ALEXANDRIA, Va.-NCUA was forced last week to infuse $1 billion into U.S. Central FCU after the central bank for credit unions reported a staggering $1.2-billion loss for its fourth quarter and $1-billion loss for 2008.
The unprecedented rescue effort will include a guarantee of all uninsured shares in not only U.S. Central but all of the corporates-covering an estimated $80 billion-in a desperate attempt to stem a run on the corporates that has been ongoing for more than a year.
NCUA will charge a premium of 56 basis points to pay for the rescue, engineered through the National CU Share Insurance Fund, which will raise more than $3.5 billion from natural person credit unions.
"The credit union industry will be using the funds they have put on deposit with the National Credit Union Share Insurance Fund to help shore up the credit union system, which they are a part of," said NCUA Chairman Michael Fryzel.
The NCUA bailout comes after the federal regulator failed to convince the Treasury Department to dedicate some of the $700 billion approved under the Troubled Asset Relief Program to assist credit unions. Fryzel called on new Treasury Secretary Timothy Geithner last week to set aside some of the TARP funds to assist credit unions.
The $1-billion infusion into U.S. Central, which will be in the form of a capital note, will be provided under the auspices of a supervisory agreement. It will not require U.S. Central to replace its board or management.
Fryzel said the NCUA Board decided to provide the emergency funding only after it was learned of the losses from U.S. Central.
The corporate network, mostly U.S. Central and seven other corporates, is sitting on more than $18 billion worth of unrealized losses on investments. U.S. Central alone has about $10 billion in unrealized losses, some of which are being realized in the fourth-quarter writedown.
But other corporates, including WesCorp FCU, Members United Corporate FCU, Southwest Corporate FCU, Corporate One FCU, Southeast Corporate FCU, Constitution Corporate FCU and SunCorp FCU, are also sitting on large unrealized losses.
Fryzel said he is not aware of the need to rescue other corporates at this time.
The latest bailout effort comes after NCUA tried to infuse new funds into the corporates through the so-called CU System Investment Program, which is providing low-cost loans to the corporates through the Central Liquidity Facility. The CU SIP, however, is only seen as a short-term stop-gap that is replacing loans from outside the credit union system with loans from inside, in order to allow the corporates to hold on to the impaired securities until maturity.
In a letter sent to credit unions last week, NCUA emphasized the importance of U.S. Central-which manages $35 billion of credit union funds-to the industry, as it is also the central switch for the payments system for the entire credit union movement. "There were no other options, as far as I'm concerned," the NCUA Chairman said.
The nature of the cash infusion for U.S. Central is unclear at this point. Fryzel said the note will count as permanent, or Tier One, capital, for U.S. Central, and is not a loan. Officials at U.S. Central said last week they plan to pay down the note over time, if possible.
The aim of the $1-billion infusion is to buy time for U.S. Central to be able to hold to maturity bonds that have deteriorated in market value. According to David Dickens,VP-asset liability management for U.S. Central, the $1.2-billion fourth-quarter charge includes $420 million of a principal shortfall on the mortgage bonds, funds that will not be recovered, but the other $800 million may be recoverable, over the life of the bonds. "According to GAAP, we have to recognize it in our 2008 financial," he said of the $1.2-billion charge.
The charge is solely related to private label mortgage backed securities held by U.S. Central and represents a write-down of about two-thirds of the book value of those investments, according to Dickens.
U.S. Central's management team, including president Francis Lee, were in Washington last week to meet with NCUA and work out the details of the bailout.
The guarantee of all corporate deposits will have an enormous cost for the NCUSIF, which currently insures all corporate deposits the same as it does deposits in natural person credit unions, up to $250,000 per account. That means the 26 corporate credit unions that have deposits in U.S. Central alone will gain more than $21 billion in new insurance coverage under NCUSIF. Deposits in those corporates will be as much as four times as much.
The additional share guarantee will run until the end of February, with corporates allowed to opt in after that until the end of 2010. Most corporates are expected to do so.
As part of the corporate bailout, NCUA has issued an advanced notice of proposed rulemaking, inviting anyone to propose a restructuring of the corporate network. The public comment period will run for 60 days.
