ALEXANDRIA, Va. – NCUA, which is managing the two biggest corporate failures ever, is continuing to try to work down billions of dollars of toxic mortgage bonds held by U.S. Central FCU and WesCorp FCU, lest it be forced to realize the diminished value of the bonds in a fire sale.
The future of the impaired assets, as much as $40 billion worth in the two corporates and as much as $50 billion throughout the corporate network, was the major problem in the network not discussed during yesterday’s NCUA Board debate on a new corporate rule – the so-called 800-pound gorilla in the room, according to NCUA Board member Gigi Hyland.
Despite taking over the one-time $52 billion U.S. Central and one-time $34 billion WesCorp almost nine months ago, NCUA still sees no clear path to disposing of the troubled assets without taking on major losses for the two corporates. "We’re not going to sell them. I can tell you that much," Larry Fazio, NCUA deputy executive director, told The Credit Union Journal yesterday. "We don’t want to lock in a market loss." He questioned whether the market for some of the assets will ever be good enough to warrant a sale.
Instead, NCUA plans to hold the bonds for as long as possible, hoping to recoup as much of the principle through time and that realized, or actual, credit losses turn out to be less than the projections under so-called other-than-temporary impaired, or OTTI, he said. But that could be many years, according to Fazio. He said an average life on some of the assets in question is four years, but "some of these have a tail of 20 years."
The actual losses realized on the assets, most of them mortgage-backed securities, will determine the future, if any, of U.S. Central, WesCorp and as many as half-dozen other corporates dealing with lesser concentrations of toxic assets.
The other major issue the proposed corporate rule avoids is the recapitalization of the corporate system. NCUA Chairman Deborah Matz made clear yesterday as the Board issued to proposal for a 90-day comment period that those types of issues will be up to the corporates and natural person credit unions, and not the federal regulator.
Corporate representatives said yesterday there is no plan being contemplated for a recapitalization, and they were waiting for the release of NCUA’s proposal and its new capital requirements before taking it up.
"There has been, and continues to be, lots of discussion going on within the corporate network. Each corporate is working on their strategic plan for moving forward," said Brad Miller, executive director for the Association of Corporate CUs. "With the proposed rule being issued, corporates will now have greater insight and direction for developing these plans and, with their member credit unions' support, implementing business models that expand upon the value that corporates provide to credit unions while reducing risk posed to the system."
Miller attended yesterday’s NCUA Board meeting with three corporate CEOs, Jay Murray of Mid-Atlantic Corporate FCU, John Cassidy of Southwest Corporate FCU and Thomas Graham of SunCorp FCU.
