (Ginnie Mae) securities backed by FHA mortgages for pledged collateral. State housing finance agenciesassociates may pledge additional collateral such as cash deposits,deposited in the Bank, or certain residential mortgage loans, with the Bankincluding securities backed by such mortgages, for advances facilitating residential or commercial mortgage lending to benefit low incomelow- and moderate-income individuals or families.

We price advances at a spread over our cost of funds. ForWe may charge a prepayment fee for advances that terminate prior to their stated maturity we charge a prepayment fee except for advances that are terminated onor outside a predetermined call or put date. The fees charged are priced to make us economically indifferent to the prepayment of the advance.

We are required by lawregulation to obtain and maintain a security interest in eligible collateral at the time we originate or renew an advance and throughout the life of the advance. Eligible collateral includes whole first mortgages on improved residential property or securities representing a whole interest in such mortgages; securities issued, insured, or guaranteed by the U.S. Government or any of the government-sponsored housing enterprises (GSE), including without limitation MBS issued or guaranteed by the Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac),Fannie Mae, Freddie Mac, or Ginnie Mae; cash or depositsdeposited in the Bank; and other real estate-related collateral acceptable to the Bank provided such collateral has a readily ascertainable value and the Bank can perfect a security interest in such property. Additionally, CFIs may pledge collateral consisting of secured small business, small farm, or small agribusiness loans, including secured business and agri-business lines of credit. As additional security, the FHLBank Act provides that the Bank has a lien on each borrower’s capital stock in the Bank.Bank; however, capital stock cannot be pledged as collateral to secure credit exposures.

Under the FHLBank Act, any security interest granted to the Bank by any member of the Bank, or any affiliate of any such member, has priority over the claims and rights of any party (including any receiver, conservator, trustee, or similar party having the rights of a lien creditor), other than claims and rights that (1) would be entitled to priority under otherwise applicable law and (2) are held by actual bona fide purchasers for value or by parties that are secured by actual perfected security interests. The Bank may perfect its security interest in accordance with applicable state laws through means such as filing Uniform Commercial Code (UCC) financing statements or through taking possession of collateral.

We generally make advances to borrowers under a blanket lien, which grants us a security interest in all eligible assets of the member to fully secure the member’s indebtedness to the Bank. The Bank generally perfects its security interest under the UCC in the collateral pledged.pledged under the UCC. Other than securities collateral and cash deposits, the Bank does not initially take control of collateral pledged by blanket lien borrowers. In the event of deterioration in the financial condition of a blanket lien borrower, we have the ability to require delivery of pledged collateral sufficient to secure the borrower’s indebtedness to the Bank.

With respect to nonblanket lien borrowers (typically insurance companies and housing associates), we generally take control of collateral through the delivery of cash, securities or mortgages to the Bank or its custodian. For additional information on the Bank’s collateral requirements refer to the “Advances” section on page 108.

The Member Finance investment portfolio is used for liquidity purposes, to maintain our target leverage ratio, and to provide earnings to the Bank. Investment income bolstersmay also bolster or strengthen our capacity to meet our affordable housing and community investment commitments, cover operating expenditures, and satisfy our REFCORP assessment.

To ensure the availability of funds to meet member credit needs, we maintain a short-term investment portfolio comprised of unsecured and secured investments. Unsecured investments generally include interest-bearing deposits, federal funds, commercial paper with highly rated counterparties, and obligations of GSEs. Secured investments may include securities purchased under agreements to resell. The Bank also maintains a long-term investment portfolio, which generally includes secured and unsecured obligations of GSEs and state and local housing agencies.associates. The long-term investment portfolio generally provides us with higher returns than those available in the short-term money markets. Investments

Additionally, the Bank maintains a liquidity portfolio, which includes investments in obligationsTemporary Liquidity Guarantee Program (TLGP) debt. This debt is backed by the full faith and credit of GSEs primarily support management of contingent liquidity.the U.S. Government.

