New securities issued from legacy assets will be guaranteed by NCUA, said Deputy Executive Director Larry Fazio. The investments will be carefully structured so that incoming cash flow will service outgoing payments to investors, he said.
"We're not expecting to ever have to make a guarantee payment," he said. NCUA consulted with the Federal Reserve Bank, U.S. Treasury and bonds experts to estimate future performance, and Fazio said the agency is very confident in its figures. However, should the bonds perform worse than estimated, credit unions would have to fund the shortfall to fund investment payments.
On the flip side, should the bonds perform better than estimated, any windfalls would be transferred to the NCUSIF to ease corporate stabilization assessments, rather than go to new investors.
"We continue to own the upside and downside," he said.
Inactive "bad bank" corporate credit union charters and the toxic assets attached to them will be transferred to NCUA's Asset Management and Assistance Center in Austin, Texas for resecuritization.
The $50 billion price tag represents unpaid principal and interest outstanding on the investments, rather than original purchase price or current market value, Fazio said.
NCUA has estimated credit losses on the underlying bonds will range from $14 billion to $16 billion, and will serve as the investments' "overcollateralization."The net difference between $50 billion in outstanding principal and estimated credit losses will determine the market value of the re-issued bonds.