Thursday, January 29, 2009

Credit Unions now need bailing out

Hat tip: Calculated Risk.

I had always thought of Credit Unions as being the more sober little banking brothers of the larger "problem-gambler" investment banks. I had these warm feelings toward Credit Unions even during the go-go credit days of 2005. I was somewhat taken aback at one point, however, when the Kern Schools ATM opening screen screamed in 200pt font:

"Ask about our Home Equity Line of Credit"

I guess they were trying to compete with junk mail advertising a $500,000 mortgage with a $650/month payment. Kern Schools was very late to the mortgage debt party, however. I assumed they would soon recognize the need to curtail the HELOC practice before they incurred massive losses - and they have. The gigantic mortgage-related losses that doomed Downey, WaMu, and Countrywide (true pioneers of bankers-gone-wild finance) did not wreck our local Credit Unions.

Credit Unions have always been near and dear to me, especially when contrasted to Banks. The interest Credit Unions charge on loans is typically lower than banks. The interest rates Credit Unions pay on savings and checking balances are typically higher. Credit Unions, unlike banks don't usually require you to commit a huge pile of money to get the best interest rates. Also a lot of the services (like notaries) are free or cheap at Credit Unions.

In spite of my longstanding warm fuzzy feelings towards Credit Unions, In mid 2008 I emptied all of my accounts. Pres. Obama might call it "an abundance of caution". For some reason I felt that a coffee can filled with bills seemed more secure than a twenty-something reading me an electronic balance from a screen at their station.

Now it looks like (with regard to Credit Unions at least) my head was indeed smarter than my heart. Even so, this is a tiny, tiny bailout, and the taxpayers are not on the hook for the losses for a change!

I've taken the liberty of bolding what I consider to be the more interesting parts.

From the Washington

U.S. Aid Goes to Credit Unions
$1 Billion Infusion Sent to Firm That
Services Industry

The federal government yesterday expanded its bailout to another vulnerable sector, saying it will inject $1 billion into a nonprofit company that provides banking services to the credit union industry.

The government also will guarantee tens of billions of dollars in previously uninsured deposits in a move that aims to forestall a crisis of confidence in a system once considered unshakable because of its conservative business practices. The National Credit Union Administration, which regulates the industry, said it was acting to protect the nearly 90 million Americans who use a retail credit union. Most of those institutions have deep financial ties with the company that is getting the bailout, U.S. Central Corporate Federal Credit Union.

The federal aid comes from assessments on the industry, not from taxpayers. This latest rescue has a familiar plot. U.S. Central invested in mortgage-related securities advertised as safe and lucrative. They were not, and U.S. Central is running out of money, endangering the financial health of many of the nation's 8,400 credit unions, even as demand for their loans has reached record heights.

U.S. Central sits atop a three-layer cake. Credit unions -- cooperatives that lend to members at low interest rates -- are mostly small institutions serving a community, such as employees of a company. Those credit unions are members of 27 corporate credit unions, cooperatives that allow them to borrow from each other and aggregate money in investments with higher profit potential. U.S. Corporate similarly links together the corporate credit unions.

The corporate credit unions together invested about $64 billion from their members in mortgage-related securities, which have declined in value by $18 billion as the market has plunged. Accounting rules are forcing the corporate credit unions to acknowledge those declines. On Monday, U.S. Central told the NCUA it estimated a fourth-quarter loss of $1.2 billion on its loan portfolio. The NCUA board met behind closed doors yesterday and then announced the intervention.

"We figured this day might come, with the overall market conditions the way they are, but we were attempting to allow U.S. Central to work though it," NCUA chairman Michael E. Fryzel said. "Now we've done what we felt we needed to stabilize the system and to put confidence back in the system."

In addition to investing in U.S. Central, NCUA said it would guarantee the money that retail credit unions have invested in the corporate credit unions so that concern about their health, prompted by the rescue, does not precipitate the equivalent of a bank run. NCUA said it was launching a formal review of how to restructure the corporate credit union system to address the evident weaknesses.

This is the government's second attempt to stabilize the corporate credit unions. NCUA announced in December that it would lend billions of dollars through retail credit unions to the corporate credit unions so they would not be forced to sell the investments that have lost value. The agency has loaned $5 billion under the program and said it expects to distribute another $5 billion at the end of the month.

Fryzel said the loans have addressed the thirst of the corporate credit unions for liquidity, or money to lend, but not the depletion of capital, the money held in reserve against losses.

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