Under Finance BoardAgency regulations, we are prohibited from investing in certain types of securities, including:

In the normal course of business, we may have investments in instruments or obligations of members and their affiliates, including interest-bearing deposits, commercial paper, TLGP, and overnight and term Federal funds. Such investments are governed by the same credit policies and counterparty approval processes as investments with nonmembers. We do not consider whether an approved counterparty is a member or affiliate of a member when contemplating an investment activity. All investment transactions are at arms length and at current market rates. Investments in member and counterparty TLGP debt are not subject to the same counterparty term limits due to the explicit government guarantee.

The Bank does not have any subsidiaries. With the exception of a limited partnership interest in a small business investment corporation,Small Business Investment Company (SBIC), the Bank has no equity position in any partnerships, corporations, or off-balance sheet special purpose entities. Our investment in the limited partnership interest was $3.8$3.9 million at December 31, 2007.2008.

We accept deposits from our members, eligible nonmembers, and housing associates. We offer several types of deposit programs, including demand, overnight, and term deposits. Deposit programs provide some of our funding while providing members a low-risk earning asset.

The Bank invests in mortgage loans through the MPF Program, which is a secondary mortgage market structure under which we purchase eligible mortgage loans from participating financial institution members (PFIs) (collectively, MPF loans). MPF loans are conforming conventional and Government (i.e., insured or guaranteed by the FHA, the Department of Veterans Affairs (VA), the Rural Housing Service of the Department of Agriculture (RHS) or the Department of Housing and Urban Development (HUD)) fixed rate mortgage loans secured by one-to-four family residential properties with maturities ranging from 5 years to 30 years or participationsyears. MPF loans may also represent the Bank’s participation in such mortgage loans.loans from other FHLBanks.

There are currently five MPF Loanloan products from which PFIs may choose. Four of these products (Original MPF, MPF 125, MPF Plus, and Original MPF Government) are closed loan products in which the Bank purchases loans that have been acquired or have already been closed by the PFI with its own funds. However, under the MPF 100 product, the Bank “table funds” MPF loans; that is, the Bank provides the funds through the PFI as the Bank’s agent to make the MPF loan to the borrower. The PFI performs all the traditional retail loan origination functions under this and all other MPF products. With respect to the MPF 100 product, the Bank is considered the originator of the MPF loan for accounting purposes since the PFI is acting as our agent when originating the MPF loan; however, we do not collect any origination fees.

For a detailed discussion and analysis of our mortgage portfolio see “Mortgage Loans” within the “Statements of Condition at December 31, 2008 and 2007” section at page 55.61. A detailed discussion of the different MPF products offered by the Bank and their related credit risk is provided in “Mortgage Assets” at page 95.110.

The MPF Provider establishesmaintains the structure of MPF loan products and the eligibility rules for MPF loans.loans as established by the FHLBanks participating in the MPF Program. In addition, the MPF Provider manages the pricing and delivery mechanism for MPF loans and the back-office processing of MPF loans in its role as master servicer and master custodian. The MPF Provider has engaged Wells Fargo Bank N.A. (Wells Fargo) as the vendor for master servicing and as the primary custodian for the MPF Program. The MPF Provider has also contracted with other custodians meeting MPF Program eligibility standards at the request of certain PFIs.

The PFI’s credit enhancement obligation (the credit enhancement amount) arises under its PFI Agreement while the amount and nature of the obligation are determined with respect to each master commitment, which is required for sales of loans to the Bank. Under the Finance Board’sAgency’s Acquired Member Asset regulation, the PFI must “bear the economic consequences” of certain losses with respect to a master commitment based upon the MPF product and other criteria. In other words, the purchase and funding are structured so that the credit risk associated with MPF loans is shared with PFIs.

