WASHINGTON - The National Credit Union Administration said Wednesday it seized a large, specialty credit union that ran into a liquidity crunch after losing millions in mortgage derivatives.

Placing $1.4 billion-asset Capital Corporate Federal Credit Union into conservatorship, the agency rejected a merger offer from the industry's largest corporate credit union.

NCUA Chairman Norman E. D'Amours said seizing Cap Corp was the government's least expensive option.

"More than a half dozen solutions have been considered in NCUA's attempt to avoid a liquidation of Cap Corp," Mr. D'Amours said. "Unfortunately, after careful analysis, all but this one would have been unacceptably detrimental to the credit union system and/or the share insurance fund."

But industry officials are riled that the agency didn't choose to merge Cap Corp with Western Corporate Federal Credit Union.

"From CUNA's viewpoint, we were disappointed that some substitute plan could not be worked out between the organizations involved," Credit Union National Association President Ralph Swoboda said in a statement.

"We are disappointed by NCUA's decision," said Richard M. Johnson, president and chief executive officer for Wescorp. "Our position has always been that we wanted to help provide a solution for Cap Corp's members. Wescorp staff spent considerable time researching and analyzing the situation to ensure we could present a viable plan."

Mr. D'Amours said Wescorp's bid would have created risks for the agency and industry.

"They were asking for forbearances that went beyond the need to manage the Capital Corporate portfolio that we couldn't as careful regulators grant because of safety-and-soundness considerations," Mr. D'Amours said.

Wescorp's merger bid would have required NCUA to provide Wescorp with $125 million over a 5-year period, sources said.

Under the conservatorship plan, the National Credit Union Insurance Fund is expected to shell out about $26 million to cover the costs of liquidating collateralized mortgage obligation holdings of Cap Corp, which have been devalued by between $80 million and $100 million.

The corporate's $33 million in primary capital also will be used to absorb the hit.

The NCUA is still weighing whether covering the costs will require using $37 million in credit union deposits that were counted as capital.

Under the conservatorship, NCUA on Feb. 6 will lift a freeze on deposits that Cap Corp imposed Dec. 7 after it couldn't meet withdrawal demands. U.S. Central Credit Union, the industry's primary liquidity center, will fund any withdrawals from the corporate.

The NCUA board approved the conservatorship by a 2-1 vote during a 90- minute meeting, with NCUA Director Robert Swan dissenting. In an interview, Mr. Swan said he wanted to give the 483 credit unions that are Cap Corp members more time to come up with a plan to recapitalize the corporate.

"It sends as message that the corporate system isn't strong and we're not there with the insurance fund to back it up," he said. "I see a loss of confidence."

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