A Bailout for Credit Unions
by Connie Madon
In a complex set of arrangements, the federal government has stepped in to stabilize the credit union industry, as reported by the Wall Street Journal. The bailout involves wholesale credit unions. They invest money for retail credit unions and provide them with check-clearing services.
During the housing bubble, these wholesale credit unions invested in subprime mortgages, and guess what? They lost a bundle of money for their clients, who are retail credit unions.
The losses have mounted to the tune of $50 billion. The the government stepped in and will manage this $50 billion of toxic assets, which are worth about half of their face value. That means that the government will eat about $25 billion in losses.
Regulators also stepped in a seized three of these wholesale credit unions: Members United Corporate Federal Credit Union, Southwest Corporate Federal Credit Union and Constitution Corporate Federal Credit Union
To avoid the negative publicity of an outright money bailout, the government will guarantee $30 to $35 billion of bonds issued by the National Credit Union Administration (NCUA). To minimize and spread out losses, regulators will move the toxic assets to a good bank/bad bank structure and turn over management of the portfolio in the bad bank to NCUA.
No matter how you cut it, there are huge losses. Local credit unions will have to make up the shortfall by charging higher interest on loans and paying less interest on savings accounts.
No matter what they call it, this is another government bailout.
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