Taking the King’s Schilling: Part II

Should the Treasury bailout, or some variation pass, there will be an opportunity to sell distressed securities and possibly delinquent mortgages to the government. But at what price?


Should the Treasury bailout, or some variation pass, there will be an opportunity to sell distressed securities and possibly delinquent mortgages to the government. But at what price?

Multiple Pricing Issues

The intent in buying troubled assets is to keep liquidity flowing in the financial system.

Three levels of “pricing” questions will be involved:

  1. How will a fair price for illiquid or troubled assets be set? It is highly unlikely this will be book value. Therefore, for any credit union that participates, this solution will most likely convert an unrealized loss into a realized one. Can a credit union’s balance sheet absorb this?
  2. What compensation will the government ask for when buying illiquid assets? Limits on executive compensation, warrants for stock purchases and other proposals suggest that the government will be looking for more than just any appreciation in value that holding these securities may bring.
  3. What will be the regulatory reforms imposed to “promise the public” that there will be no more bailouts? These reforms could be draconian. They could range from a complete restructuring of federal regulation as proposed earlier by Treasury to specific constraints that would put credit unions in the same box as the institutions that caused the problem.

The bottom line on the bailout proposal is there appears to be no benefit and almost inevitable certainty that participation will put credit unions in the new regulatory framework as the institutions that brought about the crisis.

Helping Credit Unions in Trouble

In fact, credit unions are part of the solution and all data for the last year supports these efforts in responding to members’ needs.

So, if taxpayer funds are not the answer, how does the system help credit unions confronting liquidity or capital issues?

Credit unions have two resources not available to market-driven firms: patience and cooperative resources. Patience means that if problems are due to cycles in value, credit unions have leeway in riding out the down cycle—if the asset quality issues are contained.

Secondly, in extreme cases where capital is insufficient, credit unions can be funded by the NCUSIF. Credit union’s pooled insurance fund is a source for re-capitalization when other options such as mergers or sales are not feasible. Problems do not have to result in liquidation.

Finally corporate credit unions have multiple options beyond these because of their unique structure. Extending some of these options to the entire system should be one of the objectives for regulatory reform that will be enacted in response to the current crisis.

So why take the King’s schilling? Indeed, credit unions were created by government policy to meet needs when markets fail to do so.

Part I of this article is available here. Part III is available here.




Sept. 29, 2008


  • Chip, Can't natural person credit unions apply to our CLF for liquidity relief or capital infusions if they are havig problems?
    Dave Osborn
  • Well said, let's hope for zero participation among credit unions.
    Raymond Dowling
  • In addition to the resources of: patience and cooperative resources, I hope credit unions continue to be wise in lending practices and that they continue to provide counsel for members struggling to adopt good saving and spending habits. Long term goals are achieved one day at a time.
  • great article
    Brenda Crane
  • Are you suggesting that the government should pay book value? They should pay based upon discounted cash flows taking into account expected defaults and foreclosures. There is an excess supply and market prices do not reflect value. Institutions that marked to market will probably be able to sell at a gain. This should help improve liquidity and help small businesses and consumers retain access to funds.
  • Not only should credit unions individually opt out, but as a group we should opt out. Strong credit unions should look at what they can do to help weak ones so that no CU has to go to the well. If one does we will all get painted with that brush - we are a cooperative movement
    Ralph Jones
  • Even if individual credit unions could benefit from pieces of this plan, I think we, as an industry, should do what we can to keep credit unions out of it. If we ever do take tax payer money to help us during challenging times, we lose one more opportunity to differentiate ourselves. I think it is important to recognize the credit union difference in how we operated, as a group, through the real estate boom and the unravelling of that boom. Our difference is evident in the comparitive financial strength of our industry. Also in our continued ability and passion to focus on meeting member needs through these difficult times.
    Bill Lawton
  • I agree with comment #4, 5, and 6 but keep this in mind as well. Credit Unions that do participate in the buyout may find that their credit union may lose there tax exempt status. When the time comes for the subject of the Treasury plan to be discussed again to include all financial insitutuions under the same charter credit unions may be able to fight off being included in that group but in order for that to happen certain sized credit unions may have to give up their tax exempted status. The Treasurys reason on this could be If you took the tax payers buy out money maybe you should be taxed.