credit union takeover

[nelson]

On Monday I closed some accounts at Bank of America and deposited some savings at a local credit union. It's a small credit union that seemed pretty strong to me.

And now this:

US seizes 2 big credit unions
http://money.cnn.com/2009/03/20/news/companies/credit_unions/index.htm

2 corporate credit unions taken over by government
http://finance.yahoo.com/news/2-corporate-credit-unions-apf-14707022.html

What the hell is going on? Anyone have a take on this?

I know these are "rescue" moves with good intentions but our government seems a little out of control with the takeovers and nationalizations.

I can always put it under the mattress. :gun:

[Remphoto]

On Monday I closed some accounts at Bank of America and deposited some savings at a local credit union. It's a small credit union that seemed pretty strong to me.

And now this:

US seizes 2 big credit unions
http://money.cnn.com/2009/03/20/news/companies/credit_unions/index.htm

2 corporate credit unions taken over by government
http://finance.yahoo.com/news/2-corporate-credit-unions-apf-14707022.html

What the hell is going on? Anyone have a take on this?

I know these are "rescue" moves with good intentions but our government seems a little out of control with the takeovers and nationalizations.

I can always put it under the mattress. :gun:

Credit unions face many of the same challenges as banks. As consumers become squeezed it puts pressure on their loan quality. We were told while in DC that a number of CUs were in trouble and that their insurance fund was in even worse shape than the FDIC. Their fund needs a special assessment 3 times larger than the Banks are facing. That's one of the reasons they are asking for powers to lower restrictions on making commercial loans, so they can quickly put higher yielding assets on their books. This scares me as they and their regulators are ill-equipped to make these very complex types of loans and will set the stage for a credit quality debacle.

[nelson]

The people I met at the local credit union were nice, but they wouldn't be prepared to make commercial loans. It would be a train wreck for all of us if they tried. To begin with, there are different standards and expectations for these loans, which they simply would not understand. Risk would increase for everyone making commercial loans, and that would impact all borrowers, of course. Oh and by the way, lending commercially to "members" is a terrible idea IMHO.

But Rem, if insurance funds across the board are in trouble, where does one put cash today?

[Max]

We have been a nation of debt. Probably as much as 20% of our economy or more is based on debt. As people tighten belts, as default rates rise and credit unions are right in the thick of that. I expect to see many more types of financial institutions fall in the future. I think we are still in the early stages of what could be as much as 2 trillion in bad debt alone.

Most of what has been paid to date was default gambles, the ripple effect is going to cause the tidal wave of defaults IMHO.

[The G]

Last year there was a total of 25 banks taken over by the feds, I think this is number 18 so far this year this year.

[The G]

I heard its a total of 20 banks this year.

[Remphoto]

The people I met at the local credit union were nice, but they wouldn't be prepared to make commercial loans. It would be a train wreck for all of us if they tried. To begin with, there are different standards and expectations for these loans, which they simply would not understand. Risk would increase for everyone making commercial loans, and that would impact all borrowers, of course. Oh and by the way, lending commercially to "members" is a terrible idea IMHO.

But Rem, if insurance funds across the board are in trouble, where does one put cash today?

Even though the insurance funds are below their mandated levels, they are backed by the full faith of the US Government (to the extent that is worth anything nowadays:)). A customer's deposits are insured up to $250,000 per bank (and even more depending on how your accounts are titled). Also, banks can buy additional no limit FDIC insurance for business DDA accounts. Most banks have opted in for this plan.

How fast you get your money back from the FDIC is another matter, especially if there are a massive number of banks failing. That's one of the advantages of banking with a sound bank which is less likely to fail. If you want to get an idea of how strong a bank is go to http://www.bauerfinancial.com/btc_ratings.asp. Bauer rates banks based on earnings and capital and provides a rough idea of the strength of a bank. Pick a 5-star (their highest rating) and the risk of failure is lower. As a side note, our bank is 5-star rated and has had that rating for 75 quarters, one of only 6% of US banks to claim this. We have been flooded with deposits from people looking for safety and soundness, even though our deposit rates are very low compared to market.