Federal regulators seized control Friday of the nation's two largest "wholesale" credit unions -- with combined assets of $57 billion -- in an emergency move to stabilize the nonprofit banking system used by 90 million Americans.
The National Credit Union Administration abruptly placed Western Corporate Federal Credit Union of San Dimas and U.S. Central Federal Credit Union of Lenexa, Kan., under conservatorship to stem mounting losses caused by mortgage-related bonds.
The so-called wholesale, or corporate, credit unions serve the broader industry and not individual consumers.
Western Corporate is one of 27 wholesale credit unions that serve the nation's 8,000 retail credit unions.
U.S. Central is even larger, serving Western Corporate and the other wholesalers.
Despite the seizures, the NCUA said service would not be interrupted for either institution. U.S. Central holds $34 billion in assets and Western Corporate has $23 billion in assets and 1,100 retail credit union members.
Though it has not experienced the same financial pain as banks, the traditionally conservative credit union industry has suffered significant losses in recent months after venturing into new areas such as commercial loans.
Both U.S. Central and Western Corporate have seen a dramatic drop in their capital positions because of the rapid loss in value of their mortgage-backed securities holdings.
Friday's action was taken after the federal government completed an analysis of mortgage- and asset-backed securities at the nation's corporate credit unions and determined "an unexpectedly high concentration of risk resided only in the two conserved corporate credit unions," the NCUA said.
In January, the government announced that it would guarantee uninsured shares at the corporate credit unions and infuse U.S. Central with $1 billion in capital in response to diminishing liquidity and asset values.
The cost to the newly established insurance fund as a result of the two conserved credit unions' devalued assets is estimated at $1.2 billion apiece, said John McKechnie, a spokesman for the credit union agency.
"All the insured institutions will ultimately have to replenish the funds," McKechnie said. A formula to do so has yet to be determined, he added.
An important measure of credit union health is the ratio of the fair value of investments against the fair value of liabilities. The NCUA wants to see credit unions stay above 3%. Western Corporate was at 3.32% in December 2007.
By December 2008 it had dropped to negative 8.2%. U.S. Central had an even steeper drop, from 1.6% to negative 27.58%.
The credit union agency's rules require it to run financial performance tests on a credit union that drops below 3% every month until it climbs back above that threshold.
Central had $46 billion in assets in March 2008 and was down to $34 billion before the seizure. Western Corporate had dropped from $29.8 billion in assets to $23 billion.
"I think they're trying to stabilize them now before their credit union members start pulling their deposits out," said Bert Ely, a Virginia banking consultant. "This is something that has been building for a long time and the NCUA has had a pretty good handle on it. Obviously they decided that they needed to take more serious measures than they have taken in the past."
Unlike in last year's seizure of IndyMac Bank, none of the credit unions' customers are likely to lose any money with this takeover because of the guaranteed insurance measures.
There has been a lot of consolidation in the industry over the last two years, and at least one of the two credit unions could end up merged with another, Ely said.
The move came unexpectedly to Western Corporate employees late Friday afternoon.
"I was taken by surprise by this just like everyone else," said spokesman Walter Laskos, speaking from his car after he had to turn around on the freeway and head back to his office. "There's a number of [federal regulators] at our corporate headquarters right now."
Another spokesman for the credit union, Kevin Lytle, said the regulators at the headquarters announced that they had already installed a new chief operating officer.
"We're just trying to figure out what's next," Lytle said.
A spokesperson for U.S. Central could not be reached.