By Ed Roberts, Washington Bureau Chief
WALL STREET–Last week’s earthquake in the financial markets was being felt throughout the credit union industry, as gyrating rates and a variety of holdings were delivering a major shock to balance sheets all over the country.
“Look, nobody is immune to this,” said Jeff Post, CUNA Mutual Group CEO, who was tallying the affects of the turmoil on his company’s $8-billion investment portfolio.
Last week’s bankruptcy of Lehman Brothers Holdings and the takeover of insurance giant American International Group, following closely on the heels of the federal takeover of Fannie Mae and Freddie Mac, sent the markets in a steep free fall, the likes of which hasn’t been seen the Great Depression.
Value of mortgage backed securities, a favored investment for credit unions, fell across the board last week, along with the stock markets, where credit unions investments in credit card companies Visa and MasterCard were seeing big declines, as well. Shares in the two companies, the only stock credit unions are allowed to own, fell 25% last week, dealing another blow to already strained balance sheets.
The turmoil spread to the money markets, a key provider of liquidity for credit unions, after a large money market fund “broke the buck,” that is, had its net asset value fall below the hallowed $1 a share mark. Other money market funds, which are a compilation of Treasuries, overnight Fed Funds, repurchase agreements and other short-term instruments, were also teetering last week.
“What’s going on now is a massive de-leveraging of the financial system,” said Dwight Johnston, a senior vice president with WesCorp FCU. “There is a massive mark-down of assets and asset values and a consolidation.”
Among the questions raised last week were: what impact the Lehman failure will have on the secondary mortgage market, just as the prior week’s takeover of Fannie Mae and Freddie Mac appeared to calm the secondary market.
“The number of players could be declining here in the secondary market,” said Brian Turner director of Southwest Corporate Investment Services, a unit of Southwest Corporate FCU. “With fewer players, how will it affect spreads?”
Credit union executives were also worried about the impact the Lehman failure will have on the valuation of mortgage backed securities, especially so-called private- label issues sold by Lehman and other Wall Street banks, which were being downgraded by the ratings agency after the Lehman failure.
Charles Felker, a vice president and credit union bond house First Empire Securities and a former chief investments officer at NCUA, said several of his credit union customers holding Lehman issues had called expressing concern. While some of the issues had once been highly rated, many were being downgraded last week to below the minimum double AA required by NCUA, potentially forcing them to be accounted for as impaired or even to be divested.
The concerns for money market funds were sparked after the Reserve Primary Fund announced that its NAV had fallen below $1 a share, the first time a money market fund had breached that mark in 14 years. The cause was some $660 million of debt securities the $65-billion fund held in Lehman Brothers Holdings.
John Jeffries, who administers the Callahan CU Financial Services’ Trust for CUs and its money market fund, said they expect the fund, to weather the storm because it has avoided instruments issued by Lehman, American International Group and other troubled issuers and kept to safe instruments like short-term Treasuries and agency securities. The fund holds about $700 million in credit union money.
“The yields our investors have seen have been volatile, but certainly the markets have been too,” said Jeffries.
CUNA Mutual’s Post said the credit union insurer has broad exposure to the crisis, mostly through its $6-billion bond portfolio, but they had avoided some of the biggest shocks last week. They had none of the stock, either common or preferred, in Fannie Mae or Freddie Mac, that is being marked to zero, but do hold Fannie- and Freddie-issued mortgage backed securities, which had gained some after the government takeover. CUNA Mutual had eliminated its exposure to Lehman Brothers two weeks earlier by selling off Lehman bonds because “we had some concerns over the direction they were going,” he said.
In addition, CUNA Mutual held a single $3 million AIG bond, the value of which was unknown last week.
Christopher Sullivan, chief financial officer for United Nations FCU, who manages a $1.4-billion investment portfolio, said the volatility in the markets has prompted him to sit on the sidelines. “We’re not actively trading. There’s too much volatility,” he said.
