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Thread: weekend commentary - Feds bail out US Credit Unions ... but at a price !

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    Default weekend commentary - Feds bail out US Credit Unions ... but at a price !

    This has been hanging like the Sword of Damocles for a while now, and finally came to a head last friday ...




    (snip)"It is Friday afternoon, and of course the most troubling news come out. Last week it was that the idiots in charge are raising their stake in Ally to 80%; this week also did not disappoint: the WSJ reports what can arguably be the most important story of the week - to wit: the government just seized three wholesale credit unions and has launched an "unusual plan" to manage $50 billion of troubled assets inherited from failed institutions. The unions taken into conservatorship include Members United Corporate Federal Credit Union in Warrenville, Ill., Southwest Corporate Federal Credit Union of Plano, Texas, and Constitution Corporate Federal Credit Union, Wallingford, Conn., which had a total of $19.67 billion in assets as of July. As for the funding of the new bailout program: "To help fund the rescue, the National Credit Union Administration plans to issue $30 billion to $35 billion in government-guaranteed bonds, backed by the shaky mortgage-related assets." Once again, uncle Sam bails out those who have committed federal crime and sticks Joe Sixpack with the bill. How is it a crime? "Under federal rules, wholesale credit unions were supposed to invest only in safe, liquid assets. But some institutions chased higher returns by loading up on securities backed by subprime mortgages or other risky loans. Their portfolios were decimated by the mortgage meltdown."And here is the punchline: "Officials said the plan won't cost taxpayers any money." How can one not simply laugh at the continued lies and crimes that occur each and every day, and are perpetrated by every single person in charge of this collapsing country?

    And this kind of shit continues to this day, as the morons at the pension and mutual funds are now loading up on high yield debt and stocks trading at thousands of forward PEs, which will be decimated the second rates start turning up. And guess who will pay for that next rescue, which will come just as "free" as this one, save for the several hundred billion of new bonds that will have to be issued again... and again... and again.

    More from the WSJ:

    [This intervention] marks the latest aggressive intervention by U.S. government officials into a corner of the financial system threatened by losses. Bad bets on mortgage-backed securities have killed five of the nation's 27 wholesale credit unions since March 2009. The federal government, which now controls about 70% of the total assets at such credit unions, also said the surviving institutions will be reined in so that they take fewer risks with their investments.

    And some more:

    Losses on the mortgage-backed securities held by the five seized credit unions are expected by regulators to total about $15 billion. Wiping out the capital of the failed institutions will cover a chunk of those losses, but the remaining $7 billion to $9.2 billion eventually will be passed along to the nation's 7,445 federally insured credit unions in the form of future assessments.

    Bert Ely, a longtime financial-industry consultant in Alexandria, Va., said regulators share some of the blame for the resulting mess because wholesale credit unions were allowed to pursue a strategy that was "viable only because of what clearly has turned out to be excessive risk-taking."

    Ms. Matz, the nation's top credit-union regulator, said the investment losses reflect "unprecedented economic times" and "bad decisions" by regulators, credit-union managers and board members "by heavily over-concentrating in mortgage-backed securities."

    New regulations issued by the NCUA on Friday will make oversight of wholesale credit unions much tougher and are meant to fix any regulatory shortcomings, she said.

    As part of the plan announced Friday, regulators will eventually wind down the operations of the five failed credit unions, which together had about $50 billion in shaky mortgage-backed securities on their books, according to Larry Fazio, NCUA's deputy executive director. Based on current market values, those securities are worth roughly half of their face value, representing a potential loss of $25 billion."
    (snip)


    Knowing that Credit Unions are popular with Dollar Den readers, there are probably two noteworthy 'take-aways' from this development ...

    - newly issued NCUA rules will tighten credit union requirements to evaluate the actual income level and financial 'stress level' of future borrowers. This will make life more difficult for exotic dancers.

