WASHINGTON - In a major about-face, the Treasury Department last week announced it will not be using the $700 billion approved by Congress last month to buy distressed mortgage assets as it had planned to do all along, effectively eliminating credit unions from the government's financial bailout plans.
The move increases the pressure on NCUA and other credit union entities to develop their own rescue package for the credit union industry. "Our preference is that credit unions be able to turn to (NCUA) for assistance, so that credit union funds can help credit unions solve their own problems, with backup funding from Treasury if necessary," said CUNA President Dan Mica. "We again urge NCUA to implement a program for credit unions-by credit unions- that accomplishes the intent of the Emergency Economic Stabilization Act for the movement."
CUNA has suggested several approaches to a credit union-focused resolution, including having NCUA use funds from the Troubled Asset Relief Program (TARP) to either buy distressed mortgage assets from credit unions on its own; or to finance emergency loans through the National CU Share Insurance Fund; or to use the increased capacity of the Central Liquidity Facility, now at $41.5 billion, to fund an assistance program.
Last week's announcement by Treasury Secretary Henry Paulson surprised everyone and came as increasing amounts of the $350 billion available from the bailout money (the other $350 billion must be approved by Congress) are being spent on initiatives never contemplated or approved by Congress. That includes almost $200 billion to infuse cash into banks and an estimated $40 billion to bail out insurance giant AIG.
In reversing course last week, Paulson said he decided the funds approved by Congress to buy distressed mortgage assets under TARP would be better used to prop up troubled non-bank lenders, like those providing auto, student and consumer loans. "Our assessment at this time is that this (buying distressed mortgage assets) is not the most effective way to use TARP funds, but we will continue to examine whether the targeted forms of asset purchase can play a useful role, Paulson said.
Because credit unions have not been certified as eligible for cash infusions under TARP, this effectively eliminates credit unions from any assistance under the huge government rescue.
NCUA Chairman Michael Fryzel, who has been discussing a credit union alternative with industry lobby groups, expressed surprise at last week's change in direction and called on Treasury not to abandon credit unions. "In light of this, I'm in the process of communicating to Secretary Paulson to ensure that whatever form the TARP takes it will be appropriate for credit unions and their members," Fryzel said after last week's announcement.
Credit union sources pointed out that Treasury's latest plans contrast with those that passed Congress. "Right now we're still urging Treasury to continue the congressional intent of the program," said Brad Thaler, senior lobbyist for NAFCU. He noted that Congress has scheduled hearings this week on the program where individual members are expected to express dissatisfaction with the change in course.
Meantime, other entities are trying to tap into the rescue funds. Congress is hastily preparing legislation that would make $25 billion of the bailout money available for the troubled U.S. automakers. And Treasury is expected to make some of the funds available to insurers, other than AIG.
The main credit union beneficiaries of the plans to buy distressed mortgage assets would have been corporate credit unions, which are holding more than $10 billion of unrealized losses on their mortgage securities. While the corporates have expressed little interest in selling their mortgage securities under TARP, corporate executives have expressed confidence that the Treasury's program would recreate a valid market for mortgage securities and thus, improve the values of their holdings. But that hope appeared to vanish with the Treasury's abandonment of its original plans.
In addition, while credit unions had hoped to tap into some of the cash being infused into banks under TARP, the credit union lobby continues to struggle with the ramifications. Bill Hampel, chief economist for CUNA who has been working on the issue, noted that the credit union structure of mutual ownership makes it difficult to offer the government equity in exchange for a cash boost, as the banks are doing.
Credit union representatives are also mindful of the implications a taxpayer-funded bailout could have on the credit union tax exemption. Credit unions have always avoided the connection, especially during the crisis of the late 1980s and early 1990s when, like the S&Ls, hundreds of credit unions failed, by financing their own assistance through the credit union-funded National CU Share Insurance Fund.
That is one of the main reasons CUNA is focusing on a credit union-centric assistance program.
