So in the continuing saga of #bankfailfriday, two of the nation's largest corporate credit unions failed last week. From the WSJ (emphasis added):
Credit unions are cooperatives, with members as opposed to customers, and so they have two unique features: they’re not taxed, and they don’t issue preferred stock — which is particularly relevant right now, because it means they’re not eligible for the Treasury’s “bailout” funds. And as last night made clear, the banks aren’t the only ones in need of a bailout.
I don't know much about credit unions, except that there seems to have been a recent perception of them being safer. I know they are supervised and insured, not by the FDIC, but by the National Credit Union Administration (NCUA). Deposits with credit unions appear to be insured to the same extent as standard banks.
However, from what I can glean from this article, the fact that credit unions are cooperatives, such that its members are also "owners" of a sort, it should be the situation that (I am assuming) the members get certain disclosures, and have a certain amount of say, about the lending activities of their particular credit unions. Again, I am totally speculating here, but that is typically the difference between being an owner (as in credit union) and as in a first priority creditor (which is what, effectively, a depositor with a bank is).
So these are the possibilities for why these two corporate credit unions, which were buying up the loans of the credit union and then packaging them into mortgage backed securities (and perhaps, other derivatives?) for resale, have failed. (1) They followed the traditional i-bank model, and kept a slice of the riskiest tranches, but weren't sufficiently hedged against the risks of these failing. However, as the riskiest slice, even if they were based on a better grade of mortgages, there has still been enough defaults at this point to basically wipe out the riskiest tranches. But this could at least give us hope that the credit unions were functioning as they are supposed to, with self-interested members NOT permitting lending to sub-prime borrowers. Or (2) in fact, credit unions were engaging in the same kind of pass-through practice of extending loans to the sketchiest of borrowers, but eliminating the risk by selling these loans up to the corporate credit unions, who then bundled the crap loans up and out. If this is the case, then it won't be long before we see some failures among the credit unions as well.
I'd love to see what sort of disclosure credit unions give to their members.
And while we're on the subject of credit unions, here is a lovely little piece from the late Tanta about a mysterious credit union failure last year, which suggests that (2) above is the unfortunate reason for failure. She is much missed.