Tax-Exempt Credit Unions Get $30 Billion Bailout

September 26, 2010

As if we needed reminding, the federal government has again reminded us that the financial bailout bill enacted in 2008, though often called the bank bailout, authorized the Treasury to buy almost any asset from “any institution, including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company established and regulated under the laws of the United States.”

This week the credit unions got their bailout, and it’s one of the most outrageous because the federal government funnels about $3 billion into credit unions every year, even in good years, by granting them undeserved tax exemptions.

Credit unions are granted federal tax exemption on the strength of three promises:

  • That credit unions will help lower-income people who don’t have bank accounts;
  • That they will restrict their customer base to groups of people with a common bond, enabling the credit union to specialize in their financial needs; and
  • That credit unions will avoid high-risk, high-return investments in favor of safe, lower-interest investments.

Have they delivered on any of their promises? No.

  • They have marketed their services mostly to middle- and upper-middle income people who would be profitable for taxpaying banks to serve, leaving low-income people to use check-cashing centers.
  • Credit unions and their regulators have “interpreted” the common-bond requirement to mean, for example, anyone living in Los Angeles County. Some common bond!
  • And as we now find out in this bailout announcement, credit unions were investing in the same risky subprime junk that avowed risk-takers in the taxpaying financial sector got burned on.

Regulators at the National Credit Union Administration now promise “reform,” but what they mean by that is pumping taxpayer money into financial institutions that are not performing the public service they were chartered to perform, and pay no tax, to boot. How does that qualify as “reform”? In most cases, real reform would mean revoking their tax exemption. Here’s a paper by John A. Tatom that gives the full history of these run-amok credit unions.

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