America’s banking and financial crisis continues to worsen as the Obama Administration prepares to launch details of a major aid effort as early as tonight, Australian time.
The announcement will come as regulators battle to stabilise the US credit union system which was rocked on the weekend by the failure of three more banks and the takeover of two major corporate credit unions (they act as central credit unions for smaller company and community-based credit unions) which have suffered losses on mortgage-backed securities.
The problems and the trio of bank closures highlight the need for the Obama Administration to get its latest policy right.
It also highlights the blindness of analysts and others who see a turnaround in the financial sector.
The takeover of the two central credit unions was dramatic; they had been ailing, but no one expected the move on Friday night and Saturday.
The news was originally overshadowed by the closure of three small regional banks on Friday night.
The three banks that failed were small: the biggest had around $US670 million in assets, but it means 20 US banks have now failed, compared with 25 for all of 2008.
But then the news came of the move by US regulators to place the two corporate credit unions, with a total $US57 billion in assets, into conservatorship, citing a need to "stabilize the corporate credit union system."
The National Credit Union Administration Board seized the corporate credit unions in California and Kansas.
(Corporate credit unions are chartered to act as a type of clearinghouse for the credit unions that serve consumers. They provide services such as lending and payment clearance services to retail credit unions).
The two seized had assets in excess of half the total value of assets held in corporate credit unions).
The National Credit Union Administration, or NCUA, took control of U.S. Central with $US34 billion in assets, as well as Western Corporate (WesCorp) Federal Credit Union of California, another corporate credit union with $US23 billion in assets.
The Administration is a US Government agency that regulates America’s the credit union system.
U.S. Central Federal Credit Union provides settlement services used by more than 90% of all U.S. credit unions, which are member-owned lending institutions.
If it was to fail, it would cripple credit unions across the US, setting off another financial crisis.
Reuters reported that the seizures came as a surprise because of the strains in the nonprofit banking sector "that recently had been touted as a source of new lending even as many for-profit banks limit lending and receive billions of dollars of taxpayer-funded capital injections."
U.S. Central’s losses were not disclosed, but Reuters reported that it had " a significant amount of risk … assets that are currently not marketable," according to a credit union administration executive.
Reuters says the level of credit losses in the US credit union system had been estimated earlier in the year at between $US10 billion and $US16 billion.
In January, the NCUA injected $US1 billion into U.S. Central after the corporate credit union suffered dramatic declines in the value of mortgage-backed securities it had bought.
These are said to be of high quality, but because they involve home mortgages, there’s no real market and their value continues to fall.
The main problem for regulators and NCUA was that the reserve fund that backs credit unions had seen a jump in potential losses to nearly $US 6 billion and $US4.7 billion at the start of the year.
Reuters said the NCUA moved in January to guarantee $US80 billion that US credit unions have on deposit in the corporate network, a move that was seen as a bailout America’s credit union network.
Now the situation has worsened dramatically.
So the much-leaked details of the financial stability plan can’t come too soon.
US media reports said the Obama administration will call for increased oversight of executive pay at all banks, Wall Street firms and perhaps other major companies in what’s said to be a sweeping overhaul of US financial regulation.
The reports said that the new financial system outline and regulations could be revealed tonight, our time.
The Washington Post said the US Treasury intends to create a government body called the Public Investment Corporation, funded by as much as $US100 billion, to finance the purchase of troubled bank loans and assets.
The paper said the entity will be announced tonight, our time and would join with the Federal Reserve, FDIC and investors in buying up to $US1 trillion in assets.
The New York Times said a three-pronged approach to ridding the financial system of so-called toxic assets.
The plan would create an entity, backed by the Federal Deposit Insurance Corp, a U.S. banking regulator, to buy and hold loans, the reports said.
It would expand a newly launched Federal Reserve facility — that lends money to investors to buy securities backed by consumer loans — to include toxic assets. And it would create new public and privately financed funds to buy such securities under the management of private investment experts.
The Wall Street Journal said the administration plans to contribute between $US75 billion and $US100 billion in new capital to the effort although that amount could be expanded.
The revamped Fed program will sit alongside the Treasury’s planned public-private investment funds, while the Federal Deposit Insurance Corp’s role will probably involve buying distressed loans.
Bloomberg said the new rules wil
