Legacy Assets Go to 'Bad Banks'
o Legacy assets will be pooled and place into a trust for securitization. The investments will be structured to match estimated incoming cash flow from legacy assets.
o Credit unions will be permitted to purchase the securities. This will not present a systemic risk to the industry, nor a credit risk for investing credit unions.
According to Fazio, the securities will be guaranteed by the NCUA, and the investments will be carefully structured so that incoming cash flow will service outgoing payments to investors. Approximately 70% of the securities will have floating rates tied to Libor, which matches terms on the underlying securities owned by credit unions, guaranteeing an orderly cash flow. The remaining 30% will have fixed rates.
"We're not expecting to ever have to make a guarantee payment," he said. The 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.
Corporates that own legacy assets but weren't seized by NCUA, which include the $3 billion Southeast Corporate FCU, the $2.5 billion Systems United Corporate FCU, the $3.2 billion Corporate One FCU and others, were not included in the legacy assets plan.
Toxic assets from the five seized corporates address more than 90% of all legacy assets, and 98% of losses to the industry, Fazio said.
"It is vitally important to the resolution plan's success that the Treasury walk arm-in-arm with the NCUA board," he said.
Umholtz said he submitted a question during the NCUA's virtual town hall that was not answered regarding the Treasury's influence on NCUA board policy decisions and staff implementation of the resolution plan moving forward.