When celebrating the Fourth of July, most citizens think of historic events such as our country’s declaration of independence in 1776, Revolutionary War triumphs and recent military combat championing freedom.
For most Americans, their role in protecting freedom has nothing to do with military service. Rather, their commitment is demonstrated in civic roles such as voting, supporting a political candidate, or joining a local nonprofit trying to improve schools or the environment. Some credit unions might even consider their service to members as underscoring their commitment to a more democratic country. Now, the NCUA has an opportunity to demonstrate its commitment to democracy by offering more transparency and credit unions have an opportunity to demand that transparency.
A Call to Volunteer
NCUA’s final June 29 proposal for voluntary assessments of up to 48 basis points of shares is being positioned as a chance for credit union leaders to show their cooperative virtue. The rhetoric suggests that those who do not participate are “free riders” who are not loyal or who aren’t assuming their fair share of a collective responsibility.
Fortunately, credit unions have until July 29 to decide their most appropriate response to this collective call to duty. The issue is not just about money, but more importantly, about the relationship between the governed and the governors. It’s about the democratic character of the credit union system.
The Need for $8.5 Billion
NCUA has a cash shortfall of $8.5 billion once it stripped the five corporates of $50 billion to $60 billion of their most valuable assets. The liabilities funding these assets remain at par; the pay down of the assets, or the investments, will extend years into the future. The NCUA Guaranteed Note program (NGN) raised only $28.5 billion. There is $9 billion in liabilities coming due. The speed with which this proposal was sprung upon the system suggests either an incomplete plan or a surprise. However, loan deadlines focus the need for action, as we see in daily news about sovereign debt rollovers in countries likeGreece.
The corporate system had been funding these assets through share deposits from credit unions. When NCUA confiscated the assets, the corporate system continued to fund these assets by lending money to NCUA/liquidation estates. Now these assets have been pledged to cover the NGN program. NCUA no longer has cash flow to cover the interest payments, let alone repay the loans. Therefore it must rollover its debts. Hence the need for prepayments.
This situation is ironic in multiple ways. NCUA’s solution is to go directly to credit unions to raise the funds. Of course, this was the role the corporate system routinely provided to aggregate surplus funds and then place them wherever needed in the system. Now that “system capability” has been dismantled.
NCUA’s hat-in-hand proposal should convince even the most doubtful skeptic that a credit union corporate liquidity system is needed. With all the resources of the Central Liquidity Facility ($1.9 billion in capital and $41 billion in borrowing authority), the $30 billion line from the Temporary Corporate Credit Union Stabilization Fund and the $10 billion cash sitting in the National Credit Union Share Insurance Fund, the agency still relies on credit unions to raise cash!
Conditions for Support
The potential voluntary payments are material for any fully participating credit union. The final proposal raised the maximum to 48 basis points of insured shares that a credit union could send, plus the additional assessment NCUA will require. For example, if only $500 million is voluntarily provided, then an assessment of 18.5 basis points to raise the needed cash will be levied. These two actions could cause a credit union to send almost 67 basis points of shares to NCUA this year alone.
This was not supposed to happen. Credit unions supported the May 2009 corporate stabilization fund enactment that aimed “to assess over multiple years the cost to insured credit unions associated with the corporate credit union stabilization effort,” according to the Board Action Bulletin for 2009, June 18, 2009 Board meeting.
The key word in the legislation is “costs,” not “funding.” For funding, “the NCUA Board can borrow up to $6 billion from the Treasury on a revolving basis to make payments from the stabilization fund. The NCUA board has the ability to increase the funding to $30 billion.”
NCUA has stressed that the loss estimates (costs) have not changed and that this action will not reduce those loss estimates. The last audit of the TCCUSF, released July 22, 2009, showed the loss reserve at $6.4 billion for all the contingencies of the corporate program. This is a simply an issue of liquidity management.
What a Participant Should Require
NCUA has again unilaterally changed the corporate stabilization plan and included funding as one of the credit union responsibilities. Credit unions should rethink what they need to show members and boards to validate that this new request reasonable and not just an imposed action.
The following is the minimum information that should be provided for a credit union to decide if they want to participate in this funding request by the July 29 deadline:
- The audited statement for the TCCUSF showing the latest loss estimate and whether there has been any change since the July 22, 2009 figure. Credit unions collective insurance responsibility is for the loss, not the funding for assets acquired.
- The June 30, 2011 balance sheet and income statement for each of the liquidation estates in which the assets stripped from the corporates were placed. Monthly statements should be provided to credit unions going forward.
- A full, current accounting for the OTTI loss reserve. More than $12 billion of loss reserves were established by corporates, almost all in the books of the five credits unions seized by NCUA. What is the amount of actual losses that have been charged against these reserves as of June 30, 2011? What is the current estimate of OTTI on the securities versus the unused reserve?
- An operating cash flow statement for each liquidation estate on a monthly and year-to-date basis showing the net cash generated, and a consolidated statement of cash flows for all of the assets being managed. This should be produced monthly to compliment the balance sheet and income statements.
- Detail of all payments from liquidation estates cash flows to outside vendors. How is the 30 basis points that NCUA is charging the estates being used?
- The consolidated cash flow forecast for the next 30 months, through 2013, which is the period in which NCUA says it will convert the voluntary assessments to an expense. This will also highlight any potential future borrowing needs.
These details are precisely the minimum information now provided monthly by corporates to their members. This was the information that each of the seized corporates routinely provided its credit union members and the public before NCUA’s takeover.
Moreover, this information is what any executive would need to manage cash flows and that any auditor would expect to see if providing an opinion on financial statements.
If the information is not readily available, that would be useful to know. If it is available, then credit unions can make their decision about participating in full knowledge of the facts.
Transparency and Confidence
Credit union confidence in the regulator depends on transparency just as member’s confidence in their credit union depends on transparency. Transparency is critical to responsibility and informed consent. It is fundamental to how democracy functions and how competing interests are aligned.
NCUA has stated that if credit unions do not provide the cash needed, they will just increase the assessment levied this year to raise the funds. This has the feeling of a shakedown. NCUA could lift this impression by providing the full facts that anyone looking at a truly voluntary request would need.
In his 1863Gettysburgaddress, Abraham Lincoln said the purpose of the war was “so that government of the people, by the people, and for the people, shall not perish from the earth.” He did not say “from the people.”
This is not an issue of war. Every day freedom inAmericahas to do with what we are compelled or volunteer to do. If NCUA is truly interested in voluntary support, then there is more they must do to merit this trust. It is not a big hurdle. It’s merely what the Agency requires of all credit unions on a monthly basis for their own members.
Have a Happy Fourth!