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Breaking down the Corporate Credit Unions' Failure

From: "Breaking down the Corporate Credit Unions' Failure", Kelly Evans, Wall Street Journal, 3/21/09

It’s become a weekly ritual this year: Friday afternoon, with the nation’s appetite for news at a lull, somewhere in the U.S. a bank or two quietly fails and is seized by the government, often sold off quickly to a regional competitor. Last night’s failure of Colorado National Bank, FirstCity Bank in Georgia, and TeamBank in Kansas brought this year’s total so far to 20. It also added a new element: two of the nation’s largest corporate credit unions were seized by their national regulator.

So, what the heck is a corporate credit union? It’s a middleman of sorts, often taking mortgage and vehicle loans from credit unions, slicing them up, and selling them off to investors. The proceeds are commonly loaned back to credit unions at low rates to help them fund their business, the same way the Federal Reserve’s funds are loaned to banks. There are 28 “corporates” in the U.S., which support the 8,500 or so credit unions that hold about a twelfth of the nation’s $8.3 trillion in deposits, according to Mike Moebs, who runs Moebs Services, a research and consulting firm in Lake Bluff, Ill.

Credit unions are cooperatives, with members as opposed to customers, and so they have two unique features: they’re not taxed, and they don’t issue preferred stock — which is particularly relevant right now, because it means they’re not eligible for the Treasury’s “bailout” funds. And as last night made clear, the banks aren’t the only ones in need of a bailout.

Credit unions, which originated in rural Germany over 150 years ago as a way for older farmers to help support younger farmers, came to the U.S. in the 1930s and have since had a slightly strained relationship with the rest of the banking industry, in particular because they don’t pay taxes. They have their own insurance fund and their own national regulator (akin to the FDIC), the National Credit Union Administration, which is now running the two corporate credit unions it seized last night — U.S. Central in Lenexa, Kansas, and Western Corporate or “WestCor” in San Dimas, Calif., with a combined total of $57 billion in assets, a significant chunk of the $80.8 billion industry.

NCUA told the Journal’s Mark Maremont last night that it seized the two corporates after stress tests showed they faced larger losses than previously thought on mortgage-backed securities. The group’s chairman also said regulators aren’t concerned about the health of any other wholesales credit union other than those two.

But according to Mr. Moebs, there’s plenty to be concerned about. His own tests show credit unions and wholesalers could face combined losses of nearly $75 billion as their portfolios of loans made for mortgages, vehicles, and other assets continue to sour.

“They will have to go to Congress or the Fed for money because they don’t have enough themselves and their insurance fund isn’t big enough to solve their problems,” he said. “If they could get it from the Fed, which probably wouldn’t impose any conditions, that would be the better way of going. If they get it from Congress, Congress will likely impose conditions,” such as requiring credit unions to cut costs to match banks’ efficiency (mostly by shedding personnel), or taxing them.

“They need a market that the Fed can create through a facility to take their mortgages and auto loans,” Mr. Moebs said, “and if that happens I think we would see the economy turning around in six months.” Credit unions, along with small and midsized banks, do much of the nation’s small-business lending that drives job creation, he noted, such that if the current problem isn’t addressed it will continue to harm prospects for a recovery.

It could also mean more trouble ahead for credit unions on Friday nights. Last night’s seizure of the two corporate credit unions, he said, is “a huge signal to act.”

Written By: vhorizon
Date Posted: 3/23/2009
Number of Views: 2147