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Federal Credit-Union Regulator to Securitize 'Legacy Assets'
By MARK MAREMONT And VICTORIA MCGRANE
Two years after the peak of the financial crisis, the federal government swooped in Friday to stabilize a crucial part of the credit-union industry battered by huge losses on risky mortgage-backed securities.
Regulators announced a rescue of the nation's so-called wholesale credit unions, which don't deal with the general public but provide behind-the-scenes services to thousands of other credit unions across the U.S. The vast majority of those retail credit unions are financially sound, but they are exposed to the losses through the industry's insurance fund.
Friday's moves include the seizure of three wholesale credit unions and an unusual plan by government officials to manage $50 billion of troubled assets inherited from failed institutions. To help fund the rescue, the National Credit Union Administration plans to issue $30 billion to $35 billion in government-guaranteed bonds, backed by the shaky mortgage-related assets.
Officials said the plan won't cost taxpayers any money. Still, it marks the latest aggressive intervention by U.S. government officials into a corner of the financial system threatened by losses. Bad bets on mortgage-backed securities have killed five of the nation's 27 wholesale credit unions since March 2009. The federal government, which now controls about 70% of the total assets at such credit unions, also said the surviving institutions will be reined in so that they take fewer risks with their investments.
"Previously, we stabilized the system, and now we're resolving the problem and reforming the system," said Debbie Matz, chairman of the National Credit Union Administration, the federal agency overseeing credit unions.
Members United Corporate Federal Credit Union in Warrenville, Ill., Southwest Corporate Federal Credit Union of Plano, Texas, and Constitution Corporate Federal Credit Union, Wallingford, Conn., which had a total of $19.67 billion in assets as of July, were taken into conservatorship by federal regulators.
Wholesale credit unions invest money for retail credit unions and provide them with check clearing and other services. Since the start of 2008, 66 retail credit unions have failed, compared with 290 banks or savings institutions. Credit unions are member-owned cooperatives that act much like banks.
Under federal rules, wholesale credit unions were supposed to invest only in safe, liquid assets. But some institutions chased higher returns by loading up on securities backed by subprime mortgages or other risky loans. Their portfolios were decimated by the mortgage meltdown.
Last year, regulators seized the two largest wholesale credit unions, U.S. Central Federal Credit Union, based in Lenexa, Kan., and Western Corporate Federal Credit Union, San Dimas, Calif., after finding their losses were much larger than previously reported.
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.
Bert Ely, a longtime financial-industry consultant in Alexandria, Va., said regulators share some of the blame for the resulting mess because wholesale credit unions were allowed to pursue a strategy that was "viable only because of what clearly has turned out to be excessive risk-taking."
Ms. Matz, the nation's top credit-union regulator, said the investment losses reflect "unprecedented economic times" and "bad decisions" by regulators, credit-union managers and board members "by heavily over-concentrating in mortgage-backed securities."
New regulations issued by the NCUA on Friday will make oversight of wholesale credit unions much tougher and are meant to fix any regulatory shortcomings, she said.
As part of the plan announced Friday, regulators will eventually wind down the operations of the five failed credit unions, which together had about $50 billion in shaky mortgage-backed securities on their books, according to Larry Fazio, NCUA's deputy executive director. Based on current market values, those securities are worth roughly half of their face value, representing a potential loss of $25 billion.
In an effort to minimize and spread out losses that must be absorbed by the credit-union industry, regulators said they will move all the battered securities into a so-called "good bank-bad bank" structure. NCUA officials will manage the $50 billion portfolio, or "bad bank," of each failed wholesale institution.
Federal regulators will allow the remaining "good bank" operations at the credit unions to continue for about two years while retail credit unions wind down their relationships with the failed institutions.
A similar technique was used in the late 1980s and early 1990s to rehabilitate damaged financial institutions. In the best-known example, Mellon Bank Corp., based in Pittsburgh, created a new bank in 1988 to house $1.4 billion in troubled loans.
The plan to issue bonds backed by the bad-bank assets is similar to recent asset-backed bond deals by the Federal Deposit Insurance Corp., which takes over failed banks and savings institutions.
Friday's moves could deepen tensions between regulators and retail credit unions that withstood the financial crisis and resent having to bear financial costs caused by the mistakes of wholesale institutions.
Mr. Fazio said he hopes retail credit-union executives "will understand this is the least-cost policy, and it provides a way to spread out costs" over a longer period.
NCUA officials said Friday that Treasury Secretary Timothy Geithner agreed to extend until June 2021 the deadline for the credit-union industry to pay the bill from mortgage-related losses at the wholesale credit unions. The previous deadline was 2016, but Mr. Geithner extended the life of a special fund that is temporarily covering the losses.
Mr. Ely, the consultant, said the wholesale credit unions still in business could find it harder to hold onto their retail credit-union customers as a result of the recent turmoil and new rules. "There's a fundamental question whether or not the [wholesale institutions] are even needed anymore," he said.
The changes won't immediately affect how consumers deal with the retail credit unions on street corners and in strip malls throughout the U.S.
