Why NCUA's First Step Makes Sense

NCUA announced that $5 billion was necessary to position the Agency and the credit union system to deal with potential losses from Corporate Credit Union investments.


For almost a year, the situation of falling market values in corporate investment portfolios, declining credit agency ratings, rising dependence on external borrowings, periodic OTTI