Bailout Nation Continues: U.S. Backs $30 Billion in Bonds to Stabilize Key Credit Union Institutions; Subprime Legacy

Two years after the peak of the financial crisis, the federal government is now bailing out a crucial part of the credit-union sector battered by losses on (you guessed it!) subprime mortgages.

Regulators announced Friday a rescue and revamping of the nation's wholesale credit union system, backed up by a federal guarantee valued at $30 billion or more. Wholesale credit unions don't deal with the general public but provide essential back-office services to thousands of other credit unions across the U.S. The majority of retail credit unions are sound, but they will have to help pay for the losses through special assessments over the next decade.

Friday's moves include the seizure of three wholesale credit unions, plus an unusual plan by government officials to manage $50 billion of troubled assets inherited from failed institutions. To help fund the rescue, the National Credit Union Administration plans to issue $30 billion to $35 billion in government-guaranteed bonds, backed by the shaky mortgage-related assets.

Officials claim the plan won't cost taxpayers any money. Still, it marks the latest intervention by the U.S. government into a financial system weakened by the real-estate bust. Bad bets on mortgage-backed securities have now killed five of the nation's 27 wholesale credit unions since March 2009. The federal government now controls about 70% of the total assets at such credit unions, and said the surviving institutions will be reined in so that they take fewer risks with their investments.

Bert Ely, a financial-industry consultant in Alexandria, Va., said regulators share some of the blame for the resulting mess, because wholesale credit unions were allowed to pursue a strategy that was "viable only because of what clearly has turned out to be excessive risk-taking."

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Grouch: When will bailout nation end?  Were the regulators asleep at the wheel again when it came to monitoring the risk levels of these institutions?  If taxpayer money is being used to backstop and guarantee financial assets why are these institutions allowed to gamble at the casino?  If they are relying on taxpayer guarantees to attract deposits, they should be forced to invest in safer instruments even if it means lower rates of return for the depositors.