By now, it's a familiar story: A group of financiers eager to juice returns buys billions of dollars of exotic securities backed by mortgages that plunge in value and can only be sold at a huge loss.
Only this time, the financiers worked for some of the nation's largest credit unions, and their actions nearly wiped out the national fund that insures credit union deposits.
The securities losses originated at a handful of so-called corporate credit unions, which play a key role in the industry. Such credit unions don't deal directly with consumers but collect deposits from and provide investment services for thousands of credit unions.
Until recently, many credit unions paid scant attention to their corporate brethren. But this spring, federal regulators seized two such institutions -- U.S. Central of Lenexa, Kan., and Western Corporate (known as WesCorp) of San Dimas, Calif.
Suddenly, there was real worry that small credit unions would rush to withdraw deposits from the corporate units, triggering a run. As a result, the federal agency that oversees credit unions stepped in with a costly rescue plan.
Regulators say credit unions will pay $5.9 billion to replenish the insurance fund, but some experts believe the final price tag could be much more. All told, the nation's 28 corporate credit unions own $41.5 billion in securities backed by mortgages and other debt, according to the National Credit Union Administration (NCUA), the federal agency that regulates credit unions and insures deposits.
The cleanup is already having a deep impact on credit unions' financial health.
Many of Minnesota's 156 credit unions booked the cost during the first three months of the year. In many cases, the costs dwarfed profits, forcing them to post losses. For instance, St. Paul-based Affinity Plus, the state's largest with 135,290 members, would have made $2.1 million in the quarter, but that was more than wiped out by a $9.4 million expense related to replenishing the insurance fund.
Legislation passed in May enables credit unions to spread the cost over seven years, and many are expected to restate first-quarter results upward.
The problems at the corporates were not unforeseen. In 2004, the Government Accountability Office (GAO) warned the corporates had "targeted more sophisticated and potentially riskier investments" to generate more profit. The GAO also criticized the NCUA for failing to "fully consider all risks" when assigning examiners to corporate credit unions.
Anger toward corporate credit unions has shifted to federal regulators.
An NCUA spokesman acknowledged the agency had examiners housed in five of the nation's corporate credit unions, including the two seized in the spring. "What, exactly, were those examiners doing?" said Matt Wohlers, chief executive of TruStone Financial, formerly Teacher Federal Credit Union, in Plymouth.
Chris Serres • 612-673-4308