LENEXA, Kan.-Several corporate credit unions, already weighed down by losses on their mortgage backed securities, are delaying a final accounting for 2008 as they wait to determine how much of the huge $1.1-billion loss at U.S. Central FCU will flow down to them.
For that $1.1 billion loss not only wiped out $707 million of retained earnings at U.S. Central, but also all $450 million of member corporates' so-called paid-in-capital II and $43 million of PIC I, losses that U.S. Central's 26 corporate members will have to record on their own books.
For instance, Members United Corporate FCU, already struggling with expected losses for 2008, reported last week it could be forced to take a charge of all of the $67.5 million of U.S. Central PIC II it holds, and as much as $5.5 million of the $38.1 million of PIC I. In a report to its members last week, Members United said its own retained earnings will be reduced by whatever charges it takes on its portion of U.S. Central PIC.
Southwest Corporate FCU said it has $67.5 million of PIC II with U.S. Central and $20.3 million of PIC I.
Every corporate credit union holds some kind of PIC in U.S. Central.
According to several experts, the corporates are going to have to charge-off all of their U.S. Central PIC II and portions of the PIC I as well, as a result of the U.S. Central loss. "They're going to have to charge that off. That's pass-through," said Charles Felker, a senior executive at credit union bond house First Empire Securities and a former chief investment officer at NCUA.
Meantime, credit union executives angry over the $5-billion corporate bailout planned by NCUA were calling last week for the elimination of U.S. Central. "I see no justifiable need for the second or wholesale tier. Our corporate credit union is perfectly capable of investing successfully. Eliminating the second or wholesale tier would be a good move," said Paul Phillips, president of Vision Financial FCU, in a comment letter to NCUA on proposed reforms to the corporate system.
"I would eliminate the wholesale Corporate CU structure," said John LaRosa, president of $1.2-billion Police and Fire FCU, which does not use a corporate credit union, in another comment letter.
Raymond Dowling, president of StamfordFCU, suggested the retention of a corporate system with regional corporates, and without U.S. Central. "A simplified corporate liquidity facility," wrote Dowling, "does not need the wholesale corporate function, regional corporates could easily operate independently.
The amount the corporates recover on their U.S. Central PIC investments ultimately depends on what extent U.S. Central pays off the $1-billion capital note NCUA infused into the troubled central bank for credit unions. "There is a possibility, however slight, that the capital note will be repaid," said Felker. "But they're not going to know an exact amount on how to treat their PIC until U.S. Central issues its financials."
Under NCUA's part 704 of its corporate regulations, PIC is the first in line to pay claims and absorb losses for the corporates, with membership capital shares coming next.
Felker, whose firm does business with more than 2,000 credit unions, worried about the trickle down effect of the U.S. Central losses. "If the losses at the top level [of the corporate system] and the second level are allowed to bleed into the bottom level it gives the perception that the whole industry in trouble," he told Credit Union Journal.
Felker, who the corporates see as a provocateur, said despite efforts to resuscitation, the losses have made U.S. Central insolvent. "It would be politically inconvenient to put U.S. Central into conservatorship, but that's what's going to have to be done," he asserted.