Typically, a PFI will sign a master commitment to cover all the conventional MPF loans it intends to deliver to us in a year or other time period specified in the master commitment agreement. However, a PFI may also sign a master commitment for original MPF government loans and it may choose to deliver MPF loans under more than one conventional product, or it may choose to use different servicing options and thus have several master commitments opened at any one time. Master commitments may be for shorter periods than one year and may be extended or increased by agreement of the Bank and the PFI. The master commitment defines the pool of MPF loans for which the credit enhancement amount is set so that the risk associated with investing in such pool of MPF loans is equivalent to investing in a AA-rated asset without giving effect to the Bank’s obligation to incur losses up to the amount of the First Loss Account (FLA). See discussion in “Mortgage��Mortgage Assets” at page 95.110.

We have limited our investments in MBS to those that are guaranteed by the U.S. Government, are issued by a GSE, or carry the highest investment grade ratingsrating by any NRSRO at the time of purchase.

We have participated in the MPF shared funding program, which provides a means to distribute both the benefits and the risks of the mortgage loans among a number of parties. The MPF shared funding program was created to (1) provide the FHLBanks with an alternative for managing interest rate and prepayment risks by giving the FHLBanks the ability to transfer those risks to other investors; (2) provide an additional source of liquidity that would allow further expansion of the MPF program; and (3) benefit other FHLBanks and their members by providing investment opportunities in high quality assets.

On March 24, 2008, the Finance Agency (known as the Finance Board at the time of passage) passed a resolution authorizing the FHLBanks to increase their purchases of agency MBS. Pursuant to the resolution, the limit on the FHLBank’s MBS investment authority would increase from 300 percent of regulatory capital to 600 percent of regulatory capital for two years. The resolution required an FHLBank to notify the Finance Agency prior to its first acquisition under the expanded authority and include in its notification a description of the risk management principles underlying its purchase. The expanded authority is limited to Fannie Mae and Freddie Mac securities. The securities purchased under the increased authority must be backed by mortgages that were originated after January 1, 2008 and comply with Federal bank regulatory guidance on non-traditional and subprime mortgage lending. The Bank provided notification to the Finance Agency, and did not receive an objection, for its intention to exercise the expanded investment authority and increase its investments in additional agency MBS to 600 percent of regulatory capital. The Board approved a strategy for the Bank to increase its investments in additional agency MBS in accordance with the Finance Agency resolution up to 450 percent of regulatory capital. At December 31, 20072008 and December 31, 20062007 the book value of MBS owned by the Bank, excluding MPF shared funding certificates, represented approximately 292 percent and 219 percent and 187 percent of total capital (including capital stock classified as mandatorily redeemable). regulatory capital.

We use consolidated obligations and derivatives in the same manner for both Member Finance and Mortgage Finance as part of our funding and interest rate risk management strategies. These products and services are discussed below on a combined basis.

Our primary source of funds to support our business segments is the sale of consolidated obligations, in the capital markets. Consolidated obligations are the joint and several obligations of the FHLBanks, backed only by the financial resources of the 12 FHLBanks. Consolidated obligations are not obligations of the U.S. Government, and the U.S. Government does not guarantee them. Currently, Moody’s Investors Service, Inc. (Moody’s) has rated the consolidated obligations Aaa/P-1 and Standard & Poor’s Ratings Services, a division of McGraw-Hill Companies, Inc. (S&P) has rated them AAA/A-1+.

Although we are primarily liable for the portion of consolidated obligations issued on our behalf, we are also jointly and severally liable with the other 11 FHLBanks for the payment of principal and interest on all consolidated obligations of each of the FHLBanks. The Finance Board,Agency, at its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligation whether or not the consolidated obligation represents a primary liability of such FHLBank. Although it has never happened, to the extent that an FHLBank makes any payment on a consolidated obligation on behalf of another FHLBank that is primarily liable for such consolidated obligation, Finance BoardAgency regulations provide that the paying FHLBank is entitled to reimbursement from the noncomplying FHLBank for any payments made on behalf of the noncomplying FHLBank and other associated costs (including interest to be determined by the Finance Board)Agency). If, however, the Finance BoardAgency determines that the noncomplying FHLBank is unable to satisfy its repayment obligations, the Finance BoardAgency may allocate the outstanding liabilities of the noncomplying FHLBank among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding. The Finance BoardAgency reserves the right to allocate the outstanding liabilities for the consolidated obligations between the FHLBanks in any other manner it may determine to ensure that the FHLBanks operate in a safe and sound manner.

