U.S. Central Credit Union may form "bad bank": CEO

KANSAS CITY (Reuters) - Two days after regulators seized the largest U.S. corporate credit union, the newly installed CEO said he is considering a variety of options, including setting up a "bad bank," to handle a mixture of troubled mortgage assets.

Several options are on the table at the $34 billion-asset U.S. Central Federal Credit Union, said new CEO James Nance, who quit as chief administrative officer at Icap Capital Markets Llc in New Jersey to helm the Lenexa, Kansas-based institution at the request of regulators.

In addition to setting up a separate entity, a so-called "bad bank," to take toxic assets off the books of U.S. Central, Nance told Reuters in an interview that he will look at options for securitizing the troubled assets in ways that would allow for them to be held for an extended periods, and he will explore the sale of certain assets to non-credit union buyers.

"We want to try to avoid having the situation deteriorate," said Nance, who prior to his work at Icap, oversaw asset and liability management at U.S. Central from 1993-1996.

U.S. Central is the largest of two U.S. corporate credit unions taken over on Friday. The National Credit Union Administration (NCUA) also took control of Western Corporate (WesCorp) Federal Credit Union of San Dimas, California, which has about $23 billion in assets. NCUA said the two had expected credit losses greater than total capital.

The institutions provide liquidity and settlement services tapped by more than 90 percent of the nation's nearly 8,000 credit unions, which are member-owned.

Regulators said that U.S. Central's problems stemmed in part from its investments in "private label" mortgage-backed securities and collateralized mortgage obligations. The instruments earn higher yields but do not have implicit government guarantees.

Although U.S. Central officials said the bulk of the securities continue to pay off as expected, and more than 70 percent held highly favorable AA or AAA ratings as recently as 2007, accounting rules forced them to write down the value of those securities dramatically as home values plummeted around the nation.

NCUA officials would not disclose a specific loss figure for U.S. Central. But in January the NCUA injected $1 billion into the institution.

Nance said some of the problem assets were viewed as having temporary losses, while another batch were seen as beyond recovery.

"Some of the losses on those are not going to come back even if the market does," he said.

If U.S. Central's problems were left unchecked, credit unions across the country could have seen a disruption in their access to funds.

Both Nance and NCUA officials have stressed that the credit union industry remains extremely well capitalized and will not likely need to turn to taxpayers for a bailout.

"Credit unions are going to handle this problem on their own without having to turn outside," Nance said.

The troubles emerging in the credit union industry come after the sector has been touted in recent months as a source of strength and continued credit for consumers and businesses as their banking brethren stumble.

But a NCUA risk analysis completed this month put potential credit losses throughout the credit union system as high as $16 billion, "with a most reasonable estimate in the current environment of $10.8 billion."

The needs of the reserve fund that backs credit unions had risen sharply to an estimated $5.9 billion from $4.7 billion, officials said.

"Given the enormous size and complexity of this crisis that the world's major economies are going through, it would have been extraordinary for credit unions to have escaped unscathed," said Nance. "Nobody should be shocked and amazed. This crisis is bigger than people really think it is. It is far reaching and transformative."

(Reporting by Carey Gillam; editing by Richard Chang)