HR 1106: A White Elephant?

When one looks at the recent NCUA initiated legislation now incorporated in HR 1106, the “Helping Families Save Their Homes Act of 2009,” the proposal certainly feels like a white elephant. Here’s why.

In everyday use the term white elephant refers to an object, usually a gift, which is considered ugly, useless or just impractical. These objects are frequently consigned to second hand, white elephant shops, for resale.

Despite the present meaning, the term derives from the sacred white elephants kept by monarchs in Southeast Asia or the Raj in India. White elephants were associated with the birth of Buddha. They are special creatures, considered sacred with laws to protect them from labor. As a result one tradition holds that a ruler would sometimes give a white elephant as a gift to an enemy. Because the animal was sacred, it could not be put to any practical use. The cost of maintaining it could cause a substantial economic burden on the recipient. The result was that this apparent rare “gift” in effect weakened the Raj’s opponents!

When one looks at the recent NCUA initiated legislation now incorporated in HR 1106, the “Helping Families Save Their Homes Act of 2009,” the proposal certainly feels like a white elephant. Here’s why.

HR 1106 would authorize the NCUSIF to borrow from the Federal Financing Bank up to $6 billion in order to “shift liability for losses in corporate credit unions from the NCUSIF to the new (trust) fund. The new stabilization fund would then assess federally insured credit unions for these costs over time.” (All quotes are from NCUA’s website FAQ’s about this legislation)

All borrowings must be repaid to the Treasury’s Financing Bank within 7 years. The insurance costs will be spread over five years. “…the funds would be repaid with interest either through the sale of assets or by assessments on all federally-insured credit unions.” (Statement of David Marquis, Executive Director, NCUA, before Senate Committee on Banking, March 19, 2009) Moreover, “The NCUA Board has significant discretion regarding how much and when to assess credit unions for the cost under this proposal.”

On its face, NCUA’s proposal uses the full faith and credit of federally insured credit unions to borrow from the federal government to back up the federal government’s full faith and credit of the NCUSIF insurance commitments to the corporates! There is a better, simpler, less-expensive and existing way to achieve the same goal.

The In-House Option

NCUSIF can already borrow on any terms it wishes from the NCUA Central Liquidity Facility (CLF), which in turn is funded by the same entity—the Federal Financing bank—as this proposal. The CLF has over $41 billion borrowing authority with only a small amount in use.

Thus the $6 billion is easily financed by a CLF borrowing or raised directly from the industry. Credit union liquidity is growing and stands at over $225 billion. Through the CU SIP program, credit unions have already deposited billions more than this amount in corporates. So the liquidity aspect of this bill is really de minimis.

Moreover, is legislation really needed to “spread the expense?” Other options do exist. In Chairman Fryzel’s CUNA GAC speech in February he listed a credit union “performance bond,” as just one concept which would have functioned exactly the same way as the trust fund described in this proposal.

Matching the actual losses, as realized in the Corporates’ portfolios with the premium assessments, is a sound process from both operational and accounting standpoints. For example, a 10 basis point premium on a $250,000 insurance base, assuming shares grow at 8% per year, would generate a total in 2009 and over the next five years of almost $5 billion. A 20 basis annual assessment would double the amount.

Virtually any credit union could plan for and support this approach to the systemic expenses of the corporate losses, whatever the final amounts prove to be.

NCUA’s request stems from their analysis that predicts with certainty the economic losses over the future life of these corporate securities. This is a process that other financial experts, regulators and accountants have been unable to do for any other institutions. This challenge has frustrated Treasury, the FDIC, the banking industry and all others trying to value dislocated assets. As part of the review of this bill, Congress may wish to ask for and understand this analysis before making any final decision.

The advantages of an in-house solution

Credit unions have been the most successful financial performers during this current crisis. They have continued to lend in circumstances in which others have been unwilling or unable. Credit unions have the earnings power to pay the systemic losses from the Corporates whether incurred over the next three, five or seven years.

Instead of approaching Congress with a problem, credit unions’ political capital should be used to strengthen the current cooperative model including capital options, an enhanced regulatory structure and numerous initiatives that would help the industry better serve members in a time of crisis.

A Stronger Credit Union Voice

This legislation is just the latest example of changes credit unions must evaluate rising from economic and regulatory events.

We are frequently asked, what can one credit union do? How can my voice be heard?

We believe that while credit unions may differ on tactical approaches to the future, their strength lies in their unity around shared values. These values, from a singular focus on the members’ welfare, include transparency, mutual respect, cooperation, and patient perseverance.

To amplify each credit union’s voice, this week Callahan’s will launch a new website to enable every credit union to speak, share their voice and inform critical constituents in the trades, the press, their peers, Congress and the regulatory community of their views. The site, Credit Unions Rising, includes analysis, data and commentary on both current events as well as strategic decisions affecting the future structure of the credit union system.

