Cram-Down Tie-In Is Not Expected To Hold Up NCUSIF Stabilization
The fund, to be financed by a line of credit from the Treasury Department, would pay back the Treasury Department over seven years and natural person credit unions would pay the additional premium to the NCUSIF over that time period.
The NCUA has estimated that shoring up the corporates could cost credit unions an assessment of between eight and 20 basis points a year-with an average of 14-over seven years.
Credit union CEOs said they hope that the congressional action means that the worst is over, but they are prepared for more pain.
"It wouldn't surprise me if there were more," said John Graham, president/CEO of Kentucky Employees Credit Union. "We are trying to take our medicine and move on. The fund is certainly on our radar screen but fortunately our board is looking at it as a third-party transaction that we don't have a lot of control over."
Sandy Lingerfelt, president of Clinchfield Federal Credit Union in Erwin, Tenn., said "We'd be putting out heads in the sand if we didn't plan for the possibility that there could be more required assessments. We are already going to take a hit; we will either break even or show a little loss. And we've never had a loss."
Although there was no congressional objection to the stabilization fund, it was tied in with other measures that were more controversial.
One of the points of contention was a proposal to allow bankruptcy judges to rewrite the terms of mortgages. CUNA and NAFCU both opposed it when it passed the House but took different tactics during the Senate negotiations but both wound up opposing it. The cram-down measure was being voted on as a separate amendment because backers of the stabilization effort felt it would kill the final bill if it were included; the cram-down provision is not expected to have the votes to pass the Senate.
The NCUA proposed creating the stabilization fund in March, less than a week after placing U.S. Central Federal Credit Union and Western Corporate Federal Credit Union into conservatorship. The agency said the fund is needed to spread out the costs of the conservatorship, the cost of guaranteeing the deposits of natural person credit unions in corporate credit unions, and the $1.1 billion the agency injected in U.S. Central in January after it reported $1.2 billion in losses for last year.
The agency has estimated those actions could cost the NCUSIF $5.9 billion.
The House-passed version gave the NCUA $6 billion in borrowing authority and did not provide any emergency authority. But the Senate Banking Committee approved an amendment giving the agency $18 billion in emergency borrowing authority.
At press time, Senate staff members were still determining how long the credit union system would have to replenish the NCUSIF if its equity ratio drops below 1.2%. The House-passed version provides for five years, but the NCUA and trades were pushing to increase it to eight years for parity with the FDIC.
The Senate measure extends through 2013 insurance coverage of accounts up to $250,000. Last year, Congress authorized a temporary increase. The bill passed by the House makes the increase permanent.
The measure also increases the borrowing authority of the FDIC to $100 billion. The FDIC has seen its funds diminished by the 29 bank failures this year.
CUNA, NAFCU and the NCUA all lobbied hard for the measure but didn't always agree on all the provisions.
Sources close to the discussions said congressional staffers opposed proposals to finance the corporate rescue plan through the Central Liquidity Facility or to change accounting procedures.
Some lobbyists for credit unions had proposed allowing Regulatory Accounting Principles, which allowed gains or losses to be amortized over several years, thus inflating the net worth of a financial institution in the short term. Those accounting principles were used during the savings and loan crisis and have been blamed for the escalation of that industry's problems.
The debate over judicial modification of mortgages revealed a split in tactics between CUNA and NAFCU. The afternoon before the Senate vote and with the measure facing likely defeat, CUNA announced it was withdrawing from negotiations on the measure. Sources said there were several areas in which they couldn't reach agreement, most notably how to handle second mortgages on primary residents.
NAFCU had already pulled out of negotiations a week before, saying it couldn't support the measure and leading to a public scuffle between the two groups.