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 CreditUnionsRising.com.