U.S. bails out credit unions by backing $30 billion in bonds

September 27, 2010 by · Leave a Comment
Filed under: Industry News 

Even though my core stance is that we should not of bailed out any financial institutions, I am glad to see that we are focusing on local banks and credit unions.  They have been hit the hardest because of the smaller capital cushions.  Local financial institutions are very important in smaller communities because they know the area and their borrowers better than national banks that might underwrite loans in regional centers other than right in town.

They would lean towards businesses that are known quantities like franchises where there might be local successful business that needs capital and might be turned down because of the lack of familiarity on the part of a large institution.

We shall see if this is enough to backstop the losses that are bringing down many local and regional banks around the country.

WSJ – 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.

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