Even After Detox, Will CUs Trust Corporates?
Even though the NCUA is closer to finalizing its plan to separate $50 billion worth of toxic assets from corporate balance sheets, NCUA Chairman Debbie Matz said recapitalization will still be a tough decision for credit unions.
"You will soon be facing the choice of either recapitalizing a corporate or finding other ways to obtain the same type of services that corporates have provided," Matz told 800 Texas Credit Union League members at their annual meeting April 7.
Four giant corporate credit unions were pushed toward insolvency after the market for mortgage-backed securities halted, creating losses on such a grand scale, recapitalization may be difficult for some, she said.
The $10 billion Southwest Corporate FCU, located just 30 miles east of the speaking engagement, is among the four largest corporates. As of Feb. 28, Southwest Corp has just $108 million remaining in member capital accounts and an $826 million members' deficit.
Joe Simmons, president/CEO of the Katy, Texas-based Brazos Valley Schools CU, is a member of Southwest Corp. He said he has lost almost three-fourths of his member capital invested there and anticipates he'll lose the rest of it.
However, he hasn't formally researched alternatives to the services Southwest Corporate currently provides his $511 million education-based credit union. Although he called the NCUA's developing legacy assets plan and its impact on recapitalization "a real big issue that must be resolved." He also said he expects some form of the corporate credit union system to survive, and it will be one he supports and that can meet his credit union's needs.
Matz acknowledged the legacy assets plan's largest hurdle, telling her audience, "There is no easy way to unbundle more than $50 billion worth of long-term assets, repackage them into marketable bonds and move them from corporates' balance sheets without realizing the losses."
However, she said the NCUA is close to proposing a plan that would remove the riskiest of the legacy assets from "ongoing corporates," while retaining the "most valuable pieces of the corporate system." Matz said she anticipates receiving a plan for board approval in June.
NCUA Director of Public and Congressional Affairs John McKechnie said the regulator's 20-member legacy assets working group includes staff from the Office of Corporate Credit Unions, Office of General Counsel, Office of Examination and Insurance and Office of Capital Markets and Planning. He added that Executive Director David Marquis' team has also pitched in, fielding legal and accounting questions.
Matz acknowledged that many blame the NCUA for corporate losses, particularly at seized U.S. Central FCU and Western Corporate FCU, where two examiners worked on site.
"NCUA definitely shares some of that blame," Matz said, adding, "So do the managers and boards of those corporates who exercised such poor judgment." Much of the blame falls outside the credit union industry, she said, calling out mortgage brokers and ratings agencies.
Jennifer Paul, president and CEO of the $6.7 million Bayer Credit Union, said although corporate stabilization and other assessment have hit her Kansas City, Mo.-based institution hard, she doesn't think blame matters at this point.
Paul said she doesn't think she'll have to replace the services she currently receives from Missouri Corporate CU, which lost capital investments at U.S. Central that affected members but is "still going strong". As of Jan. 31, the $864 million Missouri Corporate had a 2.85% capital ratio that includes paid-in capital, MCS and retained earnings.
However, the 34-year industry veteran did criticize NCUA transparency, saying she'd still like to see more information regarding corporate loss-projection modeling that resulted in assessments on credit unions. And, Paul said she wouldn't be happy with the ethical questions raised if PIMCO or other firms involved in estimated corporate losses were to purchase corporate assets.
Simmons said transparency regarding the NCUA's corporate-loss projections is between the regulator and corporate credit unions.
"I don't think any more information, at this point, is going to do anything for us," he said of natural person credit unions.
Simmons also said he trusts the NCUA, and "people in the loop" have closely scrutinized corporate-loss projections. They will consider proper conduct and ethics when separating toxic assets from corporates, he added.