Finance BoardAgency regulations govern the issuance and servicing of consolidated obligations. The FHLBanks issue consolidated obligations through the Office of Finance which has authority under section 11(a) of the FHLBank Act to issue joint and several consolidated obligations on behalf of the FHLBanks. No FHLBank is permitted to issue individual debt under section 11(a) without Finance BoardAgency approval.

Pursuant to Finance BoardAgency regulations, the Office of Finance has adopted policies and procedures for consolidated obligations that may be issued by the FHLBanks. The policies and procedures relate to the frequency and timing of issuance of consolidated obligations, issue size, minimum denomination, selling concessions, underwriter qualifications and selection, currency of issuance, interest rate change or conversion features, call or put features, principal amortization features, and selection of clearing organizations and outside counsel. The Office of Finance has responsibility for facilitating and approving the issuance of the consolidated obligations in accordance with these policies and procedures. In addition, the Office of Finance has the authority to restrict or deny the FHLBanks’ requests to issue consolidated obligations that are otherwise allowed by its policies and procedures if the Office of Finance determines that such action would be inconsistent with the Finance BoardAgency requirement that consolidated obligations be issued efficiently and at the lowest all-in cost over time. The Office of Finance’s authority to restrict or prohibit our requests for issuance of consolidated obligations has not adversely impacted our ability to finance our operations.

Consolidated obligations are generally issued with either fixed or variable rate payment terms that use a variety of indices for interest rate resets including LIBOR, and Constant Maturity Treasury.Treasury, and the Federal funds rate. To meet the specific needs of certain investors in consolidated obligations, both fixed and variable rate obligations may also contain certain embedded features that may result in complex coupon payment terms and call features. When such consolidated obligations are issued on behalf of the Bank, we may concurrently enter into derivative agreements containing offsetting features that effectively alter the terms of the bond to a simple variable rate tied to an index. The Office of Finance may coordinate communication between underwriters, the Bank, and financial institutions that enter into interest rate exchange agreements to facilitate issuance.

The Office of Finance may also coordinate transfers of FHLBank consolidated obligations among other FHLBanks. We may, from time to time, assume the outstanding primary liability of another FHLBank rather than issue new consolidated obligations for which the Bank is the primary obligor. If an FHLBank has acquired excess funding, that FHLBank may offer its debt to the other 11 FHLBanks at the current market rate of interest consistent with what may be expected in the auction process. We may choose to assume the outstanding primary liability of another FHLBank as it would have a known price compared with issuing debt through the auction process where actual pricing is unknown prior to issuance.

Finance BoardAgency regulations require that each FHLBank maintain the following types of assets, free from any lien or pledge, in an amount at least equal to the amount of that FHLBank’s participation in the total consolidated obligations outstanding:

We were in compliance with this requirement at December 31, 20072008 and 2006.2007. See discussion in “Regulatory“Statutory Requirements” at page 65.72.

In addition to being responsible for facilitating and executing the issuance of consolidated obligations, the Office of Finance services all outstanding debt. It also collects information on the Bank System’s unsecured credit exposure to individual counterparties, serves as a source of information for the FHLBanks on capital market developments, and manages the BankFHLBank System’s relationship with the rating agencies for consolidated obligations.obligations, and prepares the FHLBank System’s Combined Financial Reports.

