Wholesale credit unions basically are "credit unions for credit unions," Simpson explained. "They provide share draft [check] clearing services, accept overnight deposits and when needed provide loans and offer investment vehicles to their credit union customers."
Although the overwhelming majority of the nation's credit unions are financially sound, some of the wholesale entities behind them lost money by having invested in the subprime mortgage market, according to federal regulators. Of the 27 wholesale credit unions operating in the United States, five have been seized during the past 18 months.
"They were like a lot of financial institutions," Simpson said. "They invested in subprime mortgages back when those investments were rated triple A."
Consumers should not experience any service disruptions. Deposits are protected up to $250,000 per account.
The NCUA announced Friday a plan to separate billions of dollars of the bad assets that have crippled those institutions and then repackage them for sale with a federal guarantee. It also established a set of regulations that will require wholesale credit unions to hold more capital and improve their risk management and governance practices.
The credit union rescue brings a new twist to the nation's struggling financial services industry.
Credit unions have billed themselves as conservative havens insulated from risky business like subprime and commercial real estate lending. Now, two years into the worst economic crisis since the Great Depression, it seems that no area of the financial industry managed to escape the effects of the credit bubble.
NCUA officials said they believed the steps taken should create stronger safeguards for the nation's wholesale credit unions. The rescue isn't expected to cost taxpayers anything. However, credit unions in Utah and across the nation will be liable for the cost, which Matz estimated to be as much as $9.2 billion.
The entities seized Friday were Members United Corporate Federal Credit Union, of Warrenville, Ill.; Southwest Corporate Federal Credit Union, of Plano, Texas; and Constitution Corporate Credit Union, of Wallingford, Conn.
Last year, regulators closed two wholesale credit unions in Kansas and California and took control of their operations.
Regulators will help repackage and sell off about $35 billion of troubled mortgage-related assets held by the five institutions.