Credit Union Investment Losses- More Bad News

Credit Union investments losses have once again hit the headlines with the news that one of the states largest credit unions, ESCU, which has over €210m in assets, may be forced to write off c€10m. The credit union concerned sought to downplay the loss stating was a small percentage of its total investments of €150m. But it did not state such a loss would represent c30% of its reserve base and more than three times its net retained earnings (2006)
http://www.sbpost.ie/post/pages/p/story.aspx-qqqt=MARKETS-qqqs=themarket-qqqid=28462-qqqx=1.asp

It remains to be seen how many other credit unions have been exposed to losses in the ISTC bond. http://www.thepost.ie/post/pages/p/story.aspx-qqqt=THE+INSIDER-qqqs=themarket-qqqs=computersinbusiness-qqqid=28452-qqqx=1.asp

At the same time media reports have also highlighted an Ombudsman case in which Enfield Credit Union has initially succeeded, subject to appeal, in its complaint against one of the states largest stock brokers, Davy, over the advice it claims to have received prior to purchasing perpetual bonds. The initial ruling may force Davy to buy back the bonds at par. It seems that c€273m of these bonds were bought by credit unions in pursuit of higher income flows. Some media reports have indicated potential loss exposure of at least c€47m at this time.

Earlier this year the ILCU defended perpetual bond investments indicating that 10% of its SPS fund was invested in the income earning bonds. http://archives.tcm.ie/businesspost/2007/11/18/story28286.asp

It transpired the ILCU, SPS fund was exposed to these bonds: http://www.ireland.com/newspaper/finance/2007/0507/1178204568602.html.

Yet in November 2006 , the ILCU appears to have defended such investments: http://www.tribune.ie/article.tvt?_scope=TribuneFTF&id=78396&SUBCAT=&SUBCATNAME=&DT=29/10/2006%2000:00:00&keywords=credit%20union&FC=

Such news cannot but further undermine public confidence in credit unions. It is of concern to read of losses and also of a trade body defence of what in other regulated credit union sectors would be seen as highly imprudent and innappropriate investments.

It would appear to be the case that credit unions are taking on risks their savers do not expect their savings to be exposed to. It is sheer nonsense to seek to defend such risk taking on the basis that it enhances credit union income streams. Such risk may well do so, but should never be at the expense of safety and soundness.