Consolidated bonds satisfyBonds have historically satisfied our intermediate- and long-term funding requirements. Typically, the maturity of these securities ranges from one year to 2030 years, but the maturity is not subject to any statutory or regulatory limit. We also issue index amortizing notes which have amortization schedules linked to specific reference pools of mortgages. The redemption schedule of the note is dependent on the amortization schedule of the underlying reference pool. The notes are redeemed at the final maturity date, regardless of the then-outstanding amount of the reference pool.

We work with a variety of authorized securities dealers and the Office of Finance to meet our debt issuance needs. Depending on the amount and type of funding needed, consolidated bonds may be issued through a competitively bid transactions, such as the TAPauction process (TAP program or auctions, orand callable auction) on a negotiated basis.basis, or through a debt transfer between FHLBanks.

Consolidated bondsBonds issued through the TAP program are generally fixed rate, noncallable structures issued in standard maturities of 18 months or two, three, five, seven, or ten years. The goal of the TAP program is to aggregate frequent smaller issues into a larger bond issue that may have greater market liquidity. We participate in the TAP program to provide funding for our portfolio.

We may request specific amounts of certain consolidated bonds to be offered by the Office of Finance for sale via competitive auction conducted with underwriters of a bond selling group. One or more FHLBanks may also request amounts of those same bonds to be offered for sale for their benefit via the same auction. Auction structures are determined by the Bank in consultation with the Office of Finance and the securities dealer community. We may receive zeroup to 100 percent of the proceeds of the consolidated bonds issued via competitive auction depending on (1) the amounts and costs for the consolidated bonds bid by underwriters; (2) the maximum costs we or other FHLBanks participating in the same issue, if any, are willing to pay for the obligations; and (3) the guidelines for allocation of consolidated bond proceeds among multiple participating FHLBanks administered by the Office of Finance.

We may also participate in the Global Debt Program that is coordinated by the Office of Finance. The Global Debt Program allows the FHLBanks to diversify their funding sources to include overseas investors. Global Debt Program bonds may be issued in maturities ranging from one year to 30 years and can be customized with different terms and currencies. All FHLBanks that participateparticipating in the program approve the priceterms of the individual issues.

We may also issue Amortizing Prepayment Linked Securities (APLS). APLS pay down with a specified reference pool of mortgages determined at issuance and have a final stated maturity of sevenfour years to ten15 years. APLS can be issued in a wide variety of sizes and maturities to meet numerous portfolio objectives. Like all consolidated obligations, APLS carry the highest ratings from both Moody’s and S&P (Aaa/AAA) and are not obligations of the U.S. Government, and the U.S. Government does not guarantee them.

For further analysis of our consolidated bonds see “Consolidated Obligations” and “Liquidity and Capital Resources” at page 57.pages 63 and 69.

Consolidated discountDiscount notes satisfyhave historically satisfied our short-term funding requirements. These securities have maturities of up to 365/366 days and are offered daily through a consolidated discount note selling group and through other authorized underwriters. Consolidated discountDiscount notes are sold at a discount and mature at par.

On a daily basis, we may request specific amounts of certain consolidated discount notes with specific maturity dates to be offered by the Office of Finance at a specific cost for sale to underwriters in the discount note selling group. One or more FHLBanks may also request amounts of those same discount notes to be offered for sale for their benefit the same day. The Office of Finance commits to issue consolidated discount notes on behalf of the participating FHLBanks when underwriters in the selling group submit orders for the specific discount notes offered for sale. We may receive zero to 100 percent of the proceeds of the consolidated discount notes issued via this sales process depending on (1) the maximum costs we or other FHLBanks participating in the same issue, if any, are willing to pay for the discount notes; (2) the order amounts for the consolidated discount notes submitted by underwriters; and (3) the guidelines for allocation of consolidated discount note proceeds among multiple participating FHLBanks administered by the Office of Finance.

In general, we use derivatives as a fair value hedge of an underlying financial instrument and/or as an economic hedge, which does not qualify for hedge accounting treatment but serves as an asset-liability management tool. We also use derivatives to manage embedded options in assets and liabilities to hedge the market value of existing assets, liabilities, and anticipated transactions.

