WALL STREET-Even after the elimination of all of their capital in U.S. Central FCU, new problems are emerging for corporate credit unions as they continue to watch their investments deteriorate.
The biggest corporates are reporting in year-end financial statements they no longer can rely on private insurance taken out on billions of dollars in troubled mortgage-backed securities, forcing them to realize millions of dollars in new losses.
Members United Corporate FCU, which is expected to report new losses in its year-end financials, told members that two bond insurers covering its investments, Financial Guarantee Insurance Corp. and Syncora Guarantee, have been ordered by the New York Insurance Department to stop paying claims in order to preserve what little capital they have.
A third bond insurer, Ambac, also is battling solvency issues, prompting Southwest Corporate FCU to take a new, $6.9 million write-down on securities it owns, the Dallas corporate reported on Friday.
The news comes as several corporates are reporting big losses for 2009. WesCorp FCU reported Friday it lost almost $1.2 billion for 2009. Southwest Corporate FCU reported a $226 million loss for last year. Corporate One FCU had a $42.3 million loss for the year.
All three corporates reported they have written down their capital in U.S. Central by 100%. The rest of the corporates are expected to follow suit in the coming days.
The bond insurers have reported huge losses because of their insurance on collateralized debt obligations and credit default swaps, eliminating some of their ability to pay claims.
Bond insurance is considered one of the credit enhancements because it increases the likelihood of getting paid when bonds fail.
The elimination of bond insurance will accelerate losses being reported by the corporates, as well as other investors, according to Ken Ritz, a Fitch Investors analyst who covers the corporates. "This means that extra layer of credit enhancement isn't there anymore," he told Credit Union Journal.
Ohio's Corporate One said last week it took $10 million in new charges in November on securities backed by FGIC. The $4 billion corporate said it was counting on the troubled bond insurer to pay 70% on its claims-but that looks doubtful after the company was ordered to stop paying claims.
Southwest Corporate said it has reduced the probability of payouts on Ambac-wrapped bonds from 100% to 90%. Members United said the downgrade in the condition of FGIC and Syncora forced it to categorize the residential MBS they insured as other-than-temporary impaired, thereby requiring it to book a loss. The $9 billion corporate reported its biggest exposure is to MBIA ($340 million of bonds insured), Ambac ($330 million), FGIC ($100 million) and Assured Guaranty Municipal Corp. ($75 million).
Fitch's Ritz said the Wall Street agency has stopped rating the corporates. "As far as the corporates go, without government support they would have all failed," he said, of the NCUA guarantee on all corporate deposits and debt. "They wouldn't be operating without the government's support."
