LAKE BLUFF, Ill.-It's going to cost natural-person credit unions $17 billion to bail out the corporates, a price tag that could cripple the CU movement if NCUA continues with its annual assessments.
That's the conclusion of Mike Moebs, economist and CEO of Moebs $ervices, who insists NCUA's approach to resolving the corporate crisis will only bring assessments "as far as the eye can see. The corporates could drag down the entire movement if something is not done differently to address the problems."
Not only will more credit unions be pushed into the red and fail as a result of the assessments, but the value CUs provide to members will be greatly diminished as pricing suffers and service levels drop. "We are impinging their ability to grow," Moebs told Credit Union Journal. "We can't keep assessing credit unions at the rate we are. With a $17-billion price tag, we are looking at 15 to 20 years of major assessments. If we do that credit unions will be buried by the banks. I am totally opposed to these assessments, because of the harm they will do to the credit union movement."
Credit unions, like smaller community banks, have only one source of capital-earnings, reminded Moebs. "Cut earnings by assessments and credit union capital is slowed, which means credit union growth is slowed."
Moebs arrived at the $17-billion bailout ticket by projecting mark-to-market losses on corporate holdings, and by determining the capital needed to bring corporates back to a 4% standard, below what natural credit unions must maintain. In estimating the value of the corporates' investments, Moebs used March 2010 totals (shown in the table).
Moebs claimed to be "very liberal" in assessing the value of GSE debt at 90 cents on the dollar, bringing 10 cents on the dollar in losses or $579 million in a category that is shown on the March balance sheet at $5.790 billion. For privately issued MBS, Moebs estimated 50 cents on the dollar, half of the $11.731 billion or another $5.8 billion in write-downs. Assigning 90 cents on the dollar to other investments added another 10 cents on the dollar loss or $6 billion in losses in that category.
"Add these up and we are looking at $12.3 billion," Moebs concluded. "I don't think that is unrealistic. The recent assessment of $1 billion is a drop in bucket."
Capital Is Other Critical Issue
The other issue is capital, reminded Moebs. "The corporates (as a group) have no capital. They are basically at 10 basis points negative capital-to-asset ratio, when you add all of the corporates together. U.S Central and WesCorp are each 65 basis points negative."
Using a 4% minimum capital standard, based on the corporate system's combined $108.6 billion in total assets as of 2010, that would mean $4.5 billion of capital is needed. Add in mark-to-market losses and Moebs arrived at $16.8 billion. "That's the big problem," Moebs stated.
Since Moebs contends assessments are not the answer to pay the $17-billion price to bail out the corporates, the economist and CEO proposed three solutions-one which calls for private equity groups to step in, much like what could take place between JC Flowers, a private equity firm, and Kent Reliance Building Society, a cooperative similar to credit unions that is located in Great Britain.
Moebs suggested two solutions the government could provide. The Federal Reserve could buy the corporates' bad debt and shore up their capital position, or it could simply eliminate the corporates and take over their roles with natural-person CUs.
"Since the Fed's balance sheet is big, they could lend the money to the credit union movement through a no- or low-interest loan scattered over 15 to 20 years. That is not as bad as the assessment approach," Moebs stated. "But if credit unions have to borrow from the Fed and pay interest, it will still impede their ability to lend money and it will be a burden on taxpayers."
The Fed simply taking over for the corporates is the best of the two Fed solutions, asserted Moebs, since in this scenario no one has to come up with capital to support the corporate system. "That cuts the price tag by $4.5 billion immediately. It has less of an impact on the Fed, which would be able to do this fairly quickly."
However, Moebs believes calling on private equity groups is the best solution. "Private equity makes the most sense. First, there is no assessment credit unions have to go through. The Fed does not have to put up any money, so in no way will taxpayers be affected. There is a trillion dollars in private equity in the U.S. So this is a drop in the bucket. But these groups would need something. They would at least have to get their money back and have a legitimate exit strategy. This could be done with debentures backed by the U.S. government that would be defined as capital. Most importantly, the cooperative and mutual structure of the credit union is maintained. So the capital position for the corporate system would be redefined so private equity could invest. This is also a solution for natural person credit unions with precarious capital positions."
