Monday, March 11, 2013

Corporate Credit Unions Subsidized by Federal Safety Net

During the Financial Crisis, corporate credit unions received a significant subsidy from the Federal safety net, as the financial conditions of corporate credit unions deteriorated.

Five corporate credit unions failed during the financial crisis because of massive losses on their investment portfolios of risky asset-backed securities. In addition, the equity investments of corporate credit unions in U.S. Central, a wholesale corporate credit union serving retail corporate credit unions, were wiped out by losses at U.S. Central.

Concerns about systemic collapse of the credit union system arising from the mounting problems at corporate credit unions caused NCUA in late 2008 and early 2009 to take a number of actions to stabilize the corporate credit union system, including guaranteeing all uninsured deposits at corporate credit unions and borrowing funds from the U.S. Treasury to stabilize and resolve the five failed corporate credit unions.

As a result of NCUA’s actions, in early 2009 Fitch raised the Support Rating and Support Rating Floor for eight rated retail corporate credit unions, while lowering their individual stand-alone ratings.

On February 10, 2009, Fitch raised the Support Rating, which measures the probability of external support from the government, for all rated corporate credit unions from 4 to 1. A rating of 4 means there is limited probability of support, while a rating of 1 means a very high probability of external support. As a result, the Support Rating Floor was raised 10 notches from B to A+. Before the financial crisis, retail corporate credit unions rated by Fitch had Support Rating Floor of B.

Fitch also affirmed or downgraded the long-term issuer default ratings for these rated corporate credit unions to their support floor of A+. The issuer default rating for each corporate credit union could not fall below the Support Rating Floor. Five corporate credit unions were downgraded from AA- to A+. The other 3 corporate credit unions had their ratings affirmed at A+.

Three of these retail corporate credit unions ultimately failed -- Members United Corporate, Southwest Corporate, and Constitution Corporate; but still had an issuer default rating of A+ just 3 months before being seized by NCUA in September 2010.

In addition, the stand-alone ratings for these corporate credit unions were downgraded twice during the first quarter of 2009 with all ratings eventually falling to E (see table below). The average notch downgrade arising from the February 10 ratings action was 2.75 notches. The average notch downgrade for the eight retail corporate credit unions arising from both February 10 and March 24 ratings actions was 6.5 notches. A rating of E indicates that the corporate credit union has very serious problems and requires external support.

This divergence in the Support Rating Floor and the Individual Ratings shows that these retail corporate credit unions received a very valuable benefit from the Federal safety net.


  1. And your point is??? All financial institutions have had their backs covered by the federal government/Treasury Department for almost 100 years.

  2. How long did banks benefit from the prohibitions on paying interest on checking accounts? Benefit from trust preferred securities? Benefit from Subchapter S federal tax-exempt corporate status? Benefit from tax breaks from small bank loss reserve accounting? Benefit from bad debt forgiveness?

    Not complaining. Just asking.

  3. There are some in the credit union industry who don't believe they receive a subsidy. Just wanted to point this out.

    Would FDIC deter wrongdoing by announcing settlements with banks?
    By E. Scott Reckard

    10:45 AM PDT, March 11, 2013


    On its website, the Federal Deposit Insurance Corp. says pursuing damages when banks fail is a way to restore public confidence in the industry.

    Doing so, it says in an analysis of the savings and loan crisis of the 1980s, creates “the perception as well as the reality that directors, officers and other professionals at financial institutions are held accountable for wrongful conduct.”

    But can confidence be restored if the public doesn't know the FDIC is going after the directors and officers and the professionals who did business with them? A Times investigation shows the agency has only rarely made public its settlements of claims against insiders in the latest wave of failures.

    Quiz: How much do you know about mortgages?

    The Federal Deposit Insurance Corporation Improvement Act of 1991, passed in reaction to the S&L debacle, included a ban on keeping such settlements confidential.

    The provision doesn’t require the FDIC to call attention to its settlements with bank insiders. But not doing so “violates the spirit of the law, which calls for open enforcement actions and publication of formal enforcement actions,” said Sausalito attorney Bart Dzivi, a former Senate Banking Committee aide who drafted the provision.

    Dzivi said it never occurred to him at the time that the FDIC would not announce financial settlements with former bank officers and directors accused of wrongdoing, or settlements with big Wall Street powerhouses such as Deutsche Bank.

    Deutsche Bank, currently the largest bank in the world, agreed in December 2009 to pay $54 million to settle claims that soured mortgages from its subsidiary MortgageIT contributed to the failure of Pasadena-based IndyMac Bank, which cost the FDIC $13 billion.

    FDIC spokesman David Barr said a "no press release" clause in the Deutsche Bank settlement had been approved by lawyers for IndyMac before the failure. While retaining the secrecy provision, the FDIC made clear to Deutsche Bank that the FDIC would be required to reveal the settlement if asked, Barr said.

  5. We got and are getting bailed out by the treasury and therefore by the taxpayer.
    Dont know whats more embarrasing...
    A taxpayer bailout.
    Begging to keep the exemption when some dont even want it anymore.
    The type of posts like above thar seem to ignore the obvious point that we got bailed just like the big banks. Embarrasing.

  6. OK, let me understand this logic; credit unions, more specifically their corporates invest in big-bank created investments that some believe to have been fraudently created. When they go bust, the credit unions give up all their paid in capital in the corporates and then borrow, at interest, money from the Treasury. That may technically be a 'bail out' but the public is not on the hook for a single dollar. Where I come from that is an exercise in government preventing an even worse disaster in the U.S. financial system caused by Wall Street and the big banks. In the end, natural person credit unions pick up the tab and the ABA shouts 'subsidized'. We pay interest to the Treasury Department so where is the subsidy?

  7. This just in, President Lincoln shot! Up next: Will FDR run for a third term?

  8. The public supported the bailout.
    Without the public, the "movement" would have cratered according to dmatz multiple times.
    Without the public, we'd be gone.
    Corps levered in wall street fashion and bought assets in wall street fashion, so wouldn't point the wall street comes back to us in the mirror.
    Our members are also supporting the bailout with lower share returns than bank deposit returns, in most cases.
    Meanwhile, Cuna (cu not accountable) trots out a new(?) slogan about sticking together to avoid (surprise) taxes.
    And they want me to recruit my members to join the whine-fest that we're special and shouldn't pay taxes, while they struggle to make ends meet.
    No wonder the best credit unions in the country stopped the insanity and saved money by dis affiliating.
    Any credit union that recruits their members in the whine fest will need to understand when those same members disaffiliate from the cu when we lose the tax exemption in part because we needed public support.
    I just hope the smaller credit unions don't get taxed cause we don't deserve it.



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