Thursday, October 8, 2009
NAFCU Capital Proposal: Meet Charles Keating
Let me state upfront that I am an equal opportunity skewer of credit union trade associations.
In an earlier post, I criticized CUNA’s alternative capital recommendation, which would increase the level of interdependency risk within the credit union system, by allowing credit unions to make capital investments in other credit unions.
The National Association of Federal Credit Unions has set forth its own alternative capital proposal, which would let individual members of a credit union invest in alternative capital instruments issued by their credit union, even though the draft language makes it clear that this investment by members would be uninsured and available for loss.
A credit union insider contacted me stating that this proposal smelled a lot like Charles Keating and Lincoln Savings and Loan and the worthless bonds they pushed on customers.
In case your memory needs refreshing, Lincoln Saving and Loan's branch personnel convinced customers of the savings and loan to replace their federally-insured deposits with higher-yielding bonds issued by American Continental, the parent company of Lincoln. American Continental went bankrupt in April 1989 and about 23,000 customers were left with worthless bonds. Many of these investors lost their life savings. These customers later said they were never properly informed that the bonds were uninsured and very risky given the financial condition of American Continental.
I’m not saying this is going to happen; however, customers who trust their credit union can easily be duped into buying these risky capital investments, which may be entirely inappropriate for them.