For more information or to join with your peers please visit us at




April 13, 2009


  • Great ideas from the 'big picture' angle. As individual CUs we run the risk of getting caught up in the 'my turf' mentality. If we profess cooperation we need to approach these times from the big picture perspective. I agree we should leverage our strong performance to shape our own future rather than showing up as just another group looking for handouts.
    Brian McVeigh
  • Chip, this has been the question at our CU since the first word of possible NCUSIF impairmant: they can go to the CLF that has authority for $41B, why go back to Congress hat in hand to ask for money? CUs are losing thier most important ally: congressional confidence in them.
  • It would be great if there were, in fact, an existing way to solve the capital and liquidity needs of corporates, but the CLF is not it. Both federal law and Section 725.1 of the NCUA Regulations say that the purpose of the CLF is to improve the general financial stability of "credit unions" by meeting their "liquidity needs". "Credit unions" means natural person credit unions and "liquidity needs" means "the needs of credit unions primarily serving natural persons". That was the primary reason the SIP program was created; it is nothing more than a way to work around the limitations in the CLF. Are you recommending the same sort of expedient?
  • Any time you go to Congress with a piece of legislation, you are asking for trouble. Remember HR 1151 (The Credit Union Membership Access Act)? It started out as a simple two page bill and Congress turned it into a 60+ page bill that got into all kinds of issues unrelated to the field of membership.
    Charlie Maguire
  • Chip, I've heard for several weeks that the reason we cannot look to the CLF is the fact that the CLF can only be used for liquidity needs. Has something changed?
    Dan Vogler
  • Not only does your suggestion make sense Chip, an affordable option I think most CUs would accept it would keep many of us in the business of helping members in this difficult economic time instead of trying to recover from the large write-offs. DDD
    Dennis D Degenhardt
  • In response to comments #4 and #6:

    The rules of the CLF are contained in part 725. The following are quotes from the rule:

    725.22. Advances to Insurance Organizations
    (a)"In accordance with polices established by the NCUA board, the Facility may advance funds to a State credit union share or deposit insurance corporation, guaranty credit union, guaranty association, or similar organization."

    The NCUSIF is an authorized to borrow under this authority-see NCUSIF authority under Title II below. Note also sub para (4) that "the funds advanced shall not be relent at an interest rate exceeding that imposed by the facility"--that is, there is no markup permitted.

    Under liquidity needs, definition number 725.2(i)(3) reads as follows: "protracted adjustment credit available in the event of unusual or emergency circumstances of a longer term nature resulting from national, regional or local difficulties."

    I know of no one who believes this is not the situation today or has been for sometime.

    Finally under 725.23: Other Advances
    (a) The NCUA Board may authorize extensions of credit to members of the Facility for purposes other than liquidity needs if the NCUA Board, the board of governors of the Federal Reserve System and the Secretary of the Treasury concur that such extensions of credit are in the national economic interest.

    Certainly if NCUA is approaching Congress with this need, then the Federal Agencies would support this direct, and immediate, alternative.

    The following is from the enumerated powers for the NCUSIF from the Federal Credit Union Act:


    1783. National Credit Union Share Insurance Fund Subsection (f) Authorization for fund to borrow from Central Liquidity Facility.

    In addition to the authority to borrow from the Secretary of the Treasury provided in subsection (d), if in the judgment of the Board, a loan to the fund is required at any time for carrying out the purposes of this title, the fund is authorized to borrow from the National Credit Union Administration Central Liquidity Facility.

    The above are not new interpretations or authorities. In the CLF's 1982 Annual Report, page 3, there is a discussion of lending directly to corporate credit unions as agent members. This was done in response to the Penn Square Bank failure. One year later in the CLF's 1983 Annual Report, page 7, there is a discussion of the protracted credit loans that were made in the period 1980-1982. Some of these loans had maturities as long as four years.

    As discussed in the article, $6 billion in liquidity is easily available from credit unions themselves, so borrowing from the CLF is not the only option. There is no need to go to Congress for liquidity. And as described in the article, if the rationale is to match the expenses as incurred, NCUA has that option today. No other governmental, private sector or academic institution has yet to develop a model that can result in an estimate of future credit losses so specific that a holder is able or required to book and expense those losses today. Credit unions can deliver capital, in the form of insurance premiums, as needed to match future losses as incurred.

    That is just one more reason why the PIMCO numbers and the CUSIP's must be released so that independent judgments can be formed for open discussion about the best way for the industry to manage the losses that will be incurred from these investments.

    Chip Filson
  • Well, that's what you get for challenging someone who's bio says he was formerly President of the CLF! This is just proof positive that all the deceptive info out there being fed by the trades and NCUA is bogus. We have other much more viable and desirable options! It is just that CUNA, NAFCU, and NCUA together have decided on their approach and don't want us to understand that they've screwed us!!!!!
    Brian Jordan