Central Liquidity Facility SAR

I wish I could file a suspicious activity report (SAR) against the NCUA.

NCUA has stretched its legal authority by using the Central Liquidity Facility (CLF) to provide loans to two troubled, if not insolvent, corporate credit unions – U.S. Central FCU and Western Corporate (WesCorp) FCU, even though corporate credit unions cannot join or borrow from the CLF.

The CLF, which was established in 1978 to provide emergency liquidity to credit unions, receives an annual appropriation from Congress. As part of the last year’s continuing resolution to keep the government funded into 2009, Congress raised the borrowing authority for the CLF from $1.5 billion to its full statutory authority of $41 billion.

NCUA had tapped this enhanced lending authority to funnel money into two troubled corporate credit unions to prevent the disorderly collapse of corporate credit unions. At the end of August 2008, CLF borrowings from Federal Financing Bank (FFB) were zero; but were quickly ratcheted up. Total borrowings from the FFB peaked in March at $19.2 billion and as of May stood at $18.7 billion.

According to its most recent financial statement, the CLF borrowings from the FFB to provide liquidity to corporate credit unions include a $10 billion loan to the NCUSIF and an $8.2 billion loan to the Credit Union System Investment Program (CU SIP).

The NCUSIF financial statement reports that two credit unions have received loans totaling $10 billion from the NCUSIF. It is understood that the two credit unions are U.S. Central and WesCorp.

Under the CU SIP, participating creditworthy credit unions would borrow from the CLF and invest in a SIP Note. The CLF will designate which corporate will issue SIP Notes to which credit unions. Each SIP Note will be fully guaranteed by the NCUSIF. Once again, the $8.2 billion were targeted at U.S. Central and WesCorp.

It is troubling enough that NCUA is using the CLF to provide liquidity to corporate credit unions – an authority it does not have. But even worse, it is using the funds to prop up failing institutions and thereby potentially raising the cost to taxpayers.

In 1991, the Federal Deposit Insurance Corporation Improvement Act (FDICIA) explicitly prohibited the Federal Reserve from acting as a source of liquidity for financial institutions in danger of failing. The same policy should apply to the CLF.