ALEXANDRIA, Va. – In trying to revive the corporate credit union system, NCUA is struggling with a major legacy of the failures of the two biggest corporates, U.S. Central FCU and WesCorp FCU, and the question of how to keep the spreading failures from dissuading natural person credit unions from recapitalizing the system.
NCUA officials yesterday said they are devising a plan to segregate the so-called legacy assets of the two corporate giants, which includes as much as $40 billion in toxic mortgage-backed securities, to foster the restructuring of the corporates so that vital liquidity and payments functions of the corporates are maintained.
Among the options being considered are the removal of the toxic assets from U.S. Central, WesCorp and other corporates into a so-called “bad bank” that could be managed by NCUA, according to several sources. Over time, NCUA could sell some of the assets or manage the bonds as they continue to pay principle and interest.
"We’re prepared to isolate the legacy assets," said NCUA Chairman Debbie Matz said during a webcast Town Hall meeting yesterday. NCUA is reviewing several proposals on the legacy assets which it might expose to public comment, she said.
The issue of the legacy assets is critical to whether or not credit unions agree to restructure the corporates after NCUA approves new restrictions. CUNA President Dan Mica on Thursday told The Credit Union Journal the legacy assets issues must be resolved before credit unions move forward on a reform of the corporate system. "The credit union system will not capitalize the corporate system the way it exists," said Mica. He said this is something both small and large credit unions agree on.
But standing in the way of a restructuring of the corporates is those toxic assets and the certainty of increasing losses. NCUA continues to let the bonds run off at U.S. Central and WesCorp, all the while realizing growing losses. "Losses are, quite frankly, material," said Scott Hunt, director of NCUA’s office of corporate credit unions, during yesterday’s webcast. He said WesCorp alone already has realized $5 billion of losses, which will be funded by credit unions, and the entire corporate system is still sitting on potential losses of as much as $17 billion.
The realized losses will be greater still if NCUA were to decide to sell the toxic assets in the current down market, he emphasized. "Losses on those assets are very large already and we still can’t say we’ve found bottom," said Hunt.
The growing erosion of one-time highly rated mortgage bonds continues to create a difficult dilemma for NCUA. The bonds are deteriorating rapidly as the underlying collateral continues to erode due to growing mortgage foreclosures and loan defaults. But NCUA doesn’t want to liquidate U.S. Central or WesCorp yet, even as losses continue to multiply, because that would force them to realize even more of the unrealized losses.
Eventually, the losses at U.S. Central and WesCorp – and several other corporates – will find their way to the balance sheets of natural person credit unions, NCUA officials conceded. In the case of WesCorp, losses already have erased $2 billion of members’ capital at the one-time $34 billion corporate and there still is a loss of $4.5 billion, which eventually will be funded by credit unions.
NCUA officials said they do not plan to renew either the CU HARP of CU SIP program, the latter of which was used to collateralize external debt in the corporate system and fund it with credit union money.
