WASHINGTON - Corporate CUs were weighing the pros and cons last week of the massive government bailout of the mortgages markets, which would ease some of the strain of growing losses on their mortgage securities portfolios.
The government bailout comes as the corporate system-which holds more than $100 billion in credit union funds-has accumulated more than $10 billion in unrealized losses on their mortgage securities, exceeding all of the capital held by the system.
NCUA and the credit union lobby were working last week to ensure that credit unions, especially the corporates, were involved in the proposed bailout, under which the U.S. Treasury Department would buy distressed assets from financial institutions and either sell them or manage them to relieve the burden from the various institutions.
The unprecedented government bailout proposal comes as the mortgage meltdown was eliminating many of the biggest financial institutions in the country in rapid succession due to their large holdings of mortgage securities.
First, last summer's takeover of teetering Countrywide Financial by Bank of America; then the failure of Bear Stearns & Co; then the government conservatorship of Fannie Mae and Freddie Mac, followed by the bankruptcy of Lehman Brothers and the takeover of Merrill Lynch by Bank of America, the effective government takeover of American International Group, and the conversion to bank holding companies of venerable investment firms Goldman Sachs & Co. and Morgan Stanley.
Brad Miller, Washington lobbyist for the Association of Corporate CUs, said the corporates were supportive of the proposed program because they believe it will shore up the markets, and thus the values, of their huge mortgage backed securities portfolios, even if the corporates don't sell their assets under the program. But he emphasized the rapidly changing nature of the bill and that there has been no formal endorsement of it by the corporate network. "This whole situation is so fluid," said Miller, "and there's so many changes to this; it's changing by the hour."
U.S. Central FCU said it also supports the plan for the effect it would have on the markets, even if the $41-billion central bank for CUs has no plans to participate and sell its assets under the program.
At press time, the corporates had no plans for their own system-wide resolution.
David Dickens, VP in charge of asset liability management at U.S. Central, said they believe the government's plan will help the market for their holdings by adding liquidity for all mortgage securities, but they continue to hold their bonds in hopes of receiving their book value when they mature. "They continue to amortize nicely and we're receiving $400 million a month," he said.
"I would not expect us to sell assets into the (Treasury's) warehouse," said Dickens.
His remarks came as U.S. Central was reporting that the unrealized losses on its mortgage securities grew by another $300 million in August, to almost $3.1 billion. Those losses have most likely grown since then as the markets have collapsed over the past three weeks.
U.S. Central is one of a handful of large corporates reporting significant unrealized losses on their portfolios. The others, all as of July 31, include: WesCorp FCU $1.4 billion; Members United Corporate FCU $1.2 billion and Southwest Corporate $1 billion.
Most corporates, but not all, are reporting unrealized losses. Others, all as of July 31, are: Corporate One FCU $264 million; Constitution State Corporate FCU $153 million; Southeast Corporate FCU $105 million; SunCorp FCU $61 million and Corporate America FCU $10 million.
Those unrealized losses are expected to be much larger as the markets have deteriorated significantly since then.
Terry Young, a spokesman for Southwest Corporate FCU, said they were waiting to see more details about the plan, but "we're generally supportive of the government's effort to get liquidity into the system."
Similar sentiments were expressed publicly and privately by other corporate representatives last week. NCUA was working on a daily basis to determine the values of the corporates holdings, sometimes calling individual corporates two and three times a day, according to several sources.
The corporates were studying the details of the government bailout last week. Among the questions being asked were what securities would be eligible to be sold to the Treasury; what kind of discount would be involved; and what kind of terms would the Treasury exact in exchange.
For example, some corporates are holding various instruments other than mortgage backed securities. U.S. Central reported additional unrealized losses of $300,000 on instruments it holds to hedge its portfolio of jumbo mortgages that it bought from credit unions, and a potential $1 million loss on several interest rate swaps involving Lehman Brothers Holdings.
Several representatives raised the question that once the government plan stabilizes the markets they could get a better price for the securities themselves-even by selling them at a discount.
Wall Street analysts who follow U.S. Central cited the dilemma faced by the corporates. "There will be some real losses," said Ken Ritz, an analyst for Fitch Investors who covers U.S. Central and the other large corporates. "But the question is, is it better to hold on to them or sell them into the Treasury plan at a deep discount?"
"If you charge-off 20% of the value of the securities, is it better than a 60% discount offered by the Treasury?" said Ritz. "It's a basic, fundamental investment decision." (c) 2008 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved. http://www.cujournal.com/ http://www.sourcemedia.com/
