Long-term ratings gauge a company's five-year outlook. Southwest and Southeast's outlook change from stable to negative means there's a 33% chance their long-term ratings could be downgraded, Hoban said.

S&P only issues ratings to corporates that order them. Few corporates request long-term ratings from S&P, for example, so news of Southwest and Southeast's negative outlook doesn't necessarily single them out as the only corporates that may have long-term factors affecting their creditworthiness.

S&P's press release announcing the CreditWatch action contained a combination of glowing compliments and harsh criticism. Hoban said he opened with good news because he wanted to keep the bad news in perspective.

"We have our concerns and want to voice them, but also want to put them into context, and lead off up front that we still view the industry as healthy. If we didn't, the ratings wouldn't be as high as they are," Hoban said.

Hoban said he stands by S&P's release, which stated, "Overall, we believe the credit union sector/industry remains quite healthy. These institutions have a comparatively low-risk profile, strong liquidity and exhibit adequate financial profiles. A testament to the overall and individual health of the corporates is that despite the unprecedented challenges of the prolonged credit crisis, the rated corporates have been able to not only hold their structured securities portfolios but to do so without compromising their ability to perform their key roles as investment vehicles and liquidity providers to their members."

The losses threatening corporate investments aren't big compared to their portfolios, Hoban said. However, they are significant compared to their capital, with reserves and undivided earnings typically running only 2% or 3% of assets. Even though there is more to capital than undivided earnings and reserves, Hoban said the comparative risk to capital was a significant factor in his decision to place both WesCorp and Members United on CreditWatch. S&P does not treat membership capital shares as equity because it is a less permanent form of capital.

"True, they have regulatory limitations that are much more constraining than banks when it comes to their investments," Hoban said. "The absolute amount of risk is not substantial. But, the problem is, it doesn't take a very large percentage loss on an asset to eat away a meaningful amount of capital."

Hoban cautioned against natural person credit unions panicking over the future of the two corporates and the corporate system, though.

"Even if there were to be downgrades, these institutions would still carry very high ratings, so I think it's important to put our concerns within that larger context. They both still have a lot of positives, and we're not talking about the expectation for multilevel downgrades here," he said.

WesCorp Senior Vice President and Chief Financial Officer Jim Hayes suggested his corporate's ratings may improve once the Securities and Exchange Commission and Financial Accounting Standards Board propose additional interpretative guidance on fair value measurement under generally accepted accounting principles later this week.

"We anticipate any new clarifications will have a positive impact on S&P's independent review of our portfolio," Hayes said.

Hoban said the pending changes in accounting rules could result in a positive outcome for WesCorp and other corporates but added that fair-value measurement is but one of many current unknowns.

"There is so much going on in Washington, so much that could affect credit unions and liquidity in the market in a positive way, that we decided to go with ratings watches for now, rather than be rash and take negative action, only to have to reverse our position later," he said.

Hoban was critical of corporate field of membership expansion, saying increased competition among corporates was a big factor in his decision to place negative outlooks on Southeast and Southwest's long-term ratings and put WesCorp's long-term ratings under watch.

"Back when I first covered the industry, each corporate had its own footprint, and with exception of WesCorp and Southwest, nobody competed outside of that footprint, it was almost a monopoly within each market," Hoban said.

As corporates have expanded to compete against each other, he said, they've increased their overhead, while shrinking their margins in order to compete effectively.

Competition hasn't been all bad, Hoban said, as some corporates, particularly WesCorp, have increased their risk management sophistication. WesCorp actually had more exposure to subprime securities a few years ago, he said, but saw the writing on the wall early and acted in time to minimize potential losses.

"And, I'll admit, I've got nothing to back this up numbers-wise," Hoban said. "But in my view, over last few years, that competition for membership has energized natural person credit unions to demand more and shop around more, which in turn drives more competition and more overhead."

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