WASHINGTON – As they contemplate a recapitalization of the corporate credit union network, executives, directors and members of the corporates are vexed by the $50 billion question surrounding the troubled mortgage assets held in the network.
The disposition of those assets and what effects they have on the members of the corporates stand as a major impediment to efforts to recapitalize the corporates, according to experts. "That’s one of the issues we’re going to be discussing," said Bill Hampel, chief economist for CUNA and a liaison to the Corporate CU Task Force, of forthcoming deliberations on the future of the corporate system.
CUNA’s Task Force is expected to meet in the coming weeks to discuss NCUA’s proposal on reform of corporate regulations. The meeting comes as increasing numbers of corporates are reporting the depletion of their capital that is being passed down to thousands of natural person credit unions in the form of write-downs. At least eight large corporates have depleted their member capital in recent weeks and all but a few of the 28 corporates are under-capitalized under NCUA’s rules, saved only by the agency forbearance that has allowed them to survive using their capital levels of a year ago.
Among the concerns of credit union officials are how to attract new capital investments from credit unions if the corporates continue to hold troubled assets on which they expect to report additional losses in the future, according to Hampel. The issue will also help determine the shape of any corporate restructuring when decisions are made to combine some of the troubled corporates.
Even as NCUA contemplates tougher capital standards, the question remains, how will the surviving corporates raise new funds to meet those standards?
"Once burned, twice cautious," is how Charles Felker, vice president of credit union bond house First Empire Securities and a former NCUA corporate examiner, put it last week. “If you’re a credit union (executive) you have to be wondering, ‘why would I put my money in this institution after losing it a first time,’ especially if the question of all these so-called legacy assets is still hanging around out there?"
One corporate CEO told the Credit Union Journal his board plans to wait until after the NCUA’s proposed rules are finalized early next year before deciding how to raise new capital.
NCUA says the issue of the legacy assets, which it puts at as much as $50 billion, will continue to be a concern because it has no plans to sell the almost $40 billion of legacy assets of U.S. Central FCU or WesCorp FCU, as it would require those two corporates to book huge losses under the current market conditions. As a result, the agency, which took the two troubled corporates under conservatorship in March, plans to hold as much of those assets as possible to maturity, according to Larry Fazio, deputy director at the agency. "We’re not going to sell them, I can tell you that much," Fazio told The Credit Union journal in a recent interview, of the potential for locking in huge realized losses on the assets.
