Supervising Credit Unions

March 01, 1995|By David Conn | David Conn,Sun Staff Writer

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.

The corporate credit unions were designed to provide a safe place for so-called "natural person" credit unions to invest their money and to make short-term loans to those institutions to meet the borrowing demands of their depositors.

But Cap Corp and others began to pursue riskier investment strategies in search of higher returns that would attract and retain depositors. The GAO report showed that Cap Corp didn't have adequate systems to gauge the riskiness of its securities and that the board of directors failed to oversee the company's investment policies.

The NCUA "did not act to restrain Cap Corp's high concentration of CMO investments," said GAO Comptroller General Charles A. Bowsher, and in fact it actually raised the company's financial rating to the highest level in 1992, several years after it knew problems were developing.

The NCUA, which oversees all federally insured credit unions, in the past month has been selling the company's $1.2 billion investment portfolio and assured the lawmakers yesterday that the institution was under control.

Cap Corp still has about $500 million in deposits. Its $37 million in capital was used to absorb losses from the sale of the securities. About two-thirds of the $37 million in "capital shares" invested in Cap Corp by several dozen depositors will soak up what NCUA believes will be the rest of the losses.

Most observers believe the institution will be closed within weeks or months as those depositors, the credit unions that serve individuals, find other places to put their money.

Mr. D'Amours acknowledged lapses at the agency, which he joined in November 1993, that allowed Cap Corp's problems to grow out of control during a 15-month period. But he promised a set of reforms that should prevent future Cap Corps. Within a few weeks the NCUA will release proposals that would require credit unions to:

* Match the maturities of their assets, such as loans and investments, with their liabilities, primarily deposits. Part of Cap Corp's problem was that its derivatives, known as collateralized mortgage obligations (CMOs), effectively had a long-term fixed rate but its deposits carried short-term rates, which rose rapidly last year.

* Limit CMO investments to the amount of a credit union's primary capital.

* Raise the minimum required amount of capital.

* Institute automatic "trip wires" to sound an alarm and head off investment losses.

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