LENEXA, Kan. – Corporate credit union executives were muttering last week during CUNA’s annual Government Affairs Conference over the quick disappearance of $450 million in membership capital shares in U.S. Central they were forced to convert into a new form of capital, called paid-in-capital II, that now appears to be erased by U.S. Central’s subsequently announced losses for 2008.
Did U.S. Central know, the executives asked, when it converted the funds on December 31 that mounting losses on its mortgage backed securities would require a $1.2 billion charge just four weeks later that would not only wipe out $707 million of retained earnings, but also the newly designated PIC II, as part of a $1 billion bailout from NCUA?
Officials at U.S. Central and at NCUA insist they did not know the $450 million of corporate deposits in U.S. Central would be wiped out a short time later.
"We had told our members in early December and even in early January we expected the losses to amount to $50 to $100 million. We did not expect the scope of the losses we ended up taking," Lyle Niedens, a spokesman for U.S. Central, said yesterday. A subsequent external review of the portfolio discovered that the losses were "worse than we expected," he added.
In November, U.S. Central said it sought to convert the member shares to the new form of capital in order to impress the Wall Street agencies that had been continually downgrading the corporate’s ratings. The aim was to illustrate it had built new Tier One capital that would be available to absorb any losses realized on its troubled portfolio.
The shift was approved by NCUA on Dec. 12, just as U.S. Central was preparing to close the books on its fiscal 2008, and U.S. Central converted the funds on December 31. The conversion was criticized by some corporates because the PIC II is perpetual in nature, as opposed to the membership capital shares, which had a three-year notice.
Less than four weeks later, on January 26, U.S. Central notified NCUA of the $1.2 billion charge and a subsequent $1.1 billion loss for the fourth quarter, wiping out all of its retained earnings as well as the newly created PIC II.
The NCUA Board, which announced the U.S. Central bailout two days later, said it was blind-sided by the U.S. Central losses and had only learned of them two days before.
Corporates are now expected to have to write off their PIC II on their books for 2008, under generally accepted accounting principles, or GAAP. The write-offs could have a snowballing effect, pushing several other corporates into the red.
For its part, NCUA says it won’t tell the corporates how to account for their lost PIC II, but will leave that up their auditors. "Corporates are expected to follow GAAP. The expectation of compliance applies to all of the elements you cite, PIC I, PIC II and MCS. Credit unions are to consult with their CPAs to ensure compliance," said John McKechnie, chief spokesman for the agency.
