3 Corporate Credit Unions Seized

U.S. regulators seized three corporate credit unions on Friday and will repackage about $50 billion in troubled assets from these and previous seizures to sell on the open market.

The National Credit Union Administration said the three corporate credit unions, which provide clearing services to retail credit unions, were critically undercapitalized.  Barclays Capital will manage the securitization plan, the regulator said. A securitization trust will be created to issue about $35 billion in guaranteed notes backed by the government, a process that will likely start in October, the NCUA said.  "This approach is best for taxpayers, consumers and credit unions," NCUA Chairman Debbie Matz said.

Matz said the agency also put in place on Friday regulations requiring corporate credit unions to hold higher levels of capital and setting risk limits. The institutions seized on Friday were Members United Corporate Federal Credit Union of Warrenville, Illinois; Southwest Corporate Federal Credit Union of Plano, Texas; and Constitution Corporate Federal Credit Union of Wallingford, Connecticut. Matz said combined they had about $16 billion in assets.  The seizures come after the NCUA last year took over two other such institutions: U.S. Central Corporate Federal Credit Union of Kansas and Western Corporate Federal Credit Union of California.

Corporate credit unions are the retail credit union's credit union, providing services including lending, and check and payment clearance services. The wholesale credit unions have experienced more troubles than their retail counterparts because they did not face the same restrictions on permitted investments, leading to big losses during the financial crisis.

The $50 billion in troubled assets comes from all five credit unions and is mostly in the form of mortgaged-backed securities. Matz said 70 percent of all assets held by corporate credit unions are now under conservatorship.  The seizure of the five firms will ultimately cost the industry between $7 to $9 billion, she said, and NCUA will collect this amount from credit unions over the next 10 years. Taxpayers will not have to foot any of the bill, she added.

Why do I bring this up, you ask?  I used to run money for Constitution Corporate.  Pretty straight forward stuff, short duration agency CMOs and vanilla asset backeds. We used to write CDs to member credit unions and reinvest those funds in the market - your basic spread game.  Looks like they changed direction over the last 12 years.

This will cost taxpayers which belong to credit unions money in higher costs, fewer services (depending on the size of the CU) and lower deposit rates.