WASHINGTON - The Treasury Department last week was hastily developing plans for its bailout of the mortgage industry and accepted bids to manage up to $700 billion of assets it will buy from banks and credit unions.
The bailout plan easily passed Congress the week before after lawmakers added billions of dollars in tax breaks to convince wavering members of the need to rescue financial institutions, both banks and credit unions.
While the program is open for all credit unions, corporates will be the biggest beneficiaries in the credit union industry. The Bush administration hopes the program will allow troubled institutions to offload non-performing mortgage assets and recreate an active market, so those institutions not participating can once again sell and buy mortgage assets.
"While we are still assessing the full impact of this legislation on credit unions and in particular, WesCorp, our hope is that with the passage of the rescue bill, a sense of calm may finally return to Wall Street and more importantly, Main Street," said Jim Hayes, chief financial officer for WesCorp FCU, after the vote. "It's important that credit unions continue to fill the vital role they have in serving their members and this bill should help them do even more.
"U.S. Central is pleased by the passage of the rescue bill, and we are optimistic that this step will go a long way to returning calm to the financial markets. We also are grateful for the hard work of the NCUA and credit union trade associations in protecting credit union interests while this important legislation was under consideration," said U.S. Central FCU in a statement.
But as of last week, Treasury managers had yet to develop details of the program, such as how they will buy the toxic assets, at what price, and how and when they will be sold back into the market, according to several sources familiar with the process. The Treasury was accepting separate bids for the management of its portfolio of whole mortgage loans and portfolio of mortgage-backed securities, as well as for valuation of the assets to be acquired, and is expected to announce the winners as early as next week.
No Process In Place
"They don't have a process in place to implement the legislation," said Charles Felker, managing director of CU bond house First Empire Securities, who was helping train bank examiners at the Federal Reserve last week about asset-backed securities.
Felker, a former NCUA examiner who headed the agency's investment division, said it appears Treasury will buy the distressed mortgage assets at a steep discount, then either manage them or auction them off. "They won't be taking the stuff off the corporates' hands at carrying value; there's going to be some realized losses," he said, of the expectation that some of the corporates will participate in the program.
Meantime, the Treasury announced several new programs aimed at adding liquidity to the financial systems. They include a new program to buy short-term corporate debt, specifically commercial paper, that is also popular among corporate credit unions, and also to start paying interest on so-called sterile reserve banks and CUs deposit with the Federal Reserve in order to maintain access to low-cost funding through the Fed's discount window.
Commercial paper is short-term IOUs from top-ranked corporations and is among the variety of illiquid investments being held by the nation's corporate credit unions, also stuck with billions in underwater mortgage backed securities. Some corporates also sell their own commercial paper to investors in order to raise funds.
Who Holds Commercial Paper?
U.S. Central FCU, for example, held $979 million worth of commercial paper at Aug. 31. On the other side, Corporate One FCU had issued $602 million of commercial paper and other borrowings, Southeast Corporate FCU had issued $220 million of notes and commercial paper, and Members United Corporate FCU had $12 million in commercial paper outstanding, all at Aug. 31. Southeast Corporate in Tallahassee, Fla., noted in a statement, "Southeast Corporate has a $325-million commercial paper program that has been in place for several years. During this time of market turmoil only highly-rated institutions are able to sell their commercial paper. At Southeast Corporate we are gratified and take it as a testament to our good name and sound financial position that we have been able to continue to sell commercial paper. In fact the day after Lehman filed for bankruptcy, we sold $32 million in commercial paper. We have had other sales of commercial paper since then, as investors execute a flight to safety.
Some state-chartered, natural-person CUs also hold commercial paper, which is prohibited for federal charters. First Empires' Felker said increasing numbers of executives are coming forward with troubled mortgage backed securities. "There are a lot more credit unions out there that hold these private label mortgage backed securities than what is commonly known," he said. He cited an executive at a $100-million credit union who told him this week he was unaware that as much as $1 million of private label MBSs was privately issued. "They could take a shot to their net worth if they end up writing this stuff off."
On Tuesday Treasury Secretary Henry Paulson named Neel Kashkari, a one-time protege of his at Goldman Sachs & Co., to run the program, which is expected to begin buying distressed assets as soon as the next few weeks.(c) 2008 Credit Union Journal and SourceMedia, Inc. All Rights Reserved.http://www.cujournal.com/ http://www.sourcemedia.com/
