Failure Friday Returns

The FDIC closed 3 more banks yesterday (all of which were on the bad banks list), bringing the year's total to 20. I'll say it again, I don't know what they are waiting for. They skipped last Friday and the entire bad banks list could be shut down immediately. Dragging this out is of no use.

More spectacularly, there were 2 large credit union failures yesterday. A credit union functions like a bank, but the depositors are also the owners. In addition, a person must apply to be a member. Often there is some affiliation, such as employees of a certain company or residents of a certain community, that allows people to join. The National Credit Union Administration (NCUA) operates the National Credit Union Share Insurance Fund (NCUSIF). The NCUA functions in a similar fashion to the FDIC.

The credit unions that were place into conservatorship were corporate credit unions. A corporate credit union is owned by other credit unions. It functions like a central bank in a way. The corporate credit union lends to its members or accepts deposits from its members. It invests in loans or securities with the money it accepts.

U.S. Central Corporate Federal Credit Union and Western Corporate Federal Credit Union were shuttered beacuse their balance sheets did not pass the NCUA's stress tests. Here is the shocking part: they held $34 BILLION AND $23 BILLION IN ASSETS RESPECTIVELY.

The NCUA estimates that the NCUSIF will be drained by $1.2 billion because of the reprehensible actions of these 2 credit unions. As a result, the NCUA is seeking to increase its credit line with the U.S. Treasury to $6 billion from its current $100 million (Congressional testimony delivered yesterday). Why such an increase? Well, as of 6/30/08, the NCUSIF ONLY HELD $7.64 BILLION.

Wait, it gets better. The NCUA anticipates a reserve need of $4.7 billion - $5.9 billion for the fund. If they are correct, the fund is wiped out. Don't fret credit union members (of which I am one). Just like the FDIC, we will be insuring our own deposits because the funds will be supported by the taxpayers.

The FDIC and NCUA represent some of the worst supervisory performances in the history of our country. If I have to hear about Sheila Bair wanting the FDIC to shoulder more responsibility, I'm moving to Canada.