RALEIGH, N.C. - Just as the banking regulators are exploring whether to segregate banks' illiquid assets into a single entity, one CU executive is also proposing an initiative to separate out the bad assets from corporate assets; call it a "good corporate, bad corporate" plan.
But with his plan, Jim Blaine, the president of North Carolina's State Employees CU, would leave the billions of dollars of bad assets in U.S. Central FCU and the seven large corporates that hold them, and separate out the good and essential assets, like the payments systems functions.
Under this plan, says Blaine, those corporates would not longer be faced with having to accrue the $16 billion of unrealized losses they would need to realize upon the transfer of the assets under generally accepted accounting principles, or GAAP, because the assets would remain with the existing corporates.
Instead of necessitating the liquidation of those corporates, as is widely feared, the "bad corporate" would receive funding to allow that corporate to continue to manage the investments and collect interest and principal payments on the illiquid bonds, enabling it to hold much of the investments to maturity. The ongoing operations of the bad corporates could be funded from within the credit union movement, perhaps with the sale of participations to healthy credit unions, with some sort of guarantee from NCUA, suggested Blaine. The investing CUs could benefit from a guaranteed return on the participations and the industry would benefit by a reduction in the cost of a corporate rescue. "If our loss with the corporates is lower then everybody wins," he said.
In developing his proposal, Blaine looked back to the 1995 failure of Capital Corporate FCU, when NCUA seized the $1.1-billion Washington-area corporate and within weeks sold off $920 million worth of CMOs at a loss of $62 million to its members. "If they had waited a little while and let it mature, some if may have come back and the losses would have been lower," Blaine told Credit Union Journal. "I think the key point everyone is telling us is we don't want to re-do CapCorp."
Blaine called on NCUA to release all the available information it has about the corporates and their portfolios, including a report commissioned by PricewaterhouseCoopers and a review of all the corporate investments currently being conducted by bond house PIMCO, to enable as many sources as possible within the credit union movement to help devise a solution to the current corporate problems.
