Corporate Credit Union Update
March 27, 2009, Alexandria, Va. – The National Credit Union Administration (NCUA) has instituted periodic reporting to stakeholders on the status of the corporate credit union system and the conservatorships of U.S. Central Federal Credit Union (U.S. Central) and Western Corporate Federal Credit Union (Wescorp).
The first week of operations of U.S. Central and Wescorp under conservatorship have gone well, with the following actions being taken:
- Normal operations and transactions have continued without interruption, and liquidity remains stable.
- The Boards of Directors, CEOs and one senior staff member have been released.
- CEO and senior management contracts have been repudiated.
- All Senior management bonus plans have been suspended.
- Executive perks such as country club golf memberships have been cancelled.
- Membership policies have been amended to suspend the requirement that member credit unions replenish membership capital share accounts.
- Meetings/contacts have been held with member credit unions to enhance ongoing confidence in the continued operations of the corporate. The conservatorship boards and new CEOs will continue to host periodic teleconferences and town hall meetings with the members to provide information, solicit stakeholder input and fully understand member service needs.
- Contacts were made with outside counterparties to assure them of ongoing operations and to establish adequate future contingent sources of liquidity.
- Contacts with the associated Federal Home Loan and Federal Reserve Banks have also been made, and provisions to maintain lines of credit are being explored.
- Cross analysis of held securities continues with release of specific comparison expected shortly.
NCUA Chairman Michael E. Fryzel stated that “I want to assure all stakeholders that conservatorship of U.S. Central and Wescorp were necessary to protect the interests of federally-insured credit unions. These institutions posed the largest degree of risk. Moreover, in the case of WesCorp, it is clear that management’s estimates of projected credit losses on residential mortgage backed securities were dramatically lower than the estimates of both NCUA and WesCorp’s own external advisors.
The conservatorships will also facilitate NCUA’s ability to achieve a least cost resolution. NCUA’s strategy remains unchanged: to avoid incurring a larger market loss than the credit losses of holding the distressed assets to maturity. Further, NCUA remains committed to pursuing resolution options that preserve the ability to realize costs savings if credit losses are less than projected.
In fact, NCUA has been consulting with industry leaders to develop voluntary funding options within the credit union system to isolate and finance the distressed assets, allowing credit unions to recoup any performance on these assets that are better than expected. NCUA is contemplating the ‘bridge bank’ or ‘good bank – bad bank’ in this context. NCUA is also exploring using the Treasury’s and the Federal Reserve’s respective distressed asset purchase programs to sell some of the distressed assets with a share insurance fund guarantee that limits costs to credit losses when incurred.
I also want to emphasize that the conservatorships have no effect on the NCUSIF’s loss reserve. The increase in the loss reserve is a result of refined estimates of the potential losses stemming from the corporate credit union portfolios. Said simply, the cost of the corporate credit union stabilization program would have increased even if NCUA had not placed U.S. Central and Wescorp into conservatorship. Barring a deepening of the recession beyond what was incorporated into the loss projections, and economic uncertainties do remain, the $5.9 billion reserve should be sufficient to cover expected credit losses of holding the distressed assets to maturity.
Though the independent, expert analysis provided by PIMCO was one factor in arriving at this reserve, it merely refined and supplemented NCUA’s own calculations. In addition, we have seen increased convergence between the various measures NCUA has reviewed of projected credit losses on the corporate securities. There is no reason to question PIMCO’s integrity and independence.
NCUA selected PIMCO not only due to its expertise, but because it had not sold any of the bonds being analyzed and was not engaged in providing any other services to the corporate credit unions. Any firm with the expertise to evaluate these bonds is a potential purchaser. However, there is no conflict of interest given NCUA’s intention to hold these securities to maturity; in fact this course of action was recommended by PIMCO.
The agency continues to explore all other reasonable approaches to minimize the impact of these actions on credit unions. NCUA’s top legislative priority is enactment into law the proposed corporate credit union stabilization fund legislation the NCUA Board authorized NCUA to seek at its closed board meeting yesterday, in combination with provisions of H.R. 1106 that increase NCUSIF borrowing authority to $6 billion and allow the NCUSIF to be replenished over a 5-year period. These authorities will allow NCUA the flexibility to assess premiums over time, in a manner that can be expensed by federally-insured credit unions when billed.”
The National Credit Union Administration charters and supervises federal credit unions. NCUA, with the backing of the full faith and credit of the U.S. government, operates and manages the National Credit Union Share Insurance Fund, insuring the accounts of nearly 89 million account holders in all federal credit unions and the majority of state-chartered credit unions. NCUA is funded by credit unions, not federal tax dollars.
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