Regulators Step in to Aid Credit Unions

Ah yes! The recession is over. Perhaps it is -- it's been replaced by our new model DEPRESSION!! (this from The New York Times -- please follow link to original)



Regulators Step in to Aid Credit Unions
By ERIC DASH
Published: September 24, 2010


Nearly two years after Wall Street’s giants were rescued by the federal government, regulators on Friday took over three financial institutions that provide the underpinning for hundreds of the nation’s credit unions.

The three entities, known as wholesale credit unions and located in Connecticut, Illinois and Texas, were seized by regulators from the National Credit Union Administration, which supervises about 7,500 credit unions that provide basic banking services to millions of Americans. Most of those customers are linked to credit unions through their employers or through membership organizations.

Although an overwhelming majority of those credit unions are financially sound, some of the wholesale entities behind them have been hobbled by losses on subprime mortgage bonds and other complex investments. Of the 27 wholesale credit unions operating in the United States, five have been seized by regulators over the last 18 months.

The agency announced a plan Friday to separate billions of dollars of the bad assets that have crippled those institutions and then repackage them for sale with a federal guarantee. It also established a set of regulations that will require wholesale credit unions to hold more capital and improve their risk management and governance practices.

It is the latest action by regulators to try to put the financial system on stronger footing, and comes as the nation’s banks and thrifts have shown signs that they are gradually returning to health. Many of the biggest and most troubled institutions, like IndyMac and Washington Mutual, were resolved in the early days of the financial crisis.

The Federal Deposit Insurance Corporation, which insures money deposited in commercial and savings banks, has shuttered more than 295 lenders over the last few years, including two on Friday. The pace of those interventions has been slowing.

The credit union rescue, however, presents a new twist. Credit unions have billed themselves as conservative safe havens that were insulated from risky business like subprime and commercial real estate lending. Now, two years into the worst economic crisis since the Great Depression, it seems that no area of the financial industry managed to escape the effects of the credit bubble.

Officials from the credit union regulator said they believed the steps taken on Friday should create stronger safeguards for the nation’s credit unions and get the industry back on its feet.

“We feel the steps that we have taken have stabilized the system,” said Debbie Matz, the agency’s chairwoman. “We are in the next stage: resolution and reform.”

Officials said they did not expect the rescue to cost taxpayers anything. Credit unions, however, will be liable for the cost, which Ms. Matz estimated to be as much as $9.2 billion. That could force many retail credit unions to pay higher insurance premiums to the National Credit Union Administration in the coming quarters, as the agency looks to replenish its deposit insurance fund.

Consumers, meanwhile, should not experience any service disruptions. Deposits are protected up to $250,000 per account.

The entities seized on Friday were Members United Corporate Federal Credit Union of Warrenville, Ill.; Southwest Corporate Federal Credit Union of Plano, Tex.; and Constitution Corporate Credit Union of Wallingford, Conn.

Last year, regulators closed two wholesale credit unions in Kansas and California and took control of their operations. Regulators will help repackage and sell off about $35 billion of troubled mortgage-related assets held by the five institutions.

Regulators had been grappling over how to deal with the troubled wholesale credit unions since the crisis unfolded two years ago, when the value of big portfolios of complex mortgage investments suddenly collapsed. Wholesale credit unions provide payment clearing and investment services to retail credit unions. They also give the retail credit unions a place to put their cash.

To stave off a run on the troubled wholesale credit unions, the National Credit Union Administration propped them up with an emergency guarantee on all their deposits. It also stepped up scrutiny of those institutions and began working with officials at the Treasury Department, the Federal Reserve and other regulatory agencies to develop a broader resolution plan.

As part of the effort, the Treasury secretary, Timothy F. Geithner, agreed to postpone the deadline for the credit union industry to cover the cost of the mortgage-related losses at the wholesale credit unions until June 2021. Previously, they had until 2016.