Tuesday, December 9, 2008

Rescue Plan For the Credit Unions?

If you thought the automaker rescue plan was the only one in the works, think again.  According to the Wall Street Journal, federal regulators are preparing a rescue plan to shore up the finances of some of the large credit unions.  The plan will tap the $41 billion lending facility that Congress made available to credit-union regulators in September.  Apparently, corporate credit unions are reeling from paper losses (i.e. probably real losses by now) on MBS.  The Chairman of the National Credit Union Administration (NCUA) is not calling the lending facility a taxpayer-funded bailout.  It is instead a short-term "mechanism to stabilize the credit-union system" while regulators work on other steps (i.e. the actual taxpayer-funded bailout.)  A related program also to be announced by the NCUA will provide $2 billion in inexpensive loans to credit unions to reduce mortgage interest rates for homeowners.  
What are corporate credit unions and who cares about them?  Here is the WSJ's quick description:

"Credit unions are member-owned cooperatives that act much like banks, taking deposits and offering loans. At the end of last year, there were about 8,400 credit unions in the U.S. with $775 billion in assets. Most are faring fine financially.

The rescue plan is aimed at shoring up the network of corporate credit unions, which are wholesale-style institutions that provide financing, investment and clearing services to retail credit unions. The retail credit unions are cooperative owners of the corporate credit unions.

As part of their role, corporates take deposits from retail credit unions, then invest that money in longer-term assets. But some of the largest corporates invested in mortgage-backed securities, and lately have suffered paper losses."

So, really, no need to worry about the retail credit unions.  They are faring fine.  The problem is that they all rely on the corporate credit unions, which are apparently blowing out. Retail credit unions are pulling deposits exacerbating an already difficult situation for the corporates. The stabilization plan to be announced has two steps:
  • Retail credit unions borrow from a lending facility at a favorable rate (1.5%) and then deposit that money with a corporate credit union with a federal guarantee and a small additional rate of return.
  • Retail credit unions borrow up to $2 billion at a favorable rate (1.25%) and use the money to subsidize interest-rate relief for troubled homeowners.
Mind you, these are temporary financing measures that don't address the capital issue.  Perhaps a new administration will be more willing to help the plight of the credit unions as Hank Paulson chose to exclude them from the TARP.  A chart from the Journal depicts the mounting losses at the largest corporate credit unions:  

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