Legislators, AG Probe CU Failures

State legislators and Attorney General Richard Blumenthal want to learn more about why federal regulators quietly shut down two small Connecticut credit unions last month.

The closures in New London and Meriden have drawn scant attention, despite the fact that the 82-year-old investment advisor to the New London Security Federal Credit Union jumped to his death only hours after federal officials declared his institution insolvent on July 28.

The National Credit Union Administration released few details on the case, other than to say New London Security FCU was founded in 1936, had 365 depositors and $12.7 million in assets. Records show at least one unusual circumstance: it had only 2 percent of its assets in loans, compared with ratios of 60-80 percent that are more typical in the industry.

The Meriden F.A. Federal Credit Union, which was closed July 16, was even smaller. It had 206 customers and assets of $337,968.

Both Connecticut credit unions were miniscule compared with IndyMac, the California bank that set off a national wave of depositor anxiety last month when it became the third largest bank failure in U.S. history. It had assets of $31 billion.

“It’s an unfortunate set of circumstances that this has occurred on the heels of the IndyMac failure,” state Sen. Bob Duff (D-Norwalk), chairman of the banking committee, said of the Connecticut credit union failures. “From an oversight standpoint it’s something we need to continue to watch.”

Duff and fellow banking committee member Rep. Ryan Barry (D-Manchester) asked state Banking Commissioner Howard Pitkin to give them information on the soundness of state-chartered banks and credit unions.

“We don’t want to set off a panic in Connecticut, but it’s important that we know what’s going on. We have to stay ahead of the game,” Duff said.

In a letter of response, Pitkin said Connecticut banks continue to perform well, in spite of economic challenges. “Both state and federally chartered banks are well capitalized, have good asset quality and can contend with current conditions,” Pitkin wrote.

Safety and soundness ratings given by BankRate.com support Pitkin’s point. On a scale of 1-to-5 (5 being the strongest), most of the 20 largest Connecticut-based banks are rated 4 or 5. Not one was rated either 1 or 2.

Although Connecticut had 148 federally insured credit unions at year-end 2007, they are only a small piece of the state’s financial industry. They had combined assets of $7.1 billion and outstanding loans of $4.2 billion.

Even so, Blumenthal expressed concern, saying he’s heard unconfirmed reports that other Connecticut credit unions may be in trouble. He said he’s exploring his jurisdiction in investigating federal credit unions, which are regulated by the NCUA.

The Connecticut credit unions that failed had no chance to restore viable operations, said NCUA spokesperson John McKechnie.

Depositors at both institutions are insured up to $100,000 per account and $250,000 on certain retirement accounts.

The Meriden F. A. FCU did not have any uninsured shares and deposits.

But New London Security FCU held nearly $800,000 in uninsured deposits on Mar. 31, meaning some account holders may not get all their money back, at least in the short term.

In its early days, the institution provided loans to the Jewish business community. In recent years, customers put money there to earn relatively high rates. Most of those deposits were then invested in securities.

Federal regulators have been tight-lipped about their actions. Unless criminal charges are filed in the matter, the circumstances surrounding their collapses may never become public.

New London police confirmed to The Hartford Business Journal that the death of Ed Rachleff, New London Security FCU’s investment advisor, had been ruled a suicide.

According to an account in The Day, Rachleff left his home for a walk on the afternoon of July 28, hours after regulators seized control. He covered roughly three miles before reaching the Mohican Senior Apartments. He found someone to let him in, went to the 11th floor and stepped out a window.