Monday, August 11, 2008

Trouble at Corporate Credit Unions

by Tanta on 8/11/2008 09:56:00 AM

From the Wall Street Journal:

Five of the nation's largest credit unions are reporting big paper losses on mortgage-related securities, a sign that housing-market distress is spreading even to the most risk-averse financial sectors.

The federal regulator overseeing credit unions says the losses are likely to be reversed when mortgage markets stabilize, and that the institutions are sound and adequately capitalized. But some outside observers are concerned that the credit unions are underestimating the depth of their mortgage-market problems.
This is a detailed article and I suggest you read the entire thing. It is important to bear in mind that the five big credit unions mentioned in the article are "corporate" CUs, not regular old CUs used by consumer-members.
Corporate credit unions were founded to serve regular credit unions, many of which are too small to engage directly in sophisticated investing. Regular credit unions park a portion of their funds with one or more of the corporates, which in turn invest the money. In total, the 28 corporates, which are owned by their member credit unions, have about $90 billion in assets. (U.S. Central serves as a credit union for corporates, providing them with similar investment services.) . . .

As with banks, credit unions are federally insured up to $100,000 per account and $250,000 per retirement account. So far this year, nine regular credit unions have failed, including at least two due to mortgage-related problems. Seven failed in 2007.

In theory, the failure of a corporate credit union could lead to losses for any regular credit union that has deposited money with the corporate, and ripple down to individual depositors. The last time a corporate credit union failed was in 1995. Ultimately, the regular credit unions that were involved recovered their money.
Reporter Mark Maremont is quickly moving to the top of Tanta's Approved Reporter list, following his excellent piece a while back on the FDIC's trouble with Superior Bank loans. Thank you, Mr. Maremont. This is what we are asking for: context. Elaboration of unfamiliar terms or concepts. Maintaining distinctions when distinctions are very relevant. Real reporting, in other words.