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US Bails Out Credit Unions – What is This, 2008?

by Brett on September 27, 2010

A headline that looks like it’s been in the queue for about two years just popped out of the oven over the weekend:

Credit Unions Bailed Out

Two years after the peak of the financial crisis, the federal government swooped in to stabilize a crucial part of the credit-union sector battered by losses on subprime mortgages.

Regulators announced Friday a rescue and revamping of the nation’s wholesale credit union system, underpinned 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 shoulder 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.

Full article at WSJ.com

“Shaky mortgage-related assets” – HA!  That’s probably the understatement of the month.

Hard to see things getting any brighter for the banks and credit unions – many of which are probably insolvent if all of their bad paper were marked-to-market.  And the government knows this – which is why they keep trying to kick the can down the road and “buy time” for the housing market.

So where are we on the downside of this housing roller coaster?

Case Shiller Index Chart September 2010

The general rule-of-thumb for financial bubbles is that they usually retrace all of their gains from the start of the bubble, and then some.  As you can see above, we’ve dialed it back to August of 2003 price levels in housing.  But the graph started to “go parabolic” around the year 2000.  So if we’re heading back to those levels, or lower, we could see further declines in excess of 30%, on average.

This of course would not be a good thing for the credit unions and banks holding the overpriced paper backing these mortgages!  So, expect the Federal bailouts to continue until housing finally reaches reasonable, affordable levels once again.

Hat tip JL for sending this along.


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