A new line item on the 5300 Call Report shows at December 31, 2010 how much credit unions invested in NCUA’s Guaranteed Notes (NGN) program. NCUA began issuing these notes in October 2010 to refinance investments transferred to liquidation estates from the corporate credit unions that NCUA had taken over. In December, NCUA said it issued $17.75 billion, or approximately 60% of the $30 billion in expected securitizations, in NGNs in 2010.
The $1.1 billion that credit unions have obtained in these offerings represents 6.2% of the total NGN notes sold as of yearend. More than 93% of the yields on these investments that were once owned by the credit union system have gone to Wall Street investors.
NCUA has touted the “robust demand” these offerings have generated. After NCUA completed the first transaction, it said investors included “credit unions, banks, broker-dealers, insurance companies, money management funds, pension funds, and government agencies.” The strong demand is not surprising as the notes are providing competitive returns and are backed by the full faith and credit of the United States government. Even with government backing, NCUA is still paying for the issues to be rated as well.
How Much Are Credit Unions Investing?
Credit unions invested in almost 10% of the first NGN offering, according to NCUA. Subsequent NCUA press releases have not identified the portion that credit unions received. We now know 197 credit unions have invested nearly $1.1 billion in NGNs. The individual totals range from $2,000 to more than $200 million. Slightly more than 82% of the investments are in the adjustable rate note offerings.
The credit unions with the 10 largest amounts invested in NGNs are:
|Top 10 Credit Unions with Outstanding NCUA Guaranteed Notes
|Data as of December 31, 2010 for 7,160 FirstLook Credit Unions
A Small Piece Of The Pie
The $1.1 billion that credit unions have obtained in these offerings represents 6.2% of the total NGN issuance through December. Stated another way, institutions outside the credit union system are capturing more than 93% of the returns on investments that were once owned entirely by the system. These returns are on top of the fees paid to rating agencies, attorneys, Barclays Capital ($33 million), and other banks involved in the selling syndicate. They do not include the 35 basis points NCUA takes to manage the liquidation estates.
A Second Crisis: Why The Cost Has Topped $20 Billion
A special edition of The Callahan Report documents this transfer of wealth back to Wall Street. Instead of the $6.4 billion audited loss contingency published on July 21, 2010, the loss from NCUA’s action will cost credit unions more than $20 billion.
Wall Street initially sold these investments to credit unions; then NCUA turned around and sold them back at a time when investors viewed their long-term value as highly affordable. Additionally, the credit union system expensed more than $10.5 billion in reserves for additional OTTI losses that had yet to be realized on these same investments. Yet credit unions end up with only 6% of the total returns they will produce.
NCUA’s imposition of a plan designed by its Wall Street advisors shows that credit unions have now paid twice over for this experience — once to Corporates and now again through NCUA’s own actions. A plan was in place and working. Corporates had reported one of their strongest performing years through July 2010. NCUA’s plan created a second Corporate crisis with a new set of expenses and forced transfers of wealth.
If the Corporates' actions dictated fundamental reforms, what do NCUA decisions suggest should be done to avoid a second crisis burden in the future? Should there not be a reform agenda proposed for the regulator as well?