ALEXANDRIA, Va. — The failures of US Central and WesCorp is hurting the credibility of the corporate system and may lead to dramatic changes — including taxation — for the entire movement, some analysts have suggested to Credit Union Journal.
Bert Ely, principal of Ely & Company, Inc., said the recent NCUA seizure of those two corporates will force CUs across the country to re-evaluate "the extent that they will want to have an equity investment in a corporate credit union," a move that could potentially jeopardize the long-term viability of all corporates.
That process may have actually begun last year as a number of large credit unions yanked made huge withdrawals in 2008; State Employees Credit Union in North Carolina alone puled 98.5% of its corporate deposits, a total of $3.44 billion, between Q3 2007 and Q3 2008. Other big names such as The Golden 1 and Ent withdrew $612 million and $359 million respectively (see related story, page 3).
"Despite of the assurances of NCUA, natural person credit unions had a quiet run (on the corporates)," Ely pointed out.
The best way to restore faith in corporates and curtail systemic risk going forward is for a wholesale reversion of the corporate system to its origins, according Stephen Coale, managing director at Amherst Securities in Houston.
"The corporate system has to be brought back to the original intent and charter in the early 70s, that being one corporate per NCUA region, which would be five at present," he said. "Corporates must be stripped of their investment authority, because this is the second time that as a system they have demonstrated severe risk to the industry and insurance fund; the first was (Maryland-based) CapCorp. There is too much concentrated risk at a select few institutions under the present scenario."
Coale implored natural-person credit unions to stop outsourcing their investment portfolios and take charge of them in-house. He also stressed that the entire CU movement is "all in this together" and that all parties need to get back to doing what they do best.
Members of the Credit Union Economics Group said the news would hurt the industry's image in the short run, but maintained that CUs are well capitalized across the board and that NCUA's move to conserve the two corporates would provide stability.
"Any negative story that references 'credit union' will have a public impact, [but] it is important to understand that credit unions in general are very healthy with more that sufficient capital levels and with deposits that are insured through the NCUSIF," the organization told Credit Union Journal in an e-mail. [The federal seizure] should help stabilize the system and make credit unions with excess liquidity help credit unions in need of liquidity."
But Coale sees greater long-term risks for the movement as a result of the corporate failures, saying that there is a "better than 50% chance" that credit unions and banks could be rolled together under one regulator, leading to taxation on cooperatives. He also believes that the bad press combined with the public's lack of knowledge of the credit union industry could be damaging unless natural-person CUs speak up even more.
"The vast majority of the general public does not know how to decipher the difference between a corporate credit union and a natural- person credit union," Coale noted. "To the public it is the same and the headlines read 'two of the largest credit unions in the United States were taken over.' So individual credit unions must immediately get the message out that they are not corporate credit unions and that they are safe and sound."
