ALEXANDRIA, Va. – Even with NCUA’s new plan to add liquidity to the troubled corporate credit union network, there are no illusions that the plan, the so-called CU System Investment Program, will solve the corporates’ ills, unrealized losses on their investments of more than $14 billion–and growing.
Experts were saying that even if the markets improve and raise the value of many of these underwater securities, some of the investments will eventually have to be charged-off and losses realized. "Somebody is going to have to absorb a loss; either the corporates, the NCUSIF or natural person credit unions. The bottom line is the industry is going to have to take a loss," said Charles Felker, vice president at credit union bond house First Empire Securities and a former head of NCUA’s investments office.
NCUA Chairman Michael Fryzel conceded the plan he unveiled this week is meant to be a stop-gap measure. "It frees up some additional money for now. That’s the goal right now," Fryzel told The Credit Union Journal.
The plan essentially gives the corporates access to low-rate loans through the Central Liquidity Facility, through a back-door. The back-door is natural person credit unions that will be invited to borrow from the CLF on the condition that they use the money to buy certificates, called SIP notes, from the corporates, providing new new funding for the corporates.
The natural person credit unions will be allowed to borrow the CLF funds at 1.25% and the SIP notes will be offered at 1.50%–a 25 basis point spread.
All of the corporates, including U.S. Central FCU, will be allowed to issue SIP notes, which will be guaranteed by the federal government under NCUA’s new corporate credit union liquidity guarantee program. The one-year notes will not count as capital.
Officials of the corporates, many of whom are weighed down by borrowings to help them hold underwater securities, are optimistic the new program will provide some relief. "It is going to have the effect of providing additional liquidity to the corporate network and U.S. Central by replacing liquidity sources from outside the system with a liquidity source from within the (credit union) system," said David Dickens, vice president of asset liability management at U.S. Central FCU. He said U.S. Central plans to participate in the program.
NCUA plans to issue $500 million of the notes in January and is likely to expand the offering. Corporates that plan to participate must notify NCUA by Friday afternoon. Natural person credit unions must borrow at least $1 million in order to participate.
