Feds seize two large corporate credit unions
By Mark Davis | Kansas City Star
KANSAS CITY, Mo. " Federal regulators on Friday seized two massive corporate credit unions, with a combined $57 billion in assets.
U.S. Central Credit Union, the nation's largest corporate credit union, is a $34 billion institution based in Lenexa, Kan., a Kansas City suburb. It does not serve consumers directly, but provides services to traditional credit unions that do.
The action does not affect consumers' deposits, which continue to carry federal insurance up to $250,000.
The credit union was placed into a federally controlled conservatorship, which allows the National Credit Union Administration to continue to operate U.S. Central.
The NCUA also seized Western Corporate Federal Credit Union, a $23 billion institution based in San Dimas, Calif., and one of a network of corporate credit unions connected to U.S. Central.
Seizure of the two massive credit unions, with a combined $57 billion in assets, marked the latest dramatic move by federal regulators to prop up the nation's financial system.
"The unprecedented action was necessary to protect not only the assets of the two corporate credit unions, but also to protect the National Credit Union Share Insurance Fund and the interests of credit union members nationwide," NCUA Chairman Michael E. Fryzel said in a statement.
"Only by direct intervention in the daily operations of U.S. Central and WesCorp (Western Corporate) can NCUA implement timely, appropriate and effective strategies to stabilize these corporates and restore member and lender confidence," his statement said.
Regulators said the two credit unions had failed a "stress test" performed on the mortgage- and asset-backed securities at all corporate credit unions. The tests had found "an unacceptably high concentration of risk resided in only" U.S. Central and Western Corporate.
Further deterioration since that test had cut into their liquidity and ability to handle the payment system they operate for traditional credit unions, the NCUA said.
The insurance fund that backs credit union deposits had recently injected $1 billion into U.S. Central to bolster is declining financial condition. The action, along with steps to guarantee regular credit unions' deposits in the corporate network, racked up $4.7 billion in costs that the credit union industry is expected to bear this year.
Federal officials said the cost is now estimated at $5.9 billion.
Despite this burden on credit unions, which will leave some with losses this year, federal officials have said the industry is healthy enough to absorb the added costs.
U.S. Central officials were not available to comment. Previously, CEO Francis Lee issued an open-letter apology to the industry.
"At U.S. Central, we have strived throughout our history to be good stewards of the Corporate Network's funds, investing them in highly rated securities only after conducting pre-purchase analysis and subsequent ongoing scrutiny," Lee wrote. "We deeply regret that we have been unable to avoid the impact of the unprecedented distress in the housing market and its concurrent effect on the mortgage-backed securities in our investment portfolio."
Federal officials have opened an industry review of whether to restructure the network. They've said all options, even possibly dismantling it, will be considered.
U.S. Central's problems stemmed from its investments in what were highly rated mortgage-backed securities. Although U.S. Central officials said the securities continue to pay off as expected, accounting rules forced them to write down the value of those securities dramatically.
Markets for such securities have nearly dried up amid the financial crisis, leaving U.S. Central little value to count. The declines left U.S. Central owing more money to others than its own assets were worth.