Steven Jacobson is a sophomore at the University of Pennsylvania studying business and history.
Although American credit unions fared better than banks during the 2007-08 financial crisis, the industry still lost billions from its holdings of mortgage-backed securities, which plummeted in value when the housing bubble burst. Quick action by the National Credit Union Administration (NCUA), the agency that oversees the industry, saved the system from collapse. This came at great expense to itself and its insurance fund, which paid out nearly $5 billion. Since then, the regulator has accumulated $2.4 billion in legal recoveries from big banks, most recently settling for $225 million with Morgan Stanley on December 10th. These deals have come as the agency has accused the banks of misleading their credit union customers on the quality of the products they sold.
The agency undertook swift measures when calamity struck in 2008. Mortgage-backed securities’ plunge hit corporate credit unions, which reinvest the funds of regular credit unions, especially hard. The regulator placed Central Credit Union and WesCorp, America’s two biggest corporate credit unions, under a conservatorship in 2009. The agency initiated a guarantee program to prevent liquidity crises in other corporate credit unions and created a temporary stabilization fund to help replenish the insurance pool it maintains. Initial projections of costs for these steps amounted to $15 billion.
Although these settlements have helped cover the industry’s losses, they notably lack admissions of guilt on the part of the banks. This “no-admit, no-deny” policy has been common among American regulators such as the Securities and Exchange Commission (SEC). In November 2011, Judge Jed Rakoff of the Southern District of New York rejected a settlement between the regulator and Citigroup for its omission of an acknowledgment of wrongdoing on Citigroup’s part. Although the Second Circuit Court overturned Mr Rakoff’s decision in June 2014, his opinion still spurred discussion over whether banks should be required to admit their culpability in settlements.
The SEC has defended the policy, stating that it allows itself to avoid expending limited resources on costlier trials and to secure the money it needs for defrauded investors. That logic applies to the NCUA, which is about half the size of its counterpart in staff and budget. The practice has enabled the agency to collect the funds necessary to help the ever-burgeoning credit union industry recover from its darkest days.