But it is possible that assessments on the industry could result in higher interest rates on loans and lower payouts on deposits if credit unions can't otherwise cover their obligations to the insurance fund.
http://online.wsj.com/article/SB1000...=djemalertNEWS
By MARK MAREMONT And VICTORIA MCGRANE
Two years after the peak of the financial crisis, the federal government swooped in Friday to stabilize a crucial part of the credit-union industry battered by huge losses on risky mortgage-backed securities.
Regulators announced a rescue of the nation's so-called wholesale credit unions, which don't deal with the general public but provide behind-the-scenes services to thousands of other credit unions across the U.S. The vast majority of those retail credit unions are financially sound, but they are exposed to the losses through the industry's insurance fund.
Friday's moves include the seizure of three wholesale credit unions and an unusual plan by government officials to manage $50 billion of troubled assets inherited from failed institutions. To help fund the rescue, the National Credit Union Administration plans to issue $30 billion to $35 billion in government-guaranteed bonds, backed by the shaky mortgage-related assets.
Officials said the plan won't cost taxpayers any money. Still, it marks the latest aggressive intervention by U.S. government officials into a corner of the financial system threatened by losses. Bad bets on mortgage-backed securities have killed five of the nation's 27 wholesale credit unions since March 2009. The federal government, which now controls about 70% of the total assets at such credit unions, also said the surviving institutions will be reined in so that they take fewer risks with their investments.
"Previously, we stabilized the system, and now we're resolving the problem and reforming the system," said Debbie Matz, chairman of the National Credit Union Administration, the federal agency overseeing credit unions.
Members United Corporate Federal Credit Union in Warrenville, Ill., Southwest Corporate Federal Credit Union of Plano, Texas, and Constitution Corporate Federal Credit Union, Wallingford, Conn., which had a total of $19.67 billion in assets as of July, were taken into conservatorship by federal regulators.
Wholesale credit unions invest money for retail credit unions and provide them with check clearing and other services. Since the start of 2008, 66 retail credit unions have failed, compared with 290 banks or savings institutions. Credit unions are member-owned cooperatives that act much like banks.
Under federal rules, wholesale credit unions were supposed to invest only in safe, liquid assets. But some institutions chased higher returns by loading up on securities backed by subprime mortgages or other risky loans. Their portfolios were decimated by the mortgage meltdown.
Last year, regulators seized the two largest wholesale credit unions, U.S. Central Federal Credit Union, based in Lenexa, Kan., and Western Corporate Federal Credit Union, San Dimas, Calif., after finding their losses were much larger than previously reported.
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.
Bert Ely, a longtime financial-industry consultant in Alexandria, Va., said regulators share some of the blame for the resulting mess because wholesale credit unions were allowed to pursue a strategy that was "viable only because of what clearly has turned out to be excessive risk-taking."
Ms. Matz, the nation's top credit-union regulator, said the investment losses reflect "unprecedented economic times" and "bad decisions" by regulators, credit-union managers and board members "by heavily over-concentrating in mortgage-backed securities."
New regulations issued by the NCUA on Friday will make oversight of wholesale credit unions much tougher and are meant to fix any regulatory shortcomings, she said.
As part of the plan announced Friday, regulators will eventually wind down the operations of the five failed credit unions, which together had about $50 billion in shaky mortgage-backed securities on their books, according to Larry Fazio, NCUA's deputy executive director. Based on current market values, those securities are worth roughly half of their face value, representing a potential loss of $25 billion.
In an effort to minimize and spread out losses that must be absorbed by the credit-union industry, regulators said they will move all the battered securities into a so-called "good bank-bad bank" structure. NCUA officials will manage the $50 billion portfolio, or "bad bank," of each failed wholesale institution.
Federal regulators will allow the remaining "good bank" operations at the credit unions to continue for about two years while retail credit unions wind down their relationships with the failed institutions.
A similar technique was used in the late 1980s and early 1990s to rehabilitate damaged financial institutions. In the best-known example, Mellon Bank Corp., based in Pittsburgh, created a new bank in 1988 to house $1.4 billion in troubled loans.
The plan to issue bonds backed by the bad-bank assets is similar to recent asset-backed bond deals by the Federal Deposit Insurance Corp., which takes over failed banks and savings institutions.
Friday's moves could deepen tensions between regulators and retail credit unions that withstood the financial crisis and resent having to bear financial costs caused by the mistakes of wholesale institutions.
Mr. Fazio said he hopes retail credit-union executives "will understand this is the least-cost policy, and it provides a way to spread out costs" over a longer period.
NCUA officials said Friday that Treasury Secretary Timothy Geithner agreed to extend until June 2021 the deadline for the credit-union industry to pay the bill from mortgage-related losses at the wholesale credit unions. The previous deadline was 2016, but Mr. Geithner extended the life of a special fund that is temporarily covering the losses.
Mr. Ely, the consultant, said the wholesale credit unions still in business could find it harder to hold onto their retail credit-union customers as a result of the recent turmoil and new rules. "There's a fundamental question whether or not the [wholesale institutions] are even needed anymore," he said.
The changes won't immediately affect how consumers deal with the retail credit unions on street corners and in strip malls throughout the U.S.
But it is possible that assessments on the industry could result in higher interest rates on loans and lower payouts on deposits if credit unions can't otherwise cover their obligations to the insurance fund.
http://online.wsj.com/article/SB1000...=djemalertNEWS
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