When credit unions fail

By Felix Salmon
September 24, 2010

There are lots of great credit unions in America, all of which are owned by their members. And then there are the corporate credit unions, which are atrocious and expensive failures. Today, the final nail was placed in their coffin when the last three big corporates were officially taken over by the government.

Trying to explain what’s going on here isn’t easy, but essentially corporate credit unions are credit unions’ credit unions. While you or I might belong to a friendly local credit union with human members, that credit union, in turn, is itself one of the members of a corporate credit union. I’m a member of (and on the board of) Lower East Side People’s Federal Credit Union, for instance; LESPFCU is one of the 2,076 members of Members United Corporate Federal Credit Union, which got taken over today. Since we’re part owner of Members United, we’re going to lose money now that it has failed. In total, the NCUA (that’s the credit union equivalent of the FDIC) reckons that credit unions are going to lose somewhere between $8.3 billion and $10.5 billion on their investments in the corporates.

We’ve already written down a large chunk of our equity in Members United, so this latest blow will be manageable. But the fact is that pretty much everybody in the country who’s a member of a credit union will be affected in some way by the implosion of the five big corporate credit unions. They got away with things that most credit unions could never dream of — things like investing billions of dollars in subprime securities, for no obvious reason. When that trade blew up, thousands of responsible small credit unions ended up being socked with enormous losses.

So when the chair of the NCUA, Debbie Matz, says that all of this is being done at no cost to taxpayers, that’s only partially true — there are millions of taxpayers who belong to credit unions, and all of them will be affected in some way, because collectively they own the institutions which are going to end up losing billions of dollars. And nobody along the chain could reasonably have avoided these losses: you suffer no matter which credit union you’re a member of, because the credit unions themselves had to belong to a corporate, and pretty much all of the corporates have failed.

The fact that all of the big five corporate credit unions have now failed is — or should be — a massive embarrassment to the NCUA, which was meant to be their regulator. What incentives were in place such that all of these entities ended up neck-deep in toxic assets, and such that their regulator didn’t stop them? Indeed, how on earth, in the wake of this fiasco, has the NCUA survived as an independent agency at all? It has failed the very credit unions it was meant to be protecting: its lax oversight of the corporates means that all of them have suffered substantial losses. Other lax regulators, like the Office of Thrift Supervision, were closed down by the Dodd-Frank bill. But the NCUA lives on, to dream up multi-billion-dollar good-bank/bad-bank securitization schemes. I wish it were a bit more accountable for its failures.

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