A more detailed discussion regarding our use of derivatives is located in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning at page 3741 and in “Risk Management” beginning at page 82.96.

Effective June 19, 2008 the Bank replaced its reserve capital policy includeswith a limitation onretained earnings policy. Under this policy, the paymentBank’s retained earnings minimum level is defined by the aggregation of market risk, credit risk, and operational risk components.

In February 2009, management believed it would be prudent, due to the highly unusual market conditions and the fact that the circumstances causing the EVCS shortfall are largely out of the direct control of the Bank, to revise the retained earnings policy. The modified policy states that if actual retained earnings fall below the minimum target, the Bank, as determined by the Board of Directors, will either cap dividends notat less than the current earned dividend, or establish an action plan (which can include a dividend cap) to exceed net income in accordance with accounting principles generally accepted inaddress the U.S. (GAAP) earned in the fiscalretained earnings shortfall within a practicable period for which the dividend is declared. of time.

The purchaseBank’s primary source of mortgage loansfunding is through the MPF program is subject to significant competition on the basisissuance of prices paid for mortgage loans, customer service, and ancillary services such as automated underwriting. We compete primarily with other GSEs such as Fannie Mae, Freddie Mac, and private investors for acquisition of conventional fixed rate mortgage loans.

The Bank is exempt from all federal, state and local taxation except for real estate property taxes, which are a component of the Bank’s lease payments for office space or on real estate owned by the Bank.

To fund their respective AHPs, the FHLBanks each must set aside the greater of 10 percent of theirthe Bank’s current year regulatory income to fund next year’s AHP obligation.obligation, or the Bank’s pro rata share of an aggregate of $100 million to be contributed in total by the FHLBanks. Such proration is made on the basis of current year regulatory income. The required annual AHP contribution for a FHLBank shall not exceed its current year regulatory income. Regulatory income is defined by the Bank as net income calculated in accordance with GAAP before interest expense related to mandatorily redeemable capital stock and the assessment for AHP, but after the assessment for REFCORP. The treatment of interest expense related to mandatorily redeemable capital stock is based on a regulatory interpretation issued by the Finance Board.Agency. We accrue our AHP assessment on a monthly based on our net income.basis. We reduce the AHP liability as program funds are distributed.

Congress requires that each FHLBank annually pay to the REFCORP 20 percent of net income calculated in accordance with GAAP after the assessment for AHP, but before the assessment for the REFCORP. We accrue our REFCORP assessment on a monthly basis.

The FHLBanks’ obligation to the REFCORP will terminate when the aggregate actual quarterly payments made by all of the FHLBanks exactly equal the present value of a $300 million annual annuity that commences on the date on which the first obligation of the REFCORP was issued and ends on April 15, 2030. The Finance BoardAgency determines the discounting factors to use in this calculation in consultation with the Department of Treasury.

The Finance BoardAgency is required to shorten the term of the FHLBanks’ obligation to the REFCORP for each calendar quarter in which there is an excess quarterly payment. An excess quarterly payment is the amount by which the actual quarterly payment exceeds $75 million. The Finance BoardAgency is required to extend the term of the FHLBanks’ obligation to the REFCORP for each calendar quarter in which there is a deficit quarterly payment. A deficit quarterly payment is the amount by which the actual quarterly payment falls short of $75 million.

Because the FHLBanks’ recentcumulative REFCORP payments have generally exceeded $300 million per year, those extra payments have defeased $24.2$42.5 million of the $75 million benchmark payment due on OctoberApril 15, 2013 and all scheduled payments due thereafter. The defeased benchmark paymentspayment (or portionsportion thereof) can be reinstated if future actual REFCORP payments fall short of the $75 million benchmark in any quarter. During the fourth quarter of 2008, the FHLBanks’ benchmark payments or portions of them were reinstated due to actual REFCORP payments falling short of the $300 million annual requirement. Cumulative amounts to be paid by the Bank to REFCORP cannot be determined at this time because the amount is dependent upon future earnings of each FHLBank and interest rates.

