PLANO, Texas — When the news that investment icon JPMorgan Chase had stepped in to buy a struggling Bear Stearns Co. came across the wire on a late Sunday night, markets around the world braced for the fallout as investors scrambled for cover.
On March 16, Bear Stearns, most recently the fifth largest securities firm in the United States and now one of many casualties of the subprime mortgage fallout and subsequent credit crisis, reached a deal with long-time rival JPMorgan for a fire sale of roughly $237 million. This time last year, Bear Stearns was a multi-billion dollar entity. On March 14, the Federal Reserve used a provision that had not been seen since the Great Depression to give emergency credit to Bear Stearns to help it stave off insolvency.
By the middle of last week, markets had stabilized as antsy investors wondered if they could really start buying Bear Stearns shares for bargain basement prices. But concerns remained over whether the Bear Stearns deal would have a ripple effect on other banks. Meanwhile, the deal could help credit unions secure the value in their current agency-issued, mortgage-backed securities, said Brian Turner, manager of advisory services at Southwest Corporate Credit Union. Opportunities to invest in well-structured products could also arise during a time when term investment yields have fallen 250 basis points since last July.
And, fortunately, credit unions have not felt the aftershocks of the subprime market crisis, Turner said.
"Credit unions have been better insulated from credit losses due to their disciplined credit standards, especially over the past four years when market opportunists flooded the market with highly questionable loans and related non-agency issued securities [which have led to] to today's troubles," Turner said.
Even in a weak economic climate, gold standard mortgage loans could provide strong relative value to credit union earning streams, Turner noted, saying challenges may still persist on the West Coast, Northeast and lower Southeast regions of the country where home prices have appreciated ten times the rate of inflation over the past two decades.
"Lenders with mounting loan losses could pare back their lending even as the Fed tries to lower mortgage costs–not what the Fed wants but certainly a great opportunity for credit unions," Turner said. "This could lead to even wider investment spreads for investment portfolios."
What happened with Bear Stearns was symptomatic of what is going on in the markets, said David Marks, executive vice president and chief investment officer for MEMBERS Capital Advisors, the investment arm of CUNA Mutual Group. Too much excess and not enough due diligence created a forecast for doom.
"It started with the subprime aspect, but the major reason was too much leverage in hedge funds, institutional fund [among others]," Marks said. "When you have a situation when you're overheated in leverage, the credit markets will freeze up. That can turn into a credit crisis like the one with Bear not being able to borrow any credit."
Marks is sure that "greed" also played a part in the collapse as people bought securities and credit was dished out at attractive rates. While those instruments were high yielding, they were not high quality, and sometimes not verifiable, he explained. When the crisis hit, investors and institutions pared down that greed and became more conservative.
"Once you go from one end of the spectrum to the other, you have fallout in the middle. That's where Bear Stearns was–having a major portion of their business in the mortgage business," Marks said, adding that he has said since December that the country is in the midst of a recession.
For credit unions and companies like CUNA Mutual, a credit crisis is encompassing. In the 37 years he has worked in the investment arena, Marks said this is the worst credit crisis he has ever witnessed. The difference here is credit unions have weathered recessions fairly well, Marks noted. Members tend to have strong incomes and are not aggressive investors, he added.
"Some credit unions have had trouble with residential mortgages and HELOCs," Marks said. "It will affect the growth rate in revenue. People are not going to borrow to buy that house or car. My hope is that the recession will be short and not deep."
CUNA Mutual is extremely conservative these days and has high liquidity, Marks said. If the recession goes long and deep, Marks said every financial institution including credit unions will have trouble growing their business and staying within margins. The best solution now might be the Federal Reserve and the government creating a bailout of the residential mortgage market and at the same time, figuring out how to offer relief to large institutions.
–msamaad@cutimes.com
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