Tzuris for Credit Unions

There is a banking crisis. It doesn’t matter what paper, blog, twitter account or television station you’ve been paying attention to. The banking bacchanalia is in front of our faces daily. Results of the Stress Test will be revealed tomorrow. I remember the good old days when having a stress test was merely a way to determine if you had aortic stenoses.

How many of you are aware that Credit Unions have been experiencing “issues”?

On April 29, 2009 the U.S. House of Representatives’ Committee on Financial Services sent a letter signed by Barney Frank, Paul Kanjorski, and Luis Gutierrez to Senator Christopher Dodd, Chairman of the Committee on Banking, Housing, and Urban Affairs in support of the Corporate Credit Union Stabilization Fund. This fund is intended to recapitalize the credit union deposit insurance system in view of recent decisions to place U.S. Central and WesCorp (two credit unions) in conservatorship, and to guarantee its deposits. These actions are anticipated to result in $5.9 billion in losses for the National Credit Union Share Insurance Fund. Accordingly, credit unions would probably pay a fee of 99 basis point per $100 in deposits during 2009.

In order to mitigate this sizable one time charge, the National Credit Union Administration is planning to allow 7 years to amortize the cost of this charge. Here’s the kicker: without the 7 year time frame to amortize these costs, 2/3 of credit unions would have negative earnings in 2009 and approximately 225 credit unions would fall below the levels deemed to have adequate capital.

Small potatoes compared to the billions banks may need to raise, or preferred stock converted to common stock, once the Stress Test results are released to the public.

However, due to the relative small size of this issue, it has essentially been under the radar. How many other under the radar issues are there and how much will issues like this cost taxpayers? Will the Government abrogate the 7 year amortization period, like it did during the Savings & Loan crisis with supervisory goodwill, and seize credit unions at some point in the future? Will the Capitals beat Pittsburgh in Game 3?

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One Response to “Tzuris for Credit Unions”

  1. coopgeek Says:

    I found my way here from the baseline scenario blog, so this is a really interesting segue. It is true and unfortunate that the corporate credit unions are in trouble, there may be a useful experiment underway: does the decentralized federated structure of the credit union system help in this situation? If a regular conglomerate had its top two divisions go down, it seems unlikely that the subsidiaries would survive for long. I recently blogged on a comparison between AIG (or whatever it’s called today) and the mutual insurance movment: http://coopgeek.wordpress.com/2009/03/28/fundamental-failure

    It’s too early to tell, but I had thought that the early signs are somewhat positive. Your statistics are a bit more pessimistic, and I wonder where you found them. Please do tell.

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