Government seizes 3 middle-man credit unions

WASHINGTON (CNNMoney.com) -- The federal regulator watching over credit unions on Friday placed three major middle-man type credit unions, beleaguered by toxic assets, into conservatership, giving the government control over 70% of the market.

The National Credit Union Administration will issue $35 billion in bonds backed by the government to fund the federal rescue and prop up the bad assets that had been owned by the three corporate credit unions.

If those bad assets, now owned by the government, were to be put on the market today, they'd be worth about $50 billion, regulators said.

Consumers won't be impacted. Credit unions, like banks, pay into a special insurance fund that protects deposits should one go bad. In that vein, there also exists a "corporate stabilization fund," for credit unions which allows Treasury to make an emergency loan to protect the industry, and the industry pays back Treasury over a number of years.

Corporate credit unions, provide loans and liquidity to retail credit unions that consumers use.

Careful to say the move isn't a bailout, NCUA chair Debbie Matz, assured that "not one dime of taxpayer dollars will be at risk" in the move.

"It's business as usual. The over all credit union system is sound." Matz said. "This will be invisible to the consumer."

The credit unions to be taken over include: Members United Corporate Federal Credit Union in Warrenville, Ill., with $7.3 billion dollars in assets; Southwest Corporate Federal Credit Union of Plano, Texas, with $7.5 billion in assets; and Constitution Corporate Federal Credit Union, Wallingford, Conn., which had $1 billion in assets.

These seizures, combined with the two even bigger take overs in March 2009 -- Western Corporate Federal Credit Union of San Dimas and U.S. Central Federal Credit Union of Lenexa, Kan. -- means the government now is in charge of 70% of all corporate credit union assets.

NCUA expects the cost of the take overs to hit about $15 billion total, most of which will be covered when the regulators sells the firms' assets. Federally insured credit unions will pick up the rest of the tab, ranging between $7 billion to $9.2 billion, through assessments that will be levied through 2021.

The lobby for federal credit unions called the move "regrettable" but "expected," explaining that credit unions are "unhappy" about having to pay future assesments.

"But this is the reason we got this corporate stabilization fund," said National Association of Federal Credit Unions President Fred Becker. His group lobbied Congress to establish the fund to help ease the pain should credit unions face problems, "so we could stretch this out over time and not have to pay a big bill at once."