ALEXANDRIA, Va. – With NCUA’s unprecedented bailout of U.S. Central FCU underway, the question being pondered in the credit union movement is will another corporate credit union require a government rescue to stay afloat?
In explaining the $1 billion assistance for U.S. Central, NCUA Chairman Michael Fryzel said he hopes the guarantee of all uninsured corporate deposits will help stem the outflow of deposits and is convinced that no other corporates will need a cash infusion. "There are no concerns right now. There are no other corporates (needing assistance)," said the NCUA Chairman.
Fryzel said NCUA has hired an outside firm, bond fund PIMCO, to evaluate every security held in portfolio by each of the corporates.
But outside observers are not so confident in the system. Several industry analysts asserted that a run on deposits has been draining funds from the corporate network for more than a year, as credit union executives worried about deteriorating financials at the corporates.
At the end of November, the corporate system had more than $18 billion worth of unrealized losses on its books, most of it held by U.S. Central, almost $10 billion, and seven other corporates, WesCorp FCU, Members United Corporate FCU, Southwest Corporate FCU, Corporate One FCU, Constitution Corporate FCU, Southeast Corporate FCU and SunCorp FCU.
"The whole system has been unraveling for months. We may be looking at the tip of the iceberg," said Charles Felker, a vice president at credit union bond house First Empire Securities and former chef investment officer at NCUA. "They’re trying to restore some of the confidence in the system, but I think the damage has been done."
He cited the problems emerging at several of the largest corporate credit unions, including exploding sums of unrealized losses, which have forced the Wall Street rating agencies to issue downgrades in recent weeks. He suggested some of them will be forced in coming weeks to take major charges, like the $1.2 billion charge taken by U.S. Central that precipitated the NCUA bailout. "Look at WesCorp, look at (Members United)," said Felker, "They’re going to experience permanent impairment, some of them already have, to some extent."
In fact, yesterday, Joseph Herbst, the president of Members United, the $9 billion corporate with a reported $1.9 billion of unrealized losses at the end of November, said his staff must now assess the effect of U.S. Central’s massive charge on his corporate’s financials.
WesCorp, the largest of the corporates with about $24 billion in assets, has been writing down the market value of more than $550 million worth of collateralized debt obligations, some of which may be permanently impaired. "The might be the final nail in their coffin," said Felker.
In November, Southwest Corporate, which reported $1.4 billion of unrealized losses on its books, decided to realize $18.5 million of other-than-temporary impairment charges. Corporate One recognized other-than-temporary impairment on $5.1 million of securities in November, while the unrealized losses on its books rose to $307 million.
Several of those corporates are expected to report additional impairments, leading to losses, when they issue their annual financial reports over the next few weeks.
