MADISON, Wis. -- As with other sectors, the credit union industry may be wondering what the long-term implications are after the recent unprecedented market upheavals.

Following last week's collapse of Lehman Brothers, the $44 billion Bank of America acquisition of Merrill Lynch and other financial market phenomena, will the turmoil shake the confidence of already skittish members regarding the impact on their investments and long-term goals?

For the time being, David Marks, chief investment officer and executive vice president of CUNA Mutual Group, is advising members to take a deep breath, don't panic and keep in close contact with your financial advisers. With nearly 40 years of experience in the investment arena, Marks said the latest market shakeups combined with Fannie Mae and Freddie Mac's troubles are unprecedented.

"My parents went through the Great Depression. In terms of the financial markets, I would imagine that what's taking place now is similar to what was happening then."

Marks emphasized that members should not panic and diversification of assets continues to be the best way to go. High-quality, fixed annuities, Treasuries and cash are good alternatives, he advised. Income averaging is still a good route to take. Despite the gloom and doom, investors may see some opportunities.

"If you have a financial adviser or investment manager that you trust, one of the things they do as a prudent rule, is look for opportunities. This is the time when members should be talking with and listening to their advisers."

Marks strongly believes this too shall pass but not until housing prices stabilize, foreclosures get less onerous and credit becomes more available. He said he sees 2009 and, more realistically, 2010 as the time when the economy will start to see strong signs of recovery.

"My feeling is, if you put a baseball analogy to it, we're in the second or third inning," Marks said.

On the day Lehman announced its Chapter 11 bankruptcy filing, a concerned credit union CEO asked Pete Snyder what he should be doing with his credit union's broker in the midst of the market turmoil. Snyder, president of Snyder Consulting Solutions LLC, an investment and insurance service consultation CUSO, simply began with "this is not Enron."

"Members need to hear this," Snyder said. "The big issue with Enron, from a human perspective, is that all of the employees lost their retirement plans. Credit unions and members really don't have a tie into Lehman Brothers."

Even if a financial institution had contracted with Lehman to be a fiduciary on 401(k) plans for employees, Snyder said there is still no direct tie because the administration would fall outside of the Chapter 11 bankruptcy protection filing.

Snyder said members have a lot of money in insured funds, "hopefully at credit unions." To quell concerns, they can ensure that their asset allocation is in line with the market upheavals, he added.

As for Bank of America's acquisition of Merrill Lynch, Snyder said credit unions might want to watch the strategic direction of these two powerhouses going forward, seeing that financial cooperatives only have 6% of market share.

"The move to acquire Merrill Lynch was a proactive move and a synergistic move that gives them both tremendous scale," Snyder said. "The message to credit unions should be if you're collaborating [with others], continue. If not, start."

CUSO Financial Services, a broker-dealer and registered investment adviser with more than 100 credit union clients, said it does not carry inventories or participate in leveraged investment vehicles such as those that caused the large write-offs and financial difficulties experienced by Lehman Brothers and Merrill. The concurrent situations are likely to further shake the public's confidence in these large firms, said Valorie Seyfert, CEO of CFS.

"The current economic situation is challenging, no doubt, but there are a lot of factors and options to consider, so perhaps it is too early to know exactly what will happen," Seyfert offered. "As one of the largest and oldest wire houses, Merrill Lynch had a very strong brand and instant credibility. However, many of the large, high-profile firms like Merrill were suffering already from well-publicized regulatory problems, fines [and other issues]."

Seyfert said she hopes that the recent events will open up proactive opportunities for credit unions and their advisers to discuss the situation and let the members know what is available through their investment program as a means to "prove their credibility and win business as a result."

"[It's] a good opportunity for us to remind our investment advisers to reinforce the concept of well-managed diversification so that no one has too much exposure in any one stock or sector of the market, and the impact of any single point of failure is mitigated," Seyfert said. "A balanced portfolio, rebalanced as appropriate based on age and situation, is a smart defense against problems over the long term."

Henry Wirz, president/CEO of $1.3 billion Safe Credit Union, agreed that it may be too early to forecast whether Bank of America's purchase of Merrill Lynch is a good deal, saying he believed similar combinations in the past were did not pan out for the market or consumers. He recalled the Citicorp and Travelers Insurance merger a few years ago and suggested that Citicorp "never realized the synergies that were predicted" following that union.

"Citicorp might be a good example of what Bank of America may become as result of the acquisitions it has made recently of Countrywide, La Salle Bank, MBNA and now Merrill Lynch," Wirz said. "Many analysts believe that Citicorp became too big to manage and that its recent problems where the result of management losing track of the details in many of the business units. I think Bank of America has bitten off more than they can chew."

Wirz said now is a great time for credit unions to pick up some of their business "while they are distracted by the challenges of integrating two huge acquisitions on top of all the other acquisitions that are probably not yet completed."

--msamaad@cutimes.com

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