More Details Emerge on Corporate CU Plan

The focus of the plan will be the securitization and sale of legacy assets.

September 28, 2010
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On Friday, the National Credit Union Administration (NCUA) Board announced the corporate credit union “legacy assets” plan that’s intended to address the impaired mortgage-backed securities held by several corporates.

The focus of the plan will be the securitization and sale of these assets into securities which will be backed by the full faith and credit of the U.S. Government. In an earlier closed meeting, the board placed three more corporate credit unions into conservatorship: Members United, Southwest Corporate, and Constitution Corporate.

NCUA will establish “bridge corporates” to ensure the important services by the five conserved corporates (U.S. Central, WesCorp, and the three conserved Friday) to natural-person credit unions regarding payments and settlement are not disrupted.

The board also issued the long-awaited final rule that will dramatically change the regulation of corporate credit unions. The rule is complex and will result in major changes to the entire corporate credit union system.

NCUA Chairman Debbie Matz also said the agency is sending two letters to credit unions on the board’s actions.

In related matters, the board issued for a 30-day comment period a new Interpretive Ruling and Policy Statement for the chartering of corporate credit unions. It also approved a delegation of authority for approval of new activities related to corporate credit union service organizations (CUSOs).

Following are highlights from the board’s actions.

Legacy assets plan

The NCUA Board reviewed the projected Corporate Credit Union Stabilization Fund costs, which are likely to range between $8.3 billion and $10.5 billion based on estimates of the credit losses associated with the troubled or “legacy assets.”

Of this amount, credit unions have already paid about $1.3 billion. The agency said the remaining $7 billion to $9.2 billion to be repaid will be assessed over the remaining life of the Stabilization Fund, which with Treasury’s agreement has now been extended to June 30, 2021.

Agency staff said the current projections were somewhat higher than the range the agency had estimated earlier, and were the result of updating the loss estimates on legacy assets, working with Barclays Capital.

An important feature of the legacy asset plan is that if the ultimate realized credit losses on the securities turn out to be very much lower than current estimates, there could be a recapture of previously impaired capital that had been contributed by credit unions. Agency officials pointed out that under likely future economic conditions, such a recapture is extremely unlikely.

The board also discussed the agency's approach for handling the troubled assets. According to NCUA Deputy Executive Director Larry Fazio, the overall plan for dealing with the corporate credit unions includes three stages:

1. Stabilizing the corporates;
2. Resolving problems in certain corporates and isolating the legacy assets; and
3. Reforming the regulatory regime.

The announcement of the legacy assets plan today “marks the end of the stabilization phase and the beginning of the resolution phase,” Fazio said.

NCUA will isolate the legacy assets from the five conserved corporate credit unions using "good bank/bad bank" structures involving newly chartered “bridge corporates.”

A bridge corporate will act as a “good bank,” and will assume most of the viable assets and liabilities. The impaired assets will remain in the “bad bank.”

The agency has also created a securitization trust (created in consultation with Barclays Capital) using these assets. The new securities created from this structure will be guaranteed by NCUA, backed by the full faith and credit of the U.S. government, and will be accounted for in the Corporate Credit Union Stabilization Fund.

Natural-person credit unions will be permitted to invest in these new securities.

Next: Corporate CU final rule

Corporate Bailout

Tim Clark
October 12, 2010 12:21 pm
Spreading out losses over 10 years or more is wrong. It's against GAAP and makes no sense for those credit unions, like ours, that actually grow. As we grow, our share of the bailout becomes larger each year. I would rather pay our portion now and be done with it. Most credit unions are very well capitalized and should be able to afford to pay the cost now.

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Recovery of ill-gotten gains?

Lee Mosher
October 19, 2010 1:39 pm
Any plans to seek recovery from the vendors who sold the these "legacy assets", the rating agencies, the auditors, or the board members and officers that approved these toxic investments? Can you spell CLAWBACK?

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