Default on the Radio

While watching the Falcons-Jets game tonight, I noticed an (admittedly charming) ad for the Navy Federal Credit Union.  My first thought was confusion as to why they advertise – as the ad noted, they have four million members already.  Surely the pool of potential members is mostly saturated?  What really piqued my interest, though, was that they prominently advertised that they are “Insured by NCUA”. I thought the FDIC insured bank accounts. What the heck is NCUA?

It’s a neat little sidetrip into the byzantine world of American finance, that’s what.  NCUA is the National Credit Union Administration – it was formed by Richard Nixon as an overhaul of the previously outdated administration of credit unions.  It operates a parallel deposit insurance fund to the FDIC, taking fees from its member credit unions and providing insurance.  The money is held in Treasury bonds.  In turn, it is backed by the government corporation Central Liquidity Facility, funded again by its members.  The CLF is backed ultimately by the Treasury Department, which is legally authorized to lend the CLF up to $500 million in the event of a liquidity or solvency crisis.  This is in turn all a tiny tiny corner of the American financial world compared to the megabanks in New York and the community and regional banks across the nation.

The NCUA is still operating through the shutdown today, as is the Navy Federal Credit Union.  They are in fact stepping up operations – many of their members are civilian DoD employees who are currently going unpaid.  Navy Federal is offering them bridge loans.

What happens to this little corner of the financial world if the United States indeed defaults on its debt on October 17?  Well, first things first – Navy Federal members stop getting paid.  Congress made sure service members get paid during the shutdown, but in the event of a debt ceiling crisis all bets are off.  So its members run to the nearest branch to get their money out, in a classic bank run.  NCUA attempts to bail out its member credit unions…but discovers to its dismay that it can’t liquidate its huge stock of Treasuries.  Nobody wants them because the country is in the middle of a financial crisis around possibly-defaulted Treasury bonds.  So the Central Liquidity Facility is bust at its moment of greatest need…and even if it could be made whole by the $500M from Treasury, Treasury doesn’t have the cash on hand.   The credit unions end up collapsing, and its members are never made whole.  Millions of servicemembers and civilian DoD employees are left with frozen assets in a closed Federal credit union…being made whole takes months if it ever happens.  And this is all a tiny sideshow to the aforementioned massive financial crisis going on on Wall Street.

It’s a little stupefying that we’re even discussing defaulting on the debt.

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