    - the much higher future NCUA 'insurance premium' assessments charged to credit unions in order to 'pay back' the fed bailout money will put pressure on ALL credit unions 'spreads' ( i.e. the difference between loan interest rates and deposit interest payments ). This will mean higher loan interest rates being charged, and lower CD interest rates being paid.

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    Default Re: weekend commentary - Feds bail out US Credit Unions ... but at a price !

    http://www.prnewswire.com/news-relea...103741239.html

    NCUA adopted a new set of regulatory reforms aimed at strengthening the corporate credit union system. The new corporate regulation (NCUA Rules and Regulations, Part 704):

    •Implements stronger capital requirements and establishes prompt corrective action measures for corporate credit unions;
    •Establishes clear concentration limits on investments that will require corporate credit unions to better diversify their portfolios;
    •Improves asset-liability management requirements to avoid liquidity and interest rate risks; and
    •Raises governance standards to improve levels of experience and expertise on corporate boards.

    These are actually the new regulations.

    This is really the grandest illusion in this econmic mess. " The new regulations will protect us"

    The reality is the new regulations for banks and now credit unions are simplistic at best. They do not change subprime lending at all. Subprime lending is still going strong. They are actually doing everything they can to save subprime lending.

    The change in regulations only changes the issues around the subprime fall out ... capitol requirements, seperation of retail and investment banking, escrow requirements, new FHA requirements, etc. They still do not regulate subprime lending done outside of a traditional bank .... still mortgage brokers, still lenders, they just dont advertise it. Pay day loans, credit cards, home equities, everything that got us here is still going strong. No one talks about it anymore. They pretend it is dead and subprime is outlawed. It isnt

    Fact is nothing has really changed. Banks have decided on their own to be more strict with who gets to borrow. No one has forced them.

    They know the country is so addicted to debt, that if they cut off the supply of credit this country would topple upon itself.

    Btw the above regulation changes only effect the largest of the large credit unions. Many credit unions who took advantage of the subprime boom did it thru a third party. They did not take on the actual loans or risk. They just got kick backs for orginating them.
    Nature knows no indecencies; man invents them. ~ Mark Twain


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    Default Re: weekend commentary - Feds bail out US Credit Unions ... but at a price !

    the above regulation changes only effect the largest of the large credit unions
    Actually, this isn't exactly true in terms of real world consequences. For example, ALL credit unions are going to be hit with massively increased NCUA insurance premiums in order to cover the cost of these bailout bonds ... which will force all credit unions to increase loan interest rates and/or decrease deposit interest rates in order to make those increased NCUA payments. Early estimates put the impact of increased NCUA insurance premiums as rendering more than 50% of all local credit unions in the red. The only way to return to the black will be to reduce dollars paid out to savers, and/or to increase the dollars paid in by borrowers.

    Next, ALL credit unions will need to meet new borrower proof of income / debt to income ratio / credit score criteria in order to 'sell' future mortgages / auto and other secured loans to whatever intermediate financial entity ( i.e. corporate credit unions, a Wall. St financial house, Fannie / Freddie / FHA ) and thus off-load loan loss risk from their own 'books'.

    If newly written loans by local credit unions do not 'conform' to the loan standards of these intermediate financial entities, the local credit unions will be forced to 'hold' these newly written loans on their own 'books' for the full term of the loan ... which in turn ties up their limited capital and increases their loan loss reserve cash requirements, both of which make it more difficult for local credit unions to write additional future loans irregardless of the would-be borrowers' credit rating / verifiable income level / debt to income ratio. Existing NCUA regulations already limit the dollar amount of loans a local credit union can hold on its own 'books' in relation to its deposits ( i.e. CD's / savings accounts / checking accounts ), thus local credit unions will be prevented from writing very many new 'non-conforming' loans regardless of whether they wish to or not.


    Banks have decided on their own to be more strict with who gets to borrow. No one has forced them.
    arguably, higher loan loss reserve requirements and stricter 'conforming loan' requirements have indeed forced the issue.


    ~
    Last edited by Melonie; 09-27-2010 at 09:27 AM.

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