U.S. Moves to Bail Out Credit Union Network

[dkf]

In the latest effort to prop up a sector of the finance industry, federal regulators on Wednesday guaranteed $80 billion in uninsured deposits at the powerful institutions that service the nation's credit unions -- a maneuver that shows how the economic crisis continues to ripple across the U.S.

Regulators also injected $1 billion of new capital into the largest of these wholesale credit unions, U.S. Central Federal Credit Union of Lenexa, Kan., after the firm on Wednesday posted an unexpected $1.1 billion loss for 2008. U.S. Central serves essentially as a main clearinghouse for the others in the network.

The vast majority of regular credit unions -- the bank-like cooperatives familiar to millions of account-holders nationwide -- are considered financially sound. Wednesday's moves affect only these wholesale credit unions, which number 28 and operate in the background to service regular credit unions.

In general, credit unions are considered to be among the most conservatively managed financial institutions. Nevertheless, a few of the wholesale credit unions have been hurt by losses on mortgage investments. As a result, regulators took action to minimize the chances of pain spreading.

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Though smaller than the likes of Citigroup or Bank of America, credit unions reach into virtually every community in the nation. Some 90 million Americans held accounts at credit unions at the end of 2007, according to an industry trade group. Credit unions, some affiliated with individual corporations, trade groups or geographic regions, are common sources for auto loans, mortgages and other products.

The little-known network of wholesale, or "corporate," credit unions affected by Wednesday's move provide financing, check-clearing and other tasks for the retail institutions. These wholesale credit unions are owned by their retail credit-union members.

Some of the biggest wholesale credit unions have been grappling with substantial paper losses on investments, primarily mortgage-backed securities. As of the end of November, five of the largest such institutions posted unrealized losses on their investments of $11.6 billion, up from $9.4 billion just a month earlier and about double the level of last May.

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