Wednesday, August 18, 2010

NCUA Board ‘Black Friday’ for Corporate Credit Unions Expected

Below is a commentary published by Marvin Umholtz (permission granted by author) from his August 14 CU Strategic Hot Topic newsletter.

Another potentially surprising story making the rounds concerned the expectation that as part of its legacy asset strategy the National Credit Union Administration (NCUA) Board won’t wait until its September 16th meeting to take decisive action to place one or more additional troubled corporate credit unions into conservatorship. This past week Credit Union Times reporter Heather Anderson contacted this correspondent in her research for a story expected to appear in the August 18th edition based upon a ‘Black Friday’ scenario. That is one news story that this correspondent can hardly wait to read.

This correspondent has no special connections at NCUA or anywhere else that provided an inside scoop about what the NCUA Board might be about to do. The following comments on the subject are speculation based upon knowledge of the industry and the corporate credit union crisis. “Black Friday” is a reference to those events associated with the stock market in the past when stock prices dropped dramatically. In the retail trade, “Black Friday” is that day after Thanksgiving that the stores get into the black on revenues. Generically, “Black Friday” also denotes any type of day of reckoning – which would surely fit the speculation about an NCUA Board takeover of the most troubled corporate credit unions. At its September 16th meeting, the NCUA Board is expected to adopt the new stricter corporate credit union regulations, announce the legacy asset plan, and assess the 2010 NCUSIF premium.

The longer the NCUA Board goes without announcing its legacy asset plan, the more likely it is that there is not going to be one. Unless the U.S. Treasury and/or the Federal Reserve step in and take the legacy assets off of the books for the National Credit Union Share Insurance Fund (NCUSIF), the Temporary Corporate Credit Union Stabilization Fund (TCCUSF), the Central Liquidity Facility (CLF), and the conserved corporate credit unions (U.S. Central Federal Credit Union, Western Corporate Federal Credit Union, and perhaps other soon–to-be conserved troubled corporate credit unions), NCUA might not be able to reconcile its market, legal, and accounting goals to provide a least cost solution to the industry and give the corporate credit unions clean balance sheets.

Unlike Austin Powers’ lost mojo, the NCUA Board is unlikely to find the accounting black magic needed to make everything all right. Generally Accepted Accounting Principles (GAAP) and the Financial Accounting Standards Board (FASB) requirements are very unforgiving. In other words, the NCUA Board is likely stuck with the losses one way or another and NCUSIF or TCCUSF premium assessments would represent the only remaining plan to deal with the legacy assets since selling them off into the market just locks in actual losses. Let’s re-state that – retail credit unions are ultimately stuck with the cost, whatever it turns out to be.

The NCUA Board is racing against time in terms of the “unusually uncertain” economy, too. The market for mortgage-backed securities has not gotten better and is not expected to do so for many years due to the slogging economy and the deeply troubled U.S. housing market. Projected legacy asset losses are rapidly turning into actual credit losses. The NCUA Board’s original corporate stabilization actions were largely designed to buy time to find a lesser cost and more orderly fix in order to avoid a “catastrophic loss scenario” and “the demise of the credit union system” (NCUA’s own words from its last video presentation posted on its website).

As the economy continues to drag and even appear to worsen, the agency might now believe that waiting will not help the situation – thus the shift in thinking to take more immediate action to conserve some or all of the remaining corporate credit unions. Speculation about whether the NCUA Board plans to seize just the “bad” assets or all the assets provides for interesting permutations on the “Black Friday” scenario. Many corporate credit unions still rely heavily on the income streams from the performing legacy assets and would likely miss them if removed.

Rather than a catastrophic “Black Friday,” perhaps the speculated NCUA Board intervention would instead produce an environment for the phoenix-like rise from the ashes by the few corporate credit unions with the best chances to survive under the new capital expectations and payment system-focused business model. It would certainly make it easier for retail credit union officials to decide to recapitalize among fewer, healthier corporate credit unions than to try to recapitalize the entire system – especially if they were active members of one of the most troubled corporate credit unions and are still pained by their devastating past contributed capital losses. Plus, although this correspondent has not studied every corporate credit union’s website for detailed clues to its revised business plan under the new restrictions, none have loudly touted any plans yet that are economically and competitively viable moving forward.

For all practical purposes, the corporate credit union network is already in conservatorship since the NCUA Board’s stabilization program and capital waivers are the only things keeping it from collapsing. The NCUA Board’s formal conservatorship of the remaining troubled corporate credit unions might be a blessing in disguise – injecting some additional certainty into an uncertain situation. On the other hand, it is still hard to imagine a retail credit union’s board of directors getting past the losses that it has already suffered to recapitalize any corporate credit union. Many board members still don’t fully grasp the enormity of the corporate credit union crisis and those that do are madder than hell. Most never knew that the industry’s interconnected structure would leave them holding so large a toxic bag.

It would not be desirable for any speculation about the potential conservatorship of more corporate credit unions to cause a run on deposits and give the NCUA a new liquidity problem. As long as the NCUA’s deposit insurance and corporate stabilization 100% deposit guarantees are in place, the corporate credit unions – whether they are troubled or among the healthier ones – can operate safely under NCUA’s wing indefinitely. On the “Inside the Washington, DC Beltway” theory that any good crisis should not be wasted, the NCUA might indeed be positioning itself to pull the plug on the legacy assets and tackle additional corporate credit union conservatorships to force a quick transition to the next incarnation sooner rather than later. One can always hope that the rising phoenix will fly rather than crash and burn. And for the industry’s sake, one can also hope that the NCUA Board’s actions – whatever they end up being – result in the rebirth of a phoenix and not of an albatross.

The corporate credit union crisis and the resulting deposit insurance premium costs are on the minds of everyone in the industry. It has been a real shock to many credit union board directors. There appear to be no easy solutions. The credit union and corporate credit union deposit insurance funds need to be risk rated and should probably transform over time to be more like bank deposit insurance coverage funded by expensed premiums rather than the 1% NCUSIF investment. Until this funding structure changes, a high risk-taking credit union and a very risk-avoiding credit union pay the same relative rate. As the corporate credit union crisis so painfully demonstrated, the less risky are on the hook for the losses at the most risky.


  1. Never thought I'd agree with you, Keith, but your last paragraph is exactly right.

  2. Quite frankly, with this last paragraph being true, what is stopping all credit unions from in the "most risky" category. Where would credit unions be if every credit union was in that category. Good points!



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