WASHINGTON - The National Credit Union Administration on Friday faces a tough choice: facilitate a merger of two industry liquidity centers and absorb some losses, or get stuck liquidating the weak partner.

"We've been trying to act as a catalyst," NCUA Chairman Norman E. D'Amours said of Western Corporate Federal Credit Union's bid to acquire the ailing Capital Corporate Federal Credit Union.

While the regulator on Tuesday wasn't placing odds on the deal, Mr. D'Amours noted: "The last thing we want to do is liquidate."

Still, the NCUA is proving to be a tough negotiator. The regulator may be unwilling to provide as much financial help for taking over Capital Corporate as Wescorp is seeking, sources said.

"It's sort of a situation where we might be hopeful one minute and discouraged the next," Margaret Blankers, vice president of marketing for Wescorp, said in an interview Monday. "It all depends on what NCUA is willing to do."

If the NCUA on Friday votes against the merger, sources expect the $1.9 billion-asset Capital Corporate will be liquidated. Agency officials said liquidation would not seriously harm any of the Lanham, Md., corporate's 470 credit union depositors.

However, Capital Corporate chairman Nancy Stubbins argued in a letter to the corporate's members that liquidation would be a disaster for the industry.

"If Cap Corp were closed, it would likely spark a loss of confidence far beyond the millions of credit union members we serve," she wrote. "Closing a corporate could tarnish the image of credit unions everywhere."

Cap Corp has suffered a $100 million paper loss due to writedowns of some collateralized mortgage obligations in its portfolio. It was forced to seek a merger partner in December after it could not meet depositor demands for money.

Wescorp, San Dimas, Calif., agreed to a merger late last year under the impression it could take on the Maryland corporate's investments at book value. But Deloitte & Touche, the accounting firm conducting due diligence, reversed itself Jan. 13 and said Wescorp would have to take the assets on at market value, meaning a $100 million hit to Wescorp's $265 million of total capital.

This revelation knocked the merger off the fast track and forced Wescorp, which has $12.4 billion of assets, to ask NCUA to approve some financial help.

"The bottom line is if we take the investments at market value we have to do it in a way that wouldn't impact capital negatively," Wescorp's Ms. Blankers said. "The new approach does call for a way to do that."

Ms. Blankers wouldn't comment on specifics of the Wescorp proposal. But sources said the California corporate wants to receive funding to offset any capital hit.

Sources said Wescorp could receive funding from one or more of three sources: other corporate credit unions, the National Credit Union Share Insurance Fund, or members of Capital Corporate.

The funding could take the form of a long-term, nonwithdrawable deposit paying interest at or below market rates, sources said. Wescorp would repay the creditors, but the deposit would be structured in a way that accountants would accept it as capital.

The merger plan Wescorp submitted Monday is a revision of one the NCUA staff refused last Wednesday to recommend to the board. The agency wanted Capital Corporate members to pay more of the merger's costs, sources said.

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