Feds Bailout Credit Unions with $30 Billion Guarantee

Posted: September 27, 2010 in Credit Unions, Failures
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It’s been less than two years since the Feds bailed out two corporate credit unions to the tune of tens of billions. Feds on September 24th took over another three corporate credit unions. Asset size, around $20 Billion. This will only add to the financial burden being placed upon good credit unions who had no role in their demise. Wholesale credit unions, also known as corporate credit unions, invest money for retail credit unions and provide them with check clearing and other services.

If I’m a CEO of a credit union, I’m seeing red right now.

Regulators announced Friday a rescue and revamping of the nation’s wholesale credit union system, underpinned by a federal guarantee valued at $30 billion or more. Wholesale credit unions don’t deal with the general public but provide essential back-office services to thousands of other credit unions across the U.S. The majority of retail credit unions are sound, but they will have to shoulder the losses through special assessments over the next decade.

Losses on the mortgage-backed securities held by the five seized credit unions are expected by regulators to total about $15 billion. Wiping out the capital of the failed institutions will cover a chunk of those losses. But the remaining $7 billion to $9.2 billion eventually will be passed along to the nation’s 7,445 federally insured credit unions in the form of future assessments.

Credit Unions have been paying assessments on the two corporates that went under since 2009, and were expected to pay up to seven years. At some point members will be paying more for loans and services. Assessments are already wiping out profits for credit unions for their whole year with a new round of assessments being announced coming this October and will need to be paid by the end of the year. Estimates range as high as 35 basis points total. Industry average for profits is 23 basis points per year.

Bloomberg News

Debbie Matz, chairman of the National Credit Union Administration, during a Senate Banking subcommittee hearing in October, 2009.

Where were the federal regulators when the corporates were investing in these risky assets? How many more corporates are invested in risky asset’s? What’s the true value of these investments?

I’d like to hear your comments. Do you think this will impact credit unions? If so, to what extent? Do you think more corporates are heading for a bailout?

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