By Ron Jooss
3,000 people called in for CUNA's audio conference yesterday on NCUA's corporate stabilization plans. Here are some highlights:
CUNA President/CEO Dan Mica said CUNA's official position on the NCUA recent action was mixed. While the association agreed the regulator had to take action, CUNA is not convinced the proper mechanism has been prescribed.
"There are two parts with regard to our feelings about what's happened at NCUA. One, we have reviewed the information as to what NCUA has done and we feel they had no other course of action but to act. They had to do something, whether it was an injection of cash, whether it be conservatorship, they had to do something. Second, we do disagree at this point with the approach that they've taken and we are working as hard we can to find alternatives that are workable. NCUA has indicated to us as recently as today .... that any alternatives ... that are realistic responsible, and legal they will consider."
Owen Cole, director of the Office of Capital Markets and Planning at NCUA, said the proposed remedy by the NCUA was actually the least costly way to stabilize the credit union system. "By stabilizing the situation, even if we end up having to absorb the full $4.7 billion dollars in losses, that is significantly lower than the cost every CU would have borne, including the CUs that did not participate in the corporate system, through a premium expense based on the losses we would have realized if we had to liquidate these assets and subsequent assets of natural person credit unions that would have failed as a result at these fire-sale prices in this dysfunctional market," Cole said.
Bill Hampel, SVP/research/chief economist at CUNA noted that given the economic times credit unions already faced an uphill battle achieving profitability in 2009. "This is not the only bad thing happening to credit union financial statements this year," Hampel said. "Other bad things are going to. There are going to other negative pressures on credit unions this year."
Hampel did not mince word on the effect the NCUA proposal would have for natural personal credit unions--some 60 percent would finish in the red. "There is no sugar coating this. This would be horrible. I've been in this business 30 years. Never in my experience have over 60 percent of credit unions lost money in a year which is what would happen if these charges went through as they are."
Mary Dunn, CUNA SVP/deputy general counsel, outlined alternatives to be considered by the NCUA:
- injection of capital from natural person CUs through member capital accounts, paid-in capital accounts, subordinated notes and term deposits;
- greater use of the Central Liquidity Fund;
- natural person credit unions could purchase corporate CU assets (a group of natural person credit unions has expressed interest in this idea, according to Dunn);
- expanding the System Investment Program;
- corporates could deposit capital to defray the deposit guarantee;
- explore extent to which NCUA can defer from GAAP rules for funding the premium and
- explore the Temporary Asset Relief Program.
As for pursuing TARP funds, Dunn said, "Even the critics of going to TARP are diminishing, as the need for assistance increases. So we are exploring all options and all opportunities to working with NCUA, Treasury and Congress."
Dunn said CUNA reps, including herself and Hampel, will be meeting with Vice President Joe Biden's economist, chief economist Jared Bernstein, next week and access to TARP funds is "tops on our list."
Regarding TARP funds, Mica said: In my conversation with Chairman Fryzel, they are now pursing aggressively TARP funds as backup funds for NCUSIF. Fryzel is requesting a meeting with Secretary of Treasury Geithner to discuss that this next week.
When asked if credit unions would concede lobbying power in legislation battles with bankers if they accepted TARP funds, Mica said: "Absolutely, we would love to see an internal solution, but I want to be realistic. Looking at the size and scope of the problem, it would be irresponsible not to have a back-up. We hope we never use it. We don't want to use it. But it's a little like not having insurance."
Dunn said under the alternatives under consideration, natural-person credit unions would fund the first $1 billion if there were losses in the corporates. The next $5 billion would be sought from TARP. "Even though we are seeking funds from TARP, if would be in a much defined and circumscribed way," Dunn said.
NCUA Deputy Executive Director Larry Fazio was asked why the NCUA requires the 1.3 percent balance in the share insurance fund and why it can't be reduced. "The statute requires us to charge a premium when the equity ratio falls below 1.2 percent. We cannot charge a premium to increase the fund above 1.3 percent. That's the framework in which we currently operate.
"The board decided as part of its January action to replenish the fund all the way up to the 1.3 percent because of the continuing uncertainty regarding the economy and other potential losses in the corporate system as well as challenges being faced by natural person credit unions and potential further pending losses and also with the hope to provide a cushion that we would only have to charge the premium once."
Fazio was also asked, if the market turns around would the funds be returned to credit unions? "How we structured both the capital note and the guarantee program—the capital note has a $1 billion reserve implication for the fund, and the guarantee has a $3.7 billion guarantee implication for the fund—to the extent that we are repaid on all or any part of the $1 billion capital note given to U.S. Central and to the extent that we don't have to exercise on the guarantee for the uninsured deposits, that money would flow back to the share insurance fund and be returned to the credit unions."
Mica asked Fazio if $15 billion were to flow into the corporates, in term deposits for example, if that would mitigate "a great deal" the current problem. Fazio responded, "Yes, sir, that's correct.
Ron Jooss is a CUES editor.
