Credit Union Collapse Signals Depth of Financial Crisis
From: "Credit Union Collapse Signals Depth of Financial Crisis, Geithner's Toxic Asset Plan Not Specifically Designed for Credit Unions", Mary Kane, The Washington Independent, 3/26/09
Problems in the credit union system, once considered a largely
mom-and-pop operation immune to turmoil, came to light last week, when
their regulator seized two of the nation’s largest credit unions, U.S.
Central Credit Union in Lenexa, Kanss, and Western Corp. Federal Credit
Union in San Dimas, Calif. The two, with combined assets of $57
billion, are in trouble over the same investments in toxic mortgage
backed securities that have felled global banks and led to the credit
crunch.
Illustration by: Matt Mahurin
Cracks in the credit
union system are showing the breadth of the crisis - and raising the
possibility of another institution looking to the government for help.
In a mirror of the dilemma facing the Federal Deposit Insurance Corp,
the insurance fund for credit unions has been depleted by the seizure.
Smaller credit unions may have to pony up big fees to replenish it - at
the same time economy is hitting them hard, causing depositors to pull
out their savings for living expenses. All of it is creating a
liquidity squeeze that only threatens to become more severe, said
Gerald Hanweck, a finance professor at George Mason University who
follows the credit union industry.
“A lot of their membership is
becoming unemployed,” Hanweck said. “If the recession keeps getting
worse, it’s going to cause a lot of problems for them. More and more
credit unions are going to fail.”
The failure of the two large
corporate credit unions, which handle investments and other services
for the 7,800 traditional retail credit unions, may become a turning
point, proving that the industry needs more oversight, Hanweck and
others said. The system includes 26 other corporate credit unions, as
well as the two that were seized. Yet the credit union industry remains
overseen by its own, individual regulator - the National Credit Union
Administration, an independent federal agency considered by many as
mostly as a cheerleader for the credit union movement, Hanweck said.
All
the turmoil could mean that credit unions may become swept up in the
Obama administration’s financial regulatory system overhaul, and put
under closer supervision by Congress or the FDIC, in addition to
requiring a government bailout or some type of federal aid.
“They
consider themselves to be a movement, and their regulator doesn’t want
to overregulate or be too restrictive,” Hanweck said. “But that’s
contributed a considerable degree to their problems. The whole notion
of a corporate credit union has to be re-thought. If they’re going to
act like a bank, they need to be regulated like a bank.”
Even as the
economy worsened, credit unions couldn’t tap Troubled Assets Relief
Program money because they don’t issue preferred stock. The government
bailout program is limited to institutions that do so. But credit
unions are trying to find out whether they will be eligible to
participate in the new Treasury Department plan to subsidize the
purchase of toxic assets, said John McKechnie, a lobbyist and spokesman
for the NCUA. The industry believes it should be eligible but doesn’t
have enough information on the program yet, he said.
The industry
also may look to Washington for additional money, even as it charges
the retail credit unions to replenish the insurance fund. The NCUA
estimates that it could cost as much as $5.9 billion to stabilize the
corporate credit union system by rebuilding the fund, or more than the
industry’s entire profit for last year. That cost could trickle down to
customers, in the form of higher fees for loans and other services. The
regulator also said total losses to the credit union system due to
toxic securities could reach as high as $16 billion.
Treasury
Secretary Timothy Geithner may not have had credit unions in mind when
he put together his plan to buy up toxic assets, because the industry
previously had been considered safe from the difficulties facing other
financial services firms. But saying no to any kinds of government aid
for credit unions would be a difficult thing to do, said George
Overstreet, a professor at University of Virginia’s McIntire School of
Commerce who specializes in banking and credit.
“Do you really think
Washington wouldn’t bail out the poor old credit unions?” Overstreet
said. “If they bailed out that sorry Citigroup and AIG, they’re going
to have to bail them out too. At this point, what’s another few billion
here and there?”
Credit unions, which are owned and run by their
members, and are tax exempt, originated in Germany and became popular
in the 1920s in the United States, when workers needed loans to begin
buying automobiles and washing machines. The system now counts 90
million Americans as members. The 27 corporate credit unions serve as
mini-Federal Reserves for the retail ones, providing loans and making
investments on their behalf. Finally, there’s the U.S. Central Credit
Union, which serves all the corporate credit unions - and was one of
the two seized by the NCUA.
The NCUA website explains that the
regulator took over the two corporate credit unions after an
independent stress test by the Pimco investment firm found that losses
tied to mortgage-backed securities were greater than thought initially,
and threatened their viability.
“We were not prepared to let them
fail,” McKechnie said. “It could have had a domino effect on the
system, and we needed to stabilize the system.”
While times are
difficult right now for credit unions, McKechnie said the system
overall is still safe and stable. NCUA Chairman Michael Fryzel
testified recently before Congress that the credit union system is
unique, and requires its own regulator.
But emotions are running
high on credit union websites, as members complain about paying to
replenish the fund, debate whether mismanagement led to the problems,
and contend that it was unfair for credit unions to be shut out of TARP
funds.
Mike Moebs, an economist and president of Moebs Services, a
financial industry consulting and research firm in Lake Bluff, Ill.,
said he believes it was a mistake to exclude the credit unions from
TARP money, even if it wasn’t done intentionally. “I don’t think they
can get out of this problem by themselves,” he said. “The corporate
credit unions are the weak link. And they’re one of the weakest links
in the whole financial system.”
Moebs said he thinks the credit
union system should temporarily borrow money from Treasury to replenish
the insurance fund, as the FDIC has done, or seek money from the
Federal Reserve. The credit union industry also should pursue more
relaxed requirements for the amount of money it needs to cover losses,
and for its insurance fund. But credit unions don’t need to be
regulated like banks, he said.
“I don’t think it’s time to say,
‘Let’s eliminate the credit unions,’” Moebs said. “I think that would
be an injustice. They’ve shown themselves to be of value, a source for
the American consumer for auto loans and consumer loans and many other
kinds of lending.”
But even before the most recent crisis,
complaints had been growing over the corporate credit unions jumping
into the global securities market without the required expertise or
oversight. In 1995, credit union regulators seized the Capital
Corporate Federal Credit Union in Maryland, after it tallied up $100
million in losses in bad mortgage investments.
“The NCUA should have
known better, after CapCorp.,” said George Mason’s Hanweck. “And this
time around, the corporate credit unions really got caught up in all
this.”
Marvin Umholtz, a financial consultant and former lobbyist
for the credit unions, said the failures of the two corporate credit
unions highlight the problem with “interconnectedness” - meaning
troubles at the corporate credit unions infect the entire credit union
industry. “The flaws in the system are showing,” Umholtz said.
And
those flaws mean one more institution thought to be safe is yet another
casualty, in a financial crisis that shows no end to its reach.
Written By: rnybeck
Date Posted: 3/27/2009
Number of Views: 411
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