U.S. Seizes Key Cogs for Credit Unions

By MARK MAREMONT In the latest move by federal authorities to prop up the nation's banking system, regulators late Friday seized control of the two largest wholesale credit unions in the U.S. after finding that their losses on mortgage-related securities were larger than previously thought. U.S. Central Corporate Federal Credit Union in Lenexa, Kan., and Western Corporate Federal Credit Union in San Dimas, Calif., which have a total $57 billion in assets, were taken into conservatorship by federal regulators. Michael E. Fryzel, chairman of the National Credit Union Administration, the industry's federal regulator, said the seizure was necessary to maintain the integrity of the credit-union system and protect the insurance fund that backs up deposits in thousands of retail credit unions. The affected institutions don't serve the general public. They provide critical financing, check clearing and other tasks for the retail institutions. These wholesale credit unions, known in industry parlance as corporate credit unions, are owned by their retail credit-union members. The vast majority of regular credit unions, the bank-like cooperatives familiar to millions of account holders nationwide, are considered financially sound. Credit unions have more than 90 million members nationwide. U.S. Central and Western Corporate have been grappling for more than a year with large paper losses on a slew of assets, mostly mortgage related. In January, regulators moved to prop up U.S. Central with a $1 billion infusion after it took big write-downs on some of the securities. Mr. Fryzel said regulators acted Friday after becoming convinced that the two institutions were underestimating the true scope of their losses. "With us in control we'd get honest numbers," he said. Mr. Fryzel said regulators plan to replace top management at both institutions. In total, the 28 wholesale credit unions in the U.S. were showing paper losses of about $18 billion as of Dec. 31. Mr. Fryzel said regulators aren't concerned about the health of any other wholesale credit union besides the two brought into conservatorship. Mr. Fryzel said NCUA's latest estimate is that wholesale credit unions will eventually have to realize between $10 billion and $16 billion in losses on their holdings. The agency on Friday also raised its estimate for what these losses will cost its insurance fund, to $5.9 billion from the prior $4.7 billion estimate. NCUA had said it would make up the expected losses in the insurance fund by dunning the nation's thousands of retail credit unions. But after an outcry from the industry, Mr. Fryzel said the agency's board now plans to ask Congress in the coming week for authority to borrow money from the Treasury. He said the industry isn't looking for a bailout, and would repay all such borrowings. Write to Mark Maremont at mark.maremont@wsj.com