On March 16, Bear Stearns, once the fifth largest securities firm in the United States, became one of many casualties of the subprime mortgage fallout and credit crisis and put itself on the auction block. JPMorgan would eventually put in a $237 million bid for the investment bank. The Federal Reserve stepped in giving $20 billion to JPMorgan to help finance Bear Stearns and took on $30 billion of the latter's troubled loans. Industry watchers were awe-struck by the unprecedented move by a government agency.
Meanwhile, September was easily the month of mega-mergers and bailouts within the financial sector. Rumors about a possible Bank of America and Lehman merger were soon ignored when the North Carolina-based bank placed a $50 billion bid for the struggling Merrill Lynch. That same month, the government came to the rescue again, this time for American Insurance Group with an $85 billion lift. Goldman Sachs and Morgan Stanley were given the green light to become bank holding companies as Washington Mutual collapsed and was sold off to JPMorgan. Wells Fargo beat out the FDIC, which had engineered a billion-dollar deal with CitiGroup to buy Wachovia's banking operations. Days before Thanksgiving, Citi would eventually seek government relief to remain viable.
Through the upheaval, the credit union industry watched as it sought out opportunities to court nervous and frustrated bank customers and investors. The $64,000 question is what is the potential impact from the fallout, said Travis Goodman, senior financial adviser at ALM First Financial Advisors, which offers balance sheet risk management, strategic planning and investment execution services to more than 111 credit unions.
There are so many scenarios to consider, and Goodman offered several. How will increased competition from the newly formed mega banks, such as Bank of America and Wells Fargo, impact deposit balances? How will the introduction of Goldman Sachs and Morgan Stanley into the commercial banking world impact the competition for stable deposits, such as checking and savings accounts?
"With rate-shopping depositors becoming an epidemic among credit unions, will higher rates tempt them to take their business to the new mega banks, or will higher service standards remind depositors why they prefer credit unions?" Goodman asked. "There's a new level of competition, which credit unions have not had to deal with. From a deposit standpoint, it could represent more competing for dollars on a marginal basis."
Will the mergers create uncertainty about where credit unions will turn to find viable liquidity solutions outside of attracting new deposits, Goodman pondered. While credit unions historically have less-risky balance sheets than the rest of the financial community, they are by no means insulated from the current economic crisis, he pointed out.
"Credit unions face the same liquidity problems many of their counterparts face and must plan accordingly. Liquidity is certainly at a premium right now, and all financial institutions must manage it with considerable discipline and responsibility," Goodman said. "Borrowing costs continue to increase at the corporate credit unions, as well as at the FHLBs."
One potential danger is the temptation of "unworthy borrowers as available lenders shrink in the face of tighter credit and increased lending standards," Goodman noted. With the growing number of mortgage lenders closing shop, there is certainly a window of opportunity for credit unions but due diligence should always be paramount.
Still, in 2007 and 2008, credit unions were the least fazed as the financial service marketplace roiled, said Angela Calvert, a partner with ALM First. That speaks well to management as the majority of credit unions are now flush with liquidity.
"They have the funds. They are much more conservative," Calvert said. "There will be increased competition but there are tremendous opportunities to make themselves known."
Goodman said another outcome of this year's bank mergers could be how credit unions fare in the face of a potential slew of new regulations. Already, proposed solutions include establishing one regulator to oversee all financial institutions, thus, doing away with the Securities and Exchange Commission, the NCUA and the Office of Thrift Supervision, he reminded. Calvert said if that were to happen, the concern would be officials regulating credit unions who are not at all familiar with their structure.