ALEXANDRIA, Va. — The NCUA Board yesterday approved the biggest rescue in the history of credit unions with a $1 billion cash infusion into U.S. Central FCU, the central bank for credit unions.
The Board voted in emergency session after U.S. Central informed the agency it was taking a $1.2 billion charge for so-called other-than-temporary impairment of mortgage backed securities, creating a massive $1 billion loss for the year, the biggest ever for a credit union entity. The losses are all related to private label mortgage backed securities.
The bailout will be funded by a capital note provided by the National CU Share Insurance Fund, which will charge credit unions a premium of 56 basis points, more than $3 billion, to cover the costs. The premium will pay for the infusion into U.S. Central and also raise the reserves for the credit union deposit fund, which have been depleted by growing losses among natural person credit unions the past two years.
"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 yesterday.
The $1 billion infusion, enacted under so-called Section 208 assistance, will be done 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 told earlier this week by U.S. Central of the losses. "We became aware of this on Monday of this week," he said.
In a letter sent to credit unions yesterday, 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 told The Credit Union Journal.
The nature of the cash infusion 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, vice president of asset liability management for U.S. Central, the $1.2 million impairment 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 million charge.
U.S. Central's management team, including president Francis Lee, were in Washington yesterday to meet with NCUA.
Other aspects of NCUA rescue's efforts include a guarantee of all uninsured deposits held by not only U.S. Central, but all of the corporate credit unions, which have been experiencing a run on deposits over the past year as their troubles have become public. The corporate network, mostly U.S. Central and seven other corporates, are sitting on more than $18 billion worth of unrealized losses on their investments.
Fryzel said he is not aware of the need to rescue other corporates at this time.
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 twice as much.