The Bank needs liquidity to satisfy member demand for short- and long-term funds, to repay maturing consolidated obligations, and to meet other business obligations. The Bank is required to maintain liquidity in accordance with certain Finance BoardAgency regulations and with policies established by the Board of Directors. See additional discussion in Management’s Discussion and Analysis — “Liquidity Requirements” at page 65.72.

The Finance BoardAgency is an independent executive agency in the U.S. Government responsible for supervising and regulating the FHLBanks, Fannie Mae, and Freddie Mac. The Housing Act establishes the Officeposition of Finance.Director of the Finance Agency as the head of such agency. The Finance Board consists of five full time members, four of whom areAgency Director is appointed by the President of the U.S. with the consent of the Senate to serve seven-year terms. The fifth board member is the Secretary of HUD.for a five-year term. The Finance Board administers the FHLBank Act andAgency Director is authorized to issue rules, regulations, and orders affecting the FHLBanks and the Office of Finance.FHLBanks.

To assess the safety and soundness of the Bank, the Finance BoardAgency conducts annual, on-site examinations of the Bank as well as periodic off-site reviews. Additionally, we are required to submit monthly financial information including the statementstatements of condition, results of operations, and various other reports.

The Finance BoardAgency requires that we satisfy certain minimum liquidity and capital requirements. Liquidity requirements are discussed in “Regulatory“Statutory Requirements” at page 65.72. Capital requirements are discussed in “Capital Requirements” at page 67.74.

The Finance BoardAgency has broad authority to bring administrative and supervisory actions against an FHLBank and its directors and executive officers. The Finance BoardAgency may initiate proceedings to suspend or remove FHLBank directors and executive officers for cause. The Finance BoardAgency may issue a notice of charges seeking the issuance of a temporary or permanent cease and desist order to an FHLBank or any director or executive officer if the Finance BoardAgency determines that any such party is engaging in, has engaged in, or the Finance BoardAgency has cause to believe the party is about to engage in

The Finance BoardAgency may issue a notice seeking the assessment of civil monetary penalties against an FHLBank or, in some cases, any director or executive officer that

The Finance BoardAgency is funded through assessments levied against the FHLBanks.FHLBanks and other regulated entities. No tax dollars or other appropriations from the U.S. governmentGovernment support the operations of the Finance Board.Agency. The Finance BoardAgency allocates its applicable operating and capital expenditures to the FHLBanks based on each FHLBank’s percentage of the Bank System’s total capital. Unless otherwise instructed in writing by the Finance Board,Agency, each FHLBank pays the Finance BoardAgency its pro rata share of an assessment in equal monthlysemiannual installments during the annual period covered by the assessment.

The Comptroller General of the U.S. governmentGovernment has authority under the FHLBank Act to audit or examine the Finance BoardAgency and the Bank and to decide the extent to which they fairly and effectively fulfill the purposes of the FHLBank Act. Further, the Government Corporation Control Act provides that the Comptroller General may review any audit of the financial statements conducted by an independent public accounting firm. If the Comptroller General conducts such a review, he/she must report the results and provide his/her recommendations to the Congress, the Office of Management and Budget, and the FHLBank in question. The Comptroller General may also conduct his/her own audit of any financial statements of the Bank.

The Bank submits annual management reports to the Congress, the President of the U.S., the Office of Management and Budget, and the Comptroller General. These reports include statements of condition, statements of income, statements of changes in capital, statements of cash flows, a statement of internal accounting and administrative control systems, and the report of the independent auditors on the financial statements.

The Bank is required to file with the SEC an Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and current reports on Form 8-K. The SEC maintains a website that contains these reports and other information regarding the Bank’s electronic filings located atwww.sec.gov. These reports may also be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Further information about the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.