ALEXANDRIA, Va. – A comprehensive rescue plan submitted by the corporate credit union network to NCUA proposes that the emergency lending fund known as the Central Liquidity Facility be used to pump as much as $15 billion of new funds into the corporates or even be utilized to move billions of dollars of distressed assets off the corporates’s books.
Under the proposal, the CLF would either make massive deposits or investments in shares in the corporates, or enter into so-called repurchase agreements with the corporates to acquire distressed securities. The repurchase agreements, which are a routine part of securities activities, would require the corporates to repurchase the distressed assets from the CLF at a later date but would enable the corporates to continue to hold these underwater securities until maturity, all the while collecting interest and principal payments on them.
Brad Miller, Washington lobbyist for the Association of Corporate CUs, which developed the plan, would not discuss its details until he has received more direction from NCUA. "We’re at the point where we’re just waiting to get some feedback from NCUA," he said.
But according to a copy of the proposal obtained independently by The Credit Union Journal yesterday, the plan would also entail the CLF making a $10 billion investment in U.S. Central FCU and as much as $5 billion into other corporates that are carrying large amounts of distressed securities on their books.
The corporates also propose having NCUA create some kind of deposit guarantee program for the corporates, on top of the current federal deposit guarantee of $250,000 per account, in order to shore up confidence in the corporate network.
The plan also calls for the corporates to undertake comprehensive capital building, by raising core capital to 4% by the end of 2009 (U.S. Central would have until the end of 2010); by increasing paid-in-capital at those corporates that need it; by deleveraging corporate balance sheets and by increasing earnings.
The CLF was created in 1974 as an emergency liquidity source for needy credit unions but went almost unused for the past 10 years while credit unions enjoyed an unprecedented period of prosperity. But as the economy’s troubles have spread through the credit union movement Congress agreed in September to expand the size of the CLF–based on loans from the Treasury Department’s Federal Financing Board–to $40.5 billion, from its previous $1.5 billion. Since then, NCUA has made the emergency loan fund the center of its efforts to shore up credit unions.
The plan notes the negative trends among the 27 corporates and U.S. Central, like a 14%, of $11 billion decline in shares between Sept. 2007 and Sept. 2008; a 40% increase in loans to credit unions of a total of $4.6 billion at Sept. 30, 2008; and a 21% increase in external borrowings for the corporates to $15.5 billion.
Not mentioned is a total of almost $18 billion of unrealized losses on distresses securities the corporates were holding at November 30.
The corporate plans suggests that the corporates reposition themselves to provide similar services as the Federal Home Loan Banks, by offering a variety of different loan and savings products
