Concerned about large losses in a securities portfolio heavy with derivatives, federal regulators have taken over the operations of a large Landover-based credit union that serves other credit unions.
The Capital Corporate Federal Credit Union was placed in conservatorship by the National Credit Union Administration, which oversees and insures the nation's 7,600 federal credit unions. The agency also insures the deposits of 4,600 state-chartered credit unions.
The administration, based in Alexandria, Va., took the blame yesterday for failing to supervise Capital adequately. "There were red flags, and we dropped the ball," said spokesman Robert Loftus.
The move late Tuesday came a week before Capital is due to lift a 60-day freeze on withdrawals by its members, some 483 "natural person" credit unions whose members are individual depositors. Of those credit unions, 144 are based in Maryland. The administration said it will guarantee that any credit union that wants its money from Capital will have it.
The future of Capital Corporate will depend in large part on how those credit unions react when the freeze is lifted, said Mr. Loftus. "Whether it is salvageable, or how the assets, such as they are, should be disposed of will be decided in the next week or so."
As for Capital's depositor credit unions, "They're going to get all their money if they want it," he said. "That would be a self-liquidation, I guess."
Because the deposits are guaranteed, however, Capital is not expected to experience a run next week. If there's not much demand for deposits, "we possibly could fix it and turn it over to a new board of directors," Mr. Loftus said.
Tower Federal Credit Union in Laurel, for one, has not been harmed by the freeze, according to its chief financial officer, Richard L. Brake. "We had a little bit" invested in Capital, he said. "We were in a very good liquid position," Mr. Brake added, referring to his company's ability to meet the withdrawal demands of its members.
The Municipal Employees Credit Union of Baltimore, the area's third-largest credit union, with assets of $350 million, has said it was unaffected because it uses Capital only for credit card transactions.
NCUA has estimated that a liquidation of the company could leave a $100 million shortfall. But the credit union has about $37 million in capital and another $37 million in equity-like investments from several hundred of its member credit unions ++ that could be tapped if needed. That would leave a $26 million gap, which would be filled by the National Credit Union Share Insurance Fund, the industry-funded pool of money that is available for just such financial emergencies.
Capital is one of 44 "corporate" credit unions which serve the country's 12,500 so-called "natural person" credit unions, such as the State Employees Credit Union and the Municipal Employees Credit Union. The corporate credit unions make investments for some of their members and process credit card and check transactions.
At Capital, most of whose members are in Maryland, Virginia and Washington, D.C., problems emerged in late November when the NCUA forced it to sell two mortgage securities at a loss of $1.4 million. The company's chief executive officer and chief investment officer resigned soon after.
Less than a week later, on Dec. 7, Capital became temporarily unable to meet the borrowing demands of some of its member credit unions. Its investment portfolio had lost so much value on paper that Capital also couldn't afford to sell the mortgage securities and briefly had to stop lending to its customers. It announced a 60-day freeze on withdrawals by its members.
Since the freeze was announced, Capital and the NCUA had been trying to arrange a merger with the Western Corporate Credit Union, in San Dimas, Calif., the nation's second-largest corporate credit union.
Those talks fell through partly because the NCUA didn't want to suspend certain financial regulations that would be needed for Western to absorb Capital's portfolio of collateralized mortgage obligations. "For a variety of reasons the cost was too high," Mr. Loftus said.
About $1 billion of Capital's $1.5 billion in assets was invested in CMOs, whose value derives from underlying pools of mortgages. As interest rates rose last year, the value of the CMOs declined sharply.
While a number of the 42 corporate credit unions invest in CMOs, Capital had by far the heaviest concentration of them. "The quality and the appropriateness of these investments were so low, it's puzzling," said Mr. Loftus.