Two Major Credit Unions Seized
Saturday, March 21, 2009
Federal regulators yesterday seized two large companies that provide critical banking services to the credit union industry after finding that the companies had sustained debilitating losses, threatening the health of thousands of credit unions.
The seizure of U.S. Central Corporate Federal Credit Union, based in Lenexa, Kan., and Western Corporate Federal Credit Union, based in San Dimas, Calif., marked a dramatic expansion of the government's efforts to stabilize a corner of the financial industry long viewed as a safe haven because of its generally conservative practices.
The National Credit Union Administration said it would place both institutions in conservatorship, replacing senior management but leaving their operations otherwise unaffected. The NCUA said its action was intended to shelter customers of retail credit unions from any consequences.
"Credit unions that serve consumers remain very strong" and deposits remain safe, the NCUA said in a statement.
U.S. Central, which has $34 billion in assets, functions as a central bank for the credit union system. Western Corporate has about $23 billion in assets.
Most of the nation's 8,400 credit unions -- cooperatives that lend to members at low interest rates -- serve small communities such as the employees of a particular company. These small institutions generally invest some of their assets with larger institutions called corporate credit unions to take advantage of financial markets they are not big enough to tap individually. Those corporate credit unions in turn invest some of their assets with U.S. Central. The system also allows the members to borrow from one another.
U.S. Central and Western Corporate, which is a member of the second tier of credit unions, both invested large sums in mortgage-backed securities, as did other corporate credit unions. In all, the 27 corporate credit unions invested about $64 billion. The results are by now familiar: The securities have plunged in value, tying up cash because they can only be sold at a large loss. That has limited the ability of the smaller credit unions to withdraw money, threatening their health in turn.
NCUA already has intervened twice. In December, the agency announced a plan to pump up to $15 billion in loans into the corporate credit unions to improve their health. In January, NCUA invested $1 billion directly in U.S. Central and guaranteed all the money invested at the 27 corporate credit unions to forestall withdrawals.
Regulators said yesterday that the losses at U.S. Central and Western Corporate had continued to grow, and that their projected losses would exceed their available capital. NCUA also noted that the credit unions that make up their membership had lost confidence in their stability, forcing the government's hand.
The agency said it thought the remaining corporate credit unions were in better condition and would not require a similar intervention.
The federal aid comes from assessments on the industry, not from taxpayers. But the increasingly steep price tag will constrain lending by some credit unions.
NCUA estimated yesterday that the total cost of its interventions would reach $5.9 billion.
The agency faces a choice between dunning its members, which would constrain lending, or borrowing the money from the Treasury, imposing a cost on taxpayers that credit unions would repay over time.