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Thursday, July 31, 2008

News of the Weird: Credit Union Failure

by Tanta on 7/31/2008 09:05:00 AM

The failure of New London Security FCU the other day rather got lost in the news shuffle. This is probably because it had 365 members and reported assets of $12.7 million, which means it doesn't rank very high on the "systemic risk to the banking system" hot news alert scale. I must say, however, that for sheer weirdness this story delivers.

From The Day of New London, Connecticut:

A former manager of the credit union, who retired last year after decades and spoke on condition of not being identified, admitted Wednesday to being “computer illiterate.” She had been posting information manually for decades, she said.

Edwin F. Rachleff, the 82-year-old broker who handled the credit union's investments and who committed suicide on the day the institution was declared insolvent, also reportedly did not feel comfortable with computers.

Members seemed to view manual postings as part of the charm of the tiny credit union, which had only 365 members and $12.7 million in assets.

”It was a little hole in the wall,” said Jim Mallove, owner of Mallove Jewelers in Waterford, who opened accounts there several years ago for his two children. “But the deposits earned very good interest ... better than banks were offering.”

A quirk of the institution, Mallove remembers, is that the credit union would not accept monthly deposits of more than $100 per account. He had little idea why the credit union would limit deposits.

”My impression at the time was that they had a lot of money and were just basically sitting on it,” said Mallove, who received annual statements as a credit union member.
I feel that as a public service I should point out that a sound financial institution cannot "just basically sit on" a "lot of money" and still pay interest rates that are "better than what banks are offering." When you "just basically sit on" money, you get warm, flattened piles of money that retain the imprint of your buttocks. What you do not get is a competitive rate of return.

So what was New London Security doing with those miserly deposits it allowed its members to make?
Emerson added that its ratio of assets to loan amounts was extremely low. He said many credit unions have loans totaling 50 to 80 percent of their assets, though some are as low as 20 percent; New London Security, by comparison, had only about 2 percent of its assets in loans.

New London Security had more than $10 million of its assets in various investment vehicles, Emerson pointed out.

”They were into investments,” Emerson said, adding that he “wouldn't disagree” with the notion that New London Security had turned into a kind of investment club, a notion that was seconded by another credit union official who didn't want to be named.
Of course no one at this point is quite sure what these investments actually were, what with the suicide of broker and all the records being apparently handwritten on green ledger paper. It is hinted that they may be mortgage-backed securities, although for all we know it could be time-shares in the Poconos. Or postal coupons.

I feel that as a public service I should point out that an institution that does not make loans to its members in the normal course of business can be many things, but a "credit union" it is not. No matter how charming and small-town cute those hand-written passbook entries are.

(Thanks, Matt!)