"When you invest in Pentagon FCU or Navy FCU, you're also investing in the Eastern Financials, too," said Lou Paar, partner at the New York-based Sandler O'Neill and Associates. "I don't know how you could possibly craft this deal so you could offer a reasonable rate to the member while accounting for the risk of interconnectivity, the fact that credit unions are essentially all subject to a capital call by the NCUSIF."
Unspecified corporate stabilization costs are another issue, Paar said. Capital markets demand a high degree of disclosure, and the redacted PIMCO and Clayton reports available to credit unions won't cut it on Wall Street.
NAFCU President/CEO Fred Becker agreed disclosure will be an issue but said it's his understanding if 20 or more credit unions petition their corporate, they can obtain a detailed investment list, which makes the disclosure issue moot. Furthermore, Becker said the market will ultimately determine the accepted degree of disclosure because investors won't invest in credit unions if they don't understand the risks involved.
Paar also said disclosure creates a sticky situation for cooperatives: explaining to members why their CU is paying them below-market rates.
"If market rate is 10%, at what rate would you issue your note to members?" Paar said. "It's the equivalent of making a charitable contribution to the credit union. Maybe they wouldn't mind doing that, but do you think they'd consider it an investment?"
Mike Schenk, CUNA vice president of economics and statistics, agreed that disclosure is an issue but said it's not insurmountable.
"Obviously, we need to have protections in place because we want to minimize confusion," Schenk said. "But just because there's a potential for confusion, it doesn't mean the idea is inappropriate or shouldn't be allowed."
But are capital notes appropriate for credit unions? Paar said credit union members and their sponsors are a more risk-adverse group than the typical capital market investor and might not support capital issuances regardless of return.
Charlie Felker, managing director of regulatory affairs for First Empire Securities, agreed the average credit union's "savings club" member probably won't bite on a capital issuance. However, he said that there are plenty of sophisticated and experienced investors among members and sponsor groups to make secondary capital viable.
Felker agreed with Paar that interconnectivity and a lack of corporate transparency will be an issue for Wall Street. However, he said by the time secondary capital is approved on Capitol Hill and goes through the required regulatory time frames, economists and portfolio managers will know the extent of losses and what kind of a economic recovery to expect, providing a more precise risk figure.
Additionally, Felker said mergers will continue to increase the average credit union size, which should put credit unions on a more level playing field with larger banks, with whom they must compete with in the capital markets.
Becker said he hopes to release the joint NAFCU-CUNA statutory proposal draft sometime this week.