Corporates' Losing Wager Made Worse By Lack of Effective Hedging Strategies

Register now

LAKE BLUFF, Ill.-Corporate CUs are in trouble because they made a bet that did not pay off, and they failed to hedge their wager.

Mike Moebs, economist and CEO of Moebs $ervices, was blunt in his assessment of what led to the losses stinging the corporate credit unions, and the conservatorship of two of the largest. "Ultimately, when you look at the financial numbers and try to stay away from political and regulatory implications, it all comes down to the fact that each and every corporate, as a policy, decided to take a bet," he said.

The wager was Americans would keep buying homes and the value of their homes, despite minor fluctuations, would never go down, stated Moebs. And then leverage got out of hand, he added, since corporates CU CIOs opted not to hedge their positions with sufficient investments in derivatives. In 2006, the amount of money corporates held in derivatives was $136.2 million against $128.5 billion in assets, according to Moebs.

Moebs compared the corporate investment strategy to a farmer not taking out enough insurance to cover the possibility of a poor harvest. "If he's taken out enough insurance in the form of a commodity hedge, when he goes to the grain elevator, the farmer is assured he will get his price. This was not done in the case of the corporates. There wasn't nearly enough in derivatives to protect their bet."

The likely reason was times had been too good and confidence in mortgage-backed securities was high, offered Moebs, who also contended some corporates did not know the derivative market well. "Just like the farmer who did not learn anything about the commodity derivative market. A farmer not knowing the commodity derivative market is as bad as a farmer who does not maintain his equipment."

For reprint and licensing requests for this article, click here.
Corporate credit unions