The Treasury Department's decision to abandon its initial plan to buy distressed mortgage assets effectively cuts credit unions out of the $700 billion bailout, but the industry hopes that the National Credit Union Administration will offer an aid program of its own.
Treasury Secretary Henry Paulson said Wednesday that the funds authorized under the Economic Emergency Stabilization Act would be better spent on direct investments in banks rather than on buying troubled assets, as was originally proposed. The government has agreed to invest in dozens of banks and thrifts through the purchase of preferred shares, but credit unions are ineligible to participate in the Treasury's Capital Purchase Program because they cannot issue preferred shares. In addition, growing amounts of the funding approved by Congress last month are expected to be used to assist nonbank financial companies like credit card, consumer, and auto lenders.
Buying toxic mortgage assets was the linchpin of the controversial plan, which was rejected by Congress before passing after billions of dollars in tax breaks were added.
Though few credit unions planned to participate, hope was widespread that the Treasury's intervention in the market would raise the value of troubled mortgage securities.
The National Association of Federal Credit Unions said it is hoping Mr. Paulson's announcement that the Treasury will no longer buy troubled assets is not the last word on the issue.
Brad Thaler, the senior lobbyist for NAFCU, noted that Congress has scheduled hearings this week on the program and that individual members are expected to express dissatisfaction with the change in course.
"Right now we're still urging Treasury to continue the congressional intent of the program," he said.
Meanwhile, the industry's other major trade group, Credit Union National Association, is expected to step up its pressure on the NCUA to come up with a program specifically to help credit unions.
CUNA has suggested several approaches to a credit union-focused resolution, including having the NCUA finance emergency loans through the National Credit Union Share Insurance Fund or use the increased capacity of the Central Liquidity Facility, now $41.5 billion, to fund an assistance program.
"Our preference is that credit unions be able to turn to [NCUA] for assistance so that credit union funds can help credit unions solve their own problems," said Dan Mica, CUNA's president.
The NCUA has so far been mum on its plans, other than to say it is considering various programs to assist credit unions.
Still, with the Treasury's Troubled Asset Relief Program continuing to take shape, the agency is urging Mr. Paulson to keep credit unions in mind. "I'm in the process of communicating to Secretary Paulson to ensure that whatever form the TARP takes it will be appropriate for credit unions and their members," NCUA chairman Michael Fryzel told The Credit Union Journal last week.
Eric Richard, CUNA's general counsel, said part of the motivation to create a credit-union-specific relief program is to show that the industry can solve its own problems without a government bailout.
"Credit unions have a history of helping each other out; we prefer to engage in mutual aid," Mr. Richard said. "We would like the emergency mechanisms to be there if we need them, but we would make every effort to make that a last resort." Credit union representatives are also mindful of a taxpayer-funded bailout's implications for credit unions' tax exemption.
