Monday, September 27, 2010

Latest Big Banking Bust: US Bails Out 'Wholesale' Credit Unions

People in a credit union offfice.
Kai Ryssdal talks to the New York Times' Eric Dash about how the federal government is stepping into help wholesale credit unions, which support hundreds of credit unions around the country.
People in a credit union offfice. (Bensacco)



KAI RYSSDAL: If you wanted to pick a part of the banking industry that you'd bet your bottom dollar would be safe and prudent and not likely to do something silly with your money, a lot of people would probably say credit unions.
And they'd be wrong.
Last week federal regulators took over three institutions that're what's called wholesale credit unions. They're basically credit unions for your local credit union. And they were shut down because they had plowed a bunch of money into bad investments. Can you say subprime mortgages?
Eric Dash reports on banking for the New York Times. Welcome to the program.
ERIC DASH:It's great to be here.
RYSSDAL: So I think, and I think most people, think of credit unions as being this sort of college town or trade group or whatever sort of local small banking institution. But there is this whole other layer, right, wholesale credit unions?
DASH: Right. Well credit unions have always held themselves out as the safest havens of the banking industry. They were the places that didn't make subprime loans; they shied away from commercial real estate. They were where you just sort of went and parked your cash. And as it turns out, that's true. And 99 percent of credit unions are just fine. But unfortunately, there was this extra layer there that serviced these credit unions. They provided things like payment processing and investment services to the retail credit unions, which are places that you and I would go. And when the retail credit unions left their money at these wholesale credit unions, they re-invested it. Some of the things that they re-invested turned out to be complex mortgages and subprime bonds. And when the market collapsed, so did those investments.
RYSSDAL: Is there taxpayer exposure on these things?
DASH: Taxpayers aren't expected to lose a penny on these things. The industry is going to pick up the costs. Just sort of the way that FDIC insurance works: When a bank fails, it's the banking industry that pays for the costs of resolving that bank. And when a credit union fails, through a similar mechanism, the credit union industry will pay. It's probably going to cost the credit union industry anywhere between $7 and $9 billion, which is a lot of money.
RYSSDAL: Yeah, but if you're a credit union customer, you can safely expect to see $7 to $9 billion worth of fees tacked on, right? Because they're not going to take that out of their own pockets.
DASH: The industry is going to get hit with an assessment fee, and that may wind up getting passed on to consumers. But it's also a competitive industry, and also rates are very low right now. So it's hard to sort of predict where it's going to show up in the consumer experience.
RYSSDAL: The thing that raised our eyebrows when we heard about this and read about this story was the fact that mortgage-backed securities, these toxic assets, are still out there and they are still working their way through the financial system. We're not done yet.
DASH: Right. No, we're not. We're probably -- if you talk to the experts -- about halfway through the bad assets...
RYSSDAL: Wait. Say that again. Halfway through two years on?
DASH: Two years on. There were probably, at the height of the crisis, something like $1.5 trillion worth of residential real estate and $500 billion of commercial real estate. We're a lot further along on the residential side of things, but there's still a lot of commercial real estate; it's the shoe that hasn't yet dropped.
RYSSDAL: If we're halfway through, though, is the worst of it over? Now that we know what's out there?
DASH: The way I look at it, this was sort of one of the last remaining hurdles for regulators. We had the big resolutions of companies like IndyMac and Washington Mutual, then we had a wave of regional banks that were in trouble. We sort of took care of those, then we've had about 279 or so smaller banks that needed to get resolved. I think that you're starting to see signs that the worst of the problem loans are starting to stabilize.
RYSSDAL: Eric Dash is a banking reporter for the New York Times. Eric, thanks a bunch.
DASH: Thank you.