Next On Tap: Bailout of Corporate CUs

WASHINGTON – Credit union leaders were working through the weekend to ensure the massive government bailout of the mortgage industry includes the nation’s credit unions, especially corporate credit unions, which are treading amidst huge portfolios of underwater mortgage backed securities.
 
At stake is the health of some of the largest banks, such as Washington Mutual and Wachovia, but also the corporate network, which has accrued some $10 billion in unrealized losses on its mortgage backed securities – more than the capital of the entire corporate network. Almost every corporate is holding underwater mortgage securities and more losses are expected to come to light today and over the next week as the corporates report their August financials to their members.
 
The Bush administration’s proposal to buy as much as $700 billion of illiquid mortgage assets from financial institutions specifically names credit unions as eligible parties, according to NAFCU President Fred Becker. “The issue is, is it going to be a clean bill, or is there going to be some attempt to put other things on there,” Becker told The Credit Union Journal on Sunday of legislation that must be voted on by Congress.
 
New NCUA Chairman Michael Fryzel was lobbying lawmakers heavily last week and into the weekend to ensure credit unions were covered under the bailout. His staff made several trips to Capitol Hill to make the case.
 
“We are reaching out to everyone: the Treasury, the Fed, the White House and the Congress to make sure we’re involved,” CUNA’s Chief Lobbyist John MaGill said. “We’re asking that credit unions are not excluded.”
 
The bailout plan also would include troubled underwater mortgages owned by natural person credit unions, home equity loans and other mortgage assets. Becker emphasized how important the bailout proposal is to the entire credit union industry, including natural person credit unions.
 
Industry experts last week were worried that expanding losses for the corporates could cause a run on the corporates and restrict their ability to provide liquidity to the credit union system, their main function.
 
“Corporate credit unions were chartered, in part, to provide liquidity. Have you ever heard of a liquidity provider that has no liquidity?” asked Charles Felker, managing director for credit union bond house First Empire Securities, who worked many years as an NCUA investment officer.
 
The biggest losses were accruing at a handful of the largest corporates, including U.S. Central FCU, unrealized losses of $2.8 billion; WesCorp FCU, losses of $1.4 billion; Members United Corporate FCU, $1.2 billion; and, Southwest Corporate FCU, $1 billion.
 
But almost all of the corporates were reporting unrealized losses on their mortgage securities portfolios at mid year: Corporate One FCU, $264 million in losses; Constitution State Corporate FCU, $153 million; Southeast Corporate FCU, $105 million; and, SunCorp FCU, $61 million.
 
Those losses are expected to be significantly higher as the markets have deteriorated since then.
 
Felker, who helped charter Empire State Corporate FCU (now Members United) in 1976, noted that many of the one-time Triple A-rated mortgage securities held by the corporates were being downgraded after last week’s bankruptcy of Lehman Brothers Holdings, which could make it difficult for them continue to hold the impaired mortgage securities to maturity, as they hope.
 
“The corporates would not be able to use the impaired mortgage backed securities to fund withdrawals,” said Felker. “To raise money they would have to realize those losses.”
 
“If we see a situation where there’s a run on the corporates NCUA may have to put the system into conservatorship. It’s not out of the realm of possibility,” he said.
 
The corporate credit unions were created in the 1970s to provide liquidity for credit unions at a time they did not have access to the Federal Reserve. Since then they have evolved into wholesale investment banks for credit unions, providing a place for credit unions to pool their assets for purchase or sale on Wall Street. U.S. Central, in turn, has evolved into an investment bank for the corporates.