Conversion Specialists Tout Charter Change As 1 Way Out Of Corporate Mess

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WASHINGTON – Credit union executives are being solicited anew on one of the few remaining ways to avoid the growing costs of the corporate credit union bailout – conversion to a mutual savings bank.

“Before the calamity it was a much smaller number of credit unions [exploring conversion], but nobody was ready to do it. But the calamity was an enzyme,” said Peter Duffy, a managing director at Sandler O’Neil and Partners who advises credit unions, on the latest escalation in projected costs for the corporate bailout to $16 billion.

The conversion to mutual savings bank, which also comes with growing premiums being assessed by the FDIC, appears to be one of the few options for credit unions to escape the corporate bailout charges. Executives and boards at several large credit unions are being solicited to make the move.

Another exit option is conversion to private deposit insurance which would allow credit unions to skirt the bailout charges. But the only private insurer, ASI, also has charged premiums the past two years as it deals with its own troubled credit unions. In addition, NCUA said it is exploring how to make privately insured credit union members of the corporates pay a share of the corporate bailout – which they don’t currently pay.

“I think it goes beyond what the cost of the insurance [assessment] is and the corporate bailout. What these items have added to the equation is a clear and identifiable hidden tax on credit unions,” said Alan Theriault, president of CU Financial Services, who pioneered the credit union conversion to bank and hopes to gain new clients from the latest NCUA charges.

“I think people are in denial. There is a group that is resigned to it,” Theriault told Credit Union Journal yesterday. “Then there is a small group that is actively looking at a way to get away from it. And the only way you’re going to be able to do that is converting to a thrift [mutual savings bank].”

Theriault said he spent the first part of the week at the New Jersey CU League’s annual convention in Atlantic City and was heartily greeted. “I’ve never been so publicly embraced,” Theriault, who often has been reviled within the credit union movement, of the credit union executives and directors at the meeting.

The head of one large credit union, who explored a conversion two years ago when the corporate bailout first emerged, said he has no plans to re-open the matter since Congress agreed to stretch the bailout over seven years [now 11]. “My personal reaction is it’s no panacea, for a lot of reasons,” said Frank Pollack, CEO of Pentagon FCU. “For one, the banks are going to be paying a heavy cost themselves for a period of time. Maybe not as long [as credit unions] but they’re going to be paying. And, if the costs are comparable, what do your members gain, nothing.”

The costs of a bank charter would include not only annual premiums assessed by the FDIC to pay off the banking bailout costs, but annual income taxes that come to an average of about 25% of pre-tax earnings. “In our members’ situation it’s not a benefit,” said Pollack, who insisted his credit union is no longer exploring the option.


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