At a recent credit union conference I talked with a CEO about the future of the corporate network. I asked whether his billion-dollar credit union really needed corporates. He replied:
“At the height of the crisis in late 2008 and 2009 here in Florida, we were losing millions per month because of our loan loss provision. Fannie told us to move our escrow account from our corporate to a bank. The FHLB required us to preposition collateral for any borrowings, reduced their loan value, and told us any drawdown would be subject to review for terms at the time of the request. Loan demand was still strong. I called Southeast Corporate and told them our circumstances. I asked about the status of the line, which was in the tens of millions, we carried with them. Their response was: ‘You can count on us.’”
During the height of the financial and economic crisis, credit union lending has continued unabated. For the last eight quarters, loan originations have exceeded levels in the comparable period of the previous year. Not once has the credit union system ceased lending. Just as Congress intended when it passed the Federal Credit Union Act, credit unions are meeting their primary purpose of keeping credit flowing to persons and places neglected by the for-profits.
In a Storm of Trouble, Credit Unions Counted on the Corporates
At the most intense moments in the financial meltdown of September 2008 — as we know now from Treasury Secretary’s Paulson’s account -- there was not a financial institution that was willing to back another firm without guarantees. Credit markets at both the wholesale and retail levels froze. TARP legislation was passed to purchase “toxic” securities that had no market pricing. Extraordinary guarantees and expanded insurance coverage were provided to banks so they could retain funds.
A money market fund broke the buck, so Treasury issued a blanket guarantee for this $3 trillion-dollar mutual fund segment. The Federal Reserve paid interest on deposits to offer a safe refuge for financial firms to place overnight deposits. Everyone was scared -- but credit unions continued about their lending as usual. How could this have happened?
The primary reason was because every credit union knew, as the CEO above, that the corporates were there backing them. They did not fear a liquidity crisis. Yes, credit losses were rising, but the threat of having no funds in a crunch was not stopping normal lending.
Tremendous Pressure on the Corporates
The corporates, however, were both individually and collectively extremely vulnerable and facing unprecedented pressures, namely:
Higher than anticipated losses were occurring in investments;
Further OTTI losses were forecast;
Competition was fierce: bank deposits and borrowings were guaranteed by the FDIC, and the Federal Reserve was paying interest on overnight funds, draining funds from the credit union system;
Record loan volume was occurring in natural person credit unions, outstripping share growth;
Some larger credit unions were withdrawing money from the corporates;
Public commentary was focusing on the corporates, daring NCUA to act; and
NCUA, dropping its collaborative approach, started turning up the regulatory pressure.
In 2008 alone, ratings agencies downgraded over 40,000 corporate bonds, not the several hundred in a normal year. Every formerly AAA-rated portfolio was impacted -- and AAA is what corporates invested in. For example, 95% of U.S. Central’s portfolio before the crisis was in AAA securities.
But from the peak of the crisis in the fall of 2008 until today, the corporate network has not skipped a beat serving member credit unions. And the following are a few examples of what this entails each month:
ACH clearings: 25 million items estimated at $60 billion;
Bill Pay services: 2 million transactions estimated at $420 million; and
Wire transfers: 175,000 estimated at $300 billion.
More operating examples could be given for all areas of back-office operations, including item processing, custody services, card processing, and coin and currency handling. Nevertheless lines of credit have been honored. Fees for services have remained more or less stable. ALM consulting, rollouts of new solutions, and even economic outlooks have continued unabated.
All the while, every corporate has been constrained by the Letters of Understanding and Agreement imposed by NCUA in January and in March of 2009. Even as U.S. Central losses trickle down, as new estimates of OTTI recognition occur, and as capital bases are reduced, “normal” operations continue.
The Corporates Stood Firm, Even Proposed Their Own Rehab Plan
In the worst liquidity crisis the United States and global markets have experienced, corporates did not falter, credit unions did not succumb to the credit freeze or fear mentality, and loans continued. Credit unions continued to lend to their members. By any assessment, that is a miracle, a miracle based on cooperative values and practices. The corporate credit unions kept faith with their members; even as their mistakes and losses became more public, they did not run and hide.
What is equally remarkable is the corporates’ proposed plan to resolve the crisis. On December 8, 2009, the corporate network delivered an action framework to the NCUA with a copy to each board member. The five primary recommendations have been adopted more or less in full by the agency. And the timing of the three action items is precisely the sequence NCUA has followed. The difference: the corporates and credit unions were taken out of the implementation process with no further say in how the ideas could be implemented most effectively.
We Can’t Forget What the Corporates Have Done
As the industry contemplates the future of the corporate network, the debate has centered on losses in the billions. “Never again,” the NCUA promises. Indeed, the losses are real and severe. And they are, as one analyst has said, both unknown and unknowable.
But they are manageable. How do we know that? Just look at the other side of the ledger to what corporates accomplished in the last two years. And if in doubt, take a look at their self-assessment and resolution plan dated December 8, 2008. I’m sure your corporate would be glad to provide you a copy.
Errors and losses occur for many reasons. That is why regulators, supervision, and collective resources exist. But a more catastrophic mistake would be to confuse error with both purpose and function and to forget what the corporates contribute, even in the worst of times, to the credit union system.