Wednesday, February 18, 2009

Corporate Credit Unions and the NCUA

Below is the text of an article by Steven Syre of the Boston Globe. Other media articles have surfaced that report similar information. One important note to make is that the NCUA proposal is not final and other alternatives are being reviewed. Either way, credit unions are trying to solve this problem without the need for taxpayer funds or a "bailout". Credit unions are well capitalized and have the financial resources to replenish our NCUA insurance fund. The current reserve accounts of North Alabama Educators Credit Union exceed $5.5 million. All deposits at North Alabama Educators Credit Union are federally insured to $250,000 by the NCUA. Certainly this situation is not fair to North Alabama Educators Credit Union and the thousands of other natural person credit unions who did not do anything wrong. This is why the credit union industry is seeking alternatives to being billed by the NCUA for our "fair share". Here is the article;

"Credit unions are the dull populists of the financial industry, serving millions of individual members with plain-vanilla products. They're not leveraged to the eyeballs, and they don't take many risks.

That sounds like an ideal conservative profile for any institution trying to weather this financial crisis. So why are credit unions suddenly on the hook for an investment meltdown that could easily cost the entire industry the kind of money it earns in a whole year or even more?
The answer isn't about mistakes made by credit unions. Those small institutions are paying a price for decisions made somewhere else by someone else, calls that seemed reasonable at the time but worked out very badly. It's one more new spin on the familiar story about broken credit markets and the damage that trickles down to hurt people far from Wall Street.
Credit unions are facing special charges to help bail out one large institution that serves their industry and bolster two dozen more like it. The main culprit: The sinking values of mortgage-backed securities.
Compared with the trillion-dollar rescue packages under negotiation in Washington, the new problems facing credit unions look like a rounding error. And the vast majority of credit unions, which tend to maintain high capital cushions, will be able to eat the cost and move on if they must.
But it still hurts, and there are real consequences. "The plan, in my opinion, will impede the industry's ability to lend," says Michael Hanson, president of the Massachusetts Share Insurance Corp., which insures state credit union deposits that exceed federal limits. "Losses do that, just as a matter of economics."
Others agree. That includes the National Credit Union Association, the entity that insures credit union deposits up to $250,000, just as the Federal Deposit Insurance Corp. protects bank deposits.
Some credit union executives are mad over the bills they will end up paying. The Navy Federal Credit Union, the nation's largest, calls the coming expenses "unacceptable."
Other credit union chiefs I talked to this week sounded more resigned. Mike Lussier of Webster First Federal Credit Union, Debbie Guiney of Allcom Credit Union in Worcester, and Roy Campana of Industrial Credit Union in Boston all fit that description. "It's unfortunate because the capital is there for a rainy day," says Campana. "But it's raining."
It certainly is, but the story of how credit unions got so wet takes a little explaining.
Most people are familiar with the 8,000 credit unions serving members across America. But there are also 28 institutions known as corporate credit unions, which serve the other 8,000 with back-shop products and financial services. They are the credit unions to the credit unions. One particular corporate credit union, US Central, sits at the center of that system and provides investment services.
US Central has big problems. Private-label mortgage-backed securities accounted for more than half its $31 billion investment portfolio and their values were sinking like rocks despite high credit ratings late last year. Worse, member credit unions were taking some of their money out of US Central and the other corporates.
Other sources of cash, particularly the Federal Reserve and the Federal Home Loan Bank system, were reluctant to extend credit because they feared the possible risk of insolvency, according to John McKechnie, director of public affairs at NCUA, the insurer of credit union deposits.
US Central could sell some of its securities to meet demands for cash, but it would take huge losses on the securities no one wanted to own any longer. A corporate credit union collapse was possible.
The solution: The NCUA injected $1 billion of cash into US Central in the form of a note late last month and extended broader deposit insurance to all the corporate credit unions. The total cost, expected to be more than $3 billion, remains an estimate.
All credit unions insured by the NCUA will share the tab, which will amount to about 0.56 percent of their assets. That seems like a small number, but the industry only makes a profit equal to about 0.49 percent of assets a year.
The cost could go up, too. Those mortgage-backed securities have lost a lot of value, but they could lose more.
Recklessness by financial giants caused most of our problems. Your local credit union is paying a price just the same."
Steven Syre is a Globe columnist. He can be reached at

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