ALEXANDRIA, Va. – NCUA said it paid the U.S. Treasury $210 million last month as the first installment on a $1 billion NCUA capital note lent to U.S. Central FCU a year ago to help stabilize the central bank for credit unions.
The $210 million payment comes even as NCUA last month reported that continuing losses at U.S. Central will cause it to lose at least $331 million of the $1 billion, the biggest tab so far for the corporate bailout, which is projected by NCUA to cost approximately $6 billion.
Costs of the corporate bailout are growing daily, including borrowing costs for a $10 billion loan made to U.S. Central and WesCorp FCU amounting to $5 billion each. The huge loan was routed by NCUA from the Central Liquidity Facility through the National CU Share Insurance because NCUA is prevented from having the CLF lend directly to corporates.
The funding was obtained by NCUA and the CLF through the Treasury’s Federal Financing Bank, which provides loans to government entities at discounted rates, typically a 25 basis point discount. WesCorp was paying a rate of just 0.46% for its $5 billion loan as of Jan. 31.
A total of $8 billion – $7 billion for U.S. Central and $1 billion for WesCorp – has been replaced by so-called CU SIP notes that NCUA has sold to credit unions at a discount to market to keep U.S. Central and WesCorp afloat. The two failed corporates are paying a rate of 1.02% on the notes. NCUA borrowed the funds at a discount from the Federal Financing Bank, then lent it back as SIP notes paying a premium, making the government guaranteed notes attractive to credit unions and allowing the two troubled corporates to replace higher-interest loans from outside the credit union system.
“Essentially what they did was get credit unions to pony up with their excess liquidity. It’s a convoluted way of doing it,” said Tun Wai, chief economist for NAFCU.
The borrowings are costing NCUA almost $5 million a month in interest charges. Mary Ann Woodson, chief financial officer, last month told the NCUA Board the costs for 2009 were between $55 million and $60 million.
Many are pointing to signs of a rebound in the economy to suggest that the cost of the corporate bailout will be less than the $6 billion projected by NCUA.
Charles Idol, a long-time credit union economist who works with Southwest Corporate FCU, said he sees improvement in housing markets and predicted a turnaround in employment data, both indications that the values of mortgage securities held by U.S. Central, WesCorp and other corporates are poised to improve. “These are the two things that drive loss estimated,” Idol told Credit Union Journal.
NAFCU’s Wai said bond market values in asset-backed securities other than mortgage securities (e.g. autos, credit cards) are improving, another good sign for corporates holding large portfolios of these types of bonds. “If you look at the balance sheets [of the corporates] and the unrealized gains and losses you actually see improvement on the bottom lines,” he said.
