WASHINGTON -- The federal takeover of a large Maryland credit union has raised troubling questions about the government's ability to oversee yet another segment of the nation's financial system, lawmakers said yesterday.
Members of the Senate Banking, Housing and Urban Affairs committee pressed the chief credit union regulator to tighten its supervision and regulation of credit unions in the wake of the seizure of the Capital Corporate Federal Credit Union in Lanham.
Cap Corp, as it's called, was taken over by the National Credit Union Administration (NCUA) in January after its portfolio of mortgage-related derivative securities lost $100 million in value last year. The company had invested almost 70 percent of its $1.4 billion in assets in the derivatives, which plummeted in value as interest rates rose last year.
Despite assurances that Cap Corp won't cost taxpayers any money, lawmakers questioned how such excesses could have occurred in the credit union industry, seen as among the most conservative financial institutions in the United States.
"It is obvious that this is an investment strategy that is totally inappropriate when it comes to placing taxpayers' money at risk," said Sen. Alfonse M. D'Amato, a New York Republican who chairs the banking committee. "We have a right to know how this got so far out of hand.
"I want to say that this is all very disturbing," Mr. D'Amato added. "It is distressing."
Sen. Paul Sarbanes, a Maryland Democrat, said the situation suggested parallels with the savings and loan industry debacle. "When developments such as the failure of Capital Corporate Federal Credit Union occur . . . it raises concerns not only about that particular credit union, but about the credit union system as a whole," he said.
NCUA Chairman Norman E. D'Amours was quick to dismiss any connection between credit unions and savings and loans, whose failures collectively cost the taxpayers about $150 billion.
"Let us remember that credit unions are very well capitalized," Mr. D'Amours said, referring to the cushion of money financial institutions reserve to protect against losses. "We are not dealing with a comparable situation. These are safe and sound institutions."
But he did acknowledge sharp criticisms from the General Accounting Office that Cap Corp, one of 43 "corporate" credit unions whose depositors are themselves credit unions, was allowed to pursue risky investment strategies for too long.
