NEW YORK-The collapse of the housing market bubble is largely credited with creating most of the losses corporate credit unions, and their natural-person CU investors, have reported.
But one person said the problem goes back much further and is the result of a near "perfect storm" for credit unions.
Peter Duffy, managing director at Sandler O'Neill & Partners, pointed to the evolution in CUs from being primarily SEG-based to being community based occurring at nearly the same time the Glass-Steagall Act was repealed. This confluence created "gross imbalance of supply and demand" in the marketplace, said Duffy, increasing the cost of capturing deposits, lowered rates on loans, and forced lenders to look to investments to alleviate margin pressures.
"While that occurred, the lawmakers began to put pressure on the whole system that they had to get more people into homes and make credit more available. That created the credit bubble of the ages," said Duffy. At the same time, CUs were shopping for greater returns on their investments, which "put pressure on the corporates to match the yield the credit unions were seeing from the broker/dealers. They began to stretch for yield in the investment portfolios and at the same time, the regulator gave corporates open field of memberships. "It a was nefarious, almost perfect storm," Duffy concluded.
Corporates began to see the losses mount in late 2006, when they in total reported unrealized losses of $23 million. By the end of 2007, that number had swelled to $3.1 billion, Duffy pointed out, even as corporates were asking for and receiving $500-million in capital from natural-person CUs. Problems came to a head as corporates were caught off-guard when typically rock-solid securities proved to be anything but. Most corporate CUs, and nearly all credit unions that had invested in them, had not questioned investments' underlying credit risk, Duffy contended.
"It was practically a recipe for disaster. Many of us who relied on the rating agencies have learned, very painfully, that you can't."
While NCUA's proposed rule changes will likely force natural-person institutions to look to new or additional broker/dealer relationships, Duffy believes the entire CU community needs to solve a bigger problem. Large, natural-person CUs that brought their investment dollars to corporates in an effort to "support the movement," Duffy argued, were actually helping along its demise by bending the curve in favor of risk as corporates competed nationwide to offer the best yield and lowest cost of services.
"The movement has not dealt with the cleavage that is in this system," he said. "Credit unions have evolved differently; some really care about the MBL, many don't. Some care about getting secondary capital, many don't. Some need a corporate, many don't. The system hasn't really dealt with the fact that large credit unions don't really need the corporates and arguably didn't need them [before the crisis] and should have been buying from the Street to support the little guy."
