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:
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?
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.
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.