Rhode Island's Gov. Sundlun Presses Pace of Foundering Credit Unions' Bailout
Gov. Bruce G. Sundlun of Rhode Island wants to hasten his state's bond-financed rescue of 13 credit unions, whose insolvency continues to aggravate the state's recession, state officials say.
Yesterday in Providence, Gov. Sundlun called an emergency meeting of the board of directors of the Depositors Economic Protection Corp., which was created by state statute early this year to mop up the credit union mess.
Michael A. Bucci, deputy executive counsel, said earlier this week that the governor had decided to make "a significant payout" sometime this month to depositors at credit unions that remain closed.
Elayne Burke, a legal assistant at the corporation, said yesterday's meeting of the corporation board was called to determine the size of the payment to depositors. She estimated that it could exceed $80 million, freeing up accounts at seven of the institutions.
The corporation has roughly $125 million left over from its $150 million bond sale last June. The bonds, which came to market through a Goldman, Sachs & Co. syndicate, are secured by 1/2% of the state's 7% sales tax. The corporation has also earned $150 million on the outstanding loans of the credit unions.
The 13 credit unions still closed were among 45 that Gov. Sundlun shut down Jan. 1, hours after being inaugurated and following the failure of the Rhode Island Share and Deposit Indemnity Corp., a private insurer ravaged by fraud.
Some $1.7 billion in deposits were lodged in 300,000 accounts at the 45 credit unions, and the bulk of those deposits, $1.2 billion, is owed by the handful of institutions still shuttered.
The first payout under the program, $17.5 million, occurred in June. The corporation used $17.6 million of note proceeds to purchase assets of credit unions and pay depositors.
Originally, payments to depositors were to have proceeded according to a schedule that favored checking and saving accounts over certificates of deposit and individual retirement accounts, to cover 96% of all accounts within 18 months. The plan, approved by the state's General Assembly in February, covered checking accounts up to $100,000 within six months of the first payout. By the same time, owners of certificates of deposit and customers with individual retirement accounts would see only $4,000 of their money.
That disparity stoked fires of enmity. "It was one depositor against another," Ms. Burke said.
To quell the outcry, the corporation will pay all depositors equally, whether they are owners of certificates of deposit, or customers with checking, saving, or individual retirement accounts.
In the short term, bond proceeds will play a key role in purchasing assets, and therefore in reopening the credit unions and giving depositors access to their money.
According to an official statement circulated in conjunction with the $150 million offering, the corporation can issue another $150 million in bonds, as long as it can show that the 1/2% of the sales tax receipts has raised 125% of what maximum annual debt service would be.
Borrowing more to free up the public money, analysts say, might be worthwhile.
Moody's Investors Service, which affirmed its Aa rating on the state's GO bonds Tuesday, noted that the credit union imbroglio aggravates the state's economic downturn by freezing consumer dollars. "The effects of the economic recession are compounded here by the state banking crisis," the agency said in a statement issued along with the state's $164 million general obligation bond sale this week.
The severity of Rhode Island's recession, according to one municipal market observer, may be spurring the governor to act, especially considering that his two-year term expires next year.
Northeast Savings, a bank from Hartford, Conn., has emerged as successor to Rhode Island's Old Stone Bank, which unsuccessfully sought to acquire five credit unions. Northeast is performing due diligence that could lead to a deal to buy out one or as many as five of the institutions that Old Stone considered buying.
If the deal succeeds, it could take care of deposits worth $460 million, according to John McCarthy, manager of depositor relations at the Depositors Economic Protection Corp. But that would still leave the state and the corporation with $740 million worth of angry depositors on its hands.