Two years after the peak of the financial crisis, the federal government swooped in to stabilize a crucial part of the credit-union sector battered by losses on subprime mortgages.

Regulators announced Friday a rescue and revamping of the nation's wholesale credit union system, underpinned by a federal guarantee valued at $30 billion or more. Wholesale credit unions don't deal with the general public but provide essential back-office services to thousands of other credit unions across the U.S. The majority of retail credit unions are sound, but they will have to shoulder the losses through special assessments over the next decade.
Friday's moves include the seizure of three wholesale credit unions, plus an unusual plan by government officials to manage $50 billion of troubled assets inherited from failed institutions. To help fund the rescue, the National Credit Union Administration plans to issue $30 billion to $35 billion in government-guaranteed bonds, backed by the shaky mortgage-related assets.
Officials said the plan won't cost taxpayers any money. Still, it marks the latest intervention by the U.S. government into a financial system weakened by the real-estate bust. Bad bets on mortgage-backed securities have now killed five of the nation's 27 wholesale credit unions since March 2009. The federal government, which now controls about 70% of the total assets at such credit unions, said the surviving institutions will be reined in so that they take fewer risks with their investments.
""Previously, we stabilized the system, and now we're resolving the problem and reforming the system,"" said Debbie Matz, chairman of the National Credit Union Administration, the U.S. agency overseeing credit unions.
Members United Corporate Federal Credit Union in Warrenville, Ill., Southwest Corporate Federal Credit Union of Plano, Texas, and Constitution Corporate Federal Credit Union, Wallingford, Conn., which had a total of $19.67 billion in assets as of July, were taken into conservatorship by federal regulators.
Wholesale credit unions, also known as corporate credit unions, invest money for retail credit unions and provide them with check clearing and other services. Since the start of 2008, 66 retail unions have failed, compared with more than 290 banks or savings institutions. Credit unions are member-owned cooperatives that act much like banks.
Under federal rules, wholesale credit unions were supposed to invest only in safe, liquid assets. But some chased higher returns by loading up on securities backed by subprime mortgages or other risky loans. Their portfolios were decimated by the mortgage meltdown.
Last year, regulators seized the two largest wholesale credit unions, U.S. Central Federal Credit Union, based in Lenexa, Kansas, and Western Corporate Federal Credit Union, San Dimas, Calif., after finding their losses were much larger than previously reported.
Losses on the mortgage-backed securities held by the five seized credit unions are expected by regulators to total about $15 billion. Wiping out the capital of the failed institutions will cover a chunk of those losses. But the remaining $7 billion to $9.2 billion eventually will be passed along to the nation's 7,445 federally insured credit unions in the form of future assessments.

New regulations issued by the NCUA on Friday will make oversight of wholesale credit unions much tougher, she said, and are meant to fix any regulatory shortcomings.
As part of the plan, regulators will eventually wind down the operations of the five failed credit unions.
Together they had about $50 billion in shaky mortgage-backed securities on their books, according to Larry Fazio, NCUA's deputy executive director.
Based on current market values, those securities are worth roughly half of their face value, representing a potential loss of $25 billion.
Friday's moves could deepen tensions between regulators and retail credit unions that withstood the financial crisis and resent having to bear financial costs caused by the mistakes of wholesale institutions.
(Source: The Wall Street Journal)
Photo: Debbie Matz, chairman of the National Credit Union Administration, during a Senate Banking subcommittee hearing in October, 2009