Investment Restraints Will Be a Stealth Tax
Credit unions like many other leveraged institutions have experienced huge investment losses primarily with investment institutions (corporate credit unions) overly weighted in concentrated positions in privately issued mortgage-backed securities. Losses will be booked not as write-downs of investments but as capital charge-offs held at these institutions and as NCUA assessments to replenish the share insurance fund depleted to absorb investment losses.
Corporate credit unions have served as an important investment arm for the credit union industry. Perhaps, transparency and risk management could have been executed better if the deposits had been characterized as collateral debt obligation deposits to better reflect the function and nature of business of corporate credit unions. Certainly, calling a product by the right name is the first step in raising awareness about both its risks and benefits. Naming a product to raise awareness, however, can be problematic as my wife, a dietician, refers to the Big Mac as the Heart Stopper. While her name selection does create pause for me, a pause could have been a useful tool in 2005, 2006 and 2007.
It is not my intention to disparage any entity with use of the term CDO deposits. A post-mortem should be a scientific analysis with concise descriptions without worrying too much about the feelings of the departed, kind of like on "CIS." A CDO is a security whose value is derived from underlying assets. Deposits at corporate credit unions were ultimately valued by the underlying securities and the mark-downs came through with capital charge-offs and NCUA assessments.
So, deposits held at corporate credit unions could be characterized as outsourcing your investments. For many years, CDO deposits provided a good return, and the total asset return for the credit union industry was increased as a result of outsourcing to the corporate credit union network. These corporate credit unions were granted special investment powers not held by retail credit unions, and they used these powers prudently for the benefit of industry.
Ken Lewis, former CEO of Bank of America once said that he has had all the fun he could stand with investment banking, as he sold off the unit. With pending changes to NCUA regulation, an appropriate question would be "Has NCUA had all the fun it could stand with regulating a leveraged institution offering CDO deposits?" If the final answer is yes, then the credit union industry will get hit with a stealth tax in the form of loss of investment powers that it once derivatively held through corporate credit unions.
Credit unions like every leveraged institution that sells and buys money must rely on investment returns to compete in the market place. Taking investment powers away from corporate credit unions imposes restrictions on credit unions that will be detrimental to their ability to compete in the leveraged financial marketplace. My wife, my eating regulator, is not advocating shutting down the entity that serves the Big Mac as long as it fully discloses and offers alternative products with less risk-the fresh green salad with Italian dressing, for example. Perhaps, the NCUA should adopt a similar strategy.
MEMBERS Trust Co., a federal thrift, is required to invest 65% of its capital in mortgage-backed securities to meet the qualified thrift lenders test. We decided to avoid the risk of privately issued MBS and to only hold MBS issued by GSEs, a strategy that has proven very wise. Like my wife the eating regulator says, there should be more than one product in the marketplace; credit unions deserve that choice. And, our experience with MBSs offers the NCUA a good example of how broad investment powers can be prudently used for the benefit of stakeholders.
Tom E. Walker is president/CEO of MEMBERS Trust Co. He can be reached at 888-727-9191 ext. 700 or