Strengthening state credit unions Six holdouts: Privately insured institutions put investors' money at risk.

July 14, 1996

THE SITUATION sounds familiar. Financial institutions with state charters have depositors' money insured by a private corporation. They fight efforts to switch to the "full faith and credit" protection of federal insurance. It's not needed, they say. Everything is fine just the way it is.

That's what we heard in the 1980s from the state's savings and loan operators, who schemed and manipulated their way into a huge scandal that saw dozens of local thrifts declared insolvent, S&L officials and owners sent to prison, taxpayers forced to ante up $100 million and depositors deprived of their money for as long as four years.

Only this time it is six state-chartered credit unions that are telling us things are rosy.

Even in the face of the savings and loan scandal, these credit unions still have not obtained federal insurance. Instead, they are sticking with their own private insurer, the Credit Union Insurance Corp. (CUIC), which has a mere $2.9 million in assets to protect $85 million worth of deposits. CUIC has no reinsurance. If one of these local, state-chartered credit unions were to suffer a major financial setback on its investments, CUIC wouldn't have the deep financial pockets to meet its insurance obligations.

That wouldn't be the case if those six credit unions joined other state-chartered credit unions already under the auspices of the National Credit Union Share Insurance Fund, created by Congress. Depositors would finally have peace of mind. They would know the "full faith and credit" of the U.S. government stands behind their money.

Even conservative investments can go sour. In the quest to obtain extra income, credit unions could make bad decisions, putting money into risky ventures, or placing funds in the hands of others who take unnecessary chances.

We've already seen that at work in Maryland. Last year, the Capital Corporate Federal Credit Union failed, with losses of $100 million, after it used deposits from other state credit unions to invest in collateralized mortgage obligations that plunged in value when interest rates rose. The citizens of Orange County, Calif., lost $1.7 billion after its treasurer invested $12 billion in borrowed funds in risky bond derivatives.

Credit union members at Navistar, Fort Meade, Lever Brothers, the Postal Service, the U.S. Coast Guard and White Eagle (a converted S&L) -- 20,000 of them in all -- have their deposits at risk as long as their money is privately insured. There is no excuse for such risk-taking. Not after the lesson all of us should have learned from the savings and loan debacle.

Pub Date: 7/14/96

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