Sunday, April 18, 2010

Gilding the Books

Jim McTague in Barrons (subscription required) writes about the creative accounting that has allowed corporate credit unions to pretend "their capital cushions are as fat as they were back in November 2008, before their portfolios of mortgage-backed securities blew up. In reality, most are either broke or barely capitalized. The system is held together by rubber bands."

Since NCUA hasn't produced an audited annual report for 2008 or 2009, it is nearly impossible to know how large the losses are in the credit union system. The article cites estimates of $6 billion to $18 billion.


  1. Yes the credit union DIF can nearly be considered technically semi-solvent.

    Unlike FDIC which could be considered fully insolvent. FDIC is defying the dictates of Government GAAP, tested negative equity ratios, has un-assessed assessments, intuitions impregnated with artificial TARP insemination, bank books cooked with loss recovery entitlements from past tax recapture, unlimited no-interest borrowing opportunity to free up credit that is still insufficiently extended to American business, offers inconceivable loss-sharing percentages so the deposit insurance fund can kick costs down the road, demonstrates no adequate provisioning for future bank failure losses in an appropriate allowance account, and coverage is provided for institutions that are mathematically too big to cover at failure.

    An audited annual report (if published) might suggest NCUA might do things differently. However, my guess is that same audit firm might have more to say about FDIC:

    “The financial statements of the federal bank insurer have been prepared assuming that the Agency will continue as a going concern. However, the Congress of the United States is in the pre-exploration stage of forcing sweeping change in its operations; current events demonstrate it has no dependable source of revenue from insured institutions, it is a captive of the industry and is reliant on its ability to raise unlimited capital from taxpayers or other sources of government guarantees to sustain operations. These factors, along with other matters raise substantial doubt that the Agency will be able to continue as a going concern. The financial statements of the FDIC, such as they are, do not include any adjustments that might result in a change from the outcome of this uncertainty.”

    Yes, bring on the audited annual statements. Really, really good audit statements.

  2. Keith: Thanks for providing this forum for commenting on your observations ...

    Mr. McTague’s column, which you reference here, needs to be put into context. So, let me set some things straight (with kind input from CUNA Chief Economist Bill Hampel):

    -- You report that the article cites loss estimates on the corporate portfolios of $6 billion to $18 billion. Those indeed were the initial estimates of the broad range of the possible losses, ranging from most optimistic to most pessimistic, created a year ago. The "most likely" estimate was $11 billion. More recently, NCUA has said the losses are likely in the range of $9 billion to $11 billion, meaning the most likely value is around $10 billion.

    -- Further, readers of Mr. McTague’s column should bear in mind that this $9 billion to $11 billion figure includes both $5 billion in losses already paid for by the capital of CUs in the corporates, plus current estimates of $4 billion to $6 billion to be covered by the National Credit Union Share Insurance Fund, which CUs are paying for through premium costs expensed over the next six to seven years. This is a reduction in the estimated cost to the share insurance fund from $6 billion last year.

    --The bottom line is that the net standing of the National Credit Union Share Insurance Fund, after subtracting the current estimate of the future losses from the corporate portfolios that credit unions will have to pay, is somewhere between 0.25% and 0.45% of insured shares.

    -- That means the Share Insurance Fund is miles ahead of the FDIC in restoring normal operations through future bank premiums, which by the FDIC's latest report has a fund balance of negative 0.39% of insured deposits. Since normal operations are around 1.25% of insured deposits, credit unions can look to eventually paying between 80 bp 100 bp. Banks on the other hand are on the hook for around 165 bp.

    I hope this helped put Mr. McTague’s comments into context.



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