In the latest dramatic move by federal authorities to prop up the nation's banking system, regulators late Friday seized control of the two largest wholesale credit unions in the U.S. after finding that their losses on mortgage-related securities were even larger than previously thought.
U.S. Central Corporate Federal Credit Union and Western Corporate Federal Credit Union, which have a total $57 billion in assets, were taken into conservatorship by federal regulators. Under conservatorship, the government will continue to run the institutions.
Michael E. Fryzel, chairman of the National Credit Union Administration, the industry's federal regulator, said the seizure was necessary to maintain the integrity of the credit union system and the already-strained insurance fund that backs up deposits in thousands of retail credit unions.
The affected institutions don't serve the general public. Instead, they provide critical financing, check-clearing and other tasks for the retail institutions. These wholesale credit unions, known in industry parlance as corporate credit unions, are owned by their retail credit-union members.
U.S. Central and Western Corporate have been grappling for more than a year with large paper losses on a slew of assets, mostly mortgage-related. In January, regulators moved to prop up U.S. Central with a $1 billion infusion after it took big writedowns on some of the securities.
Fryzel said regulators moved after becoming convinced that the two institutions were underestimating the true scope of their losses. "With us in control we'd get honest numbers," he said. Fryzel said regulators plan to replace top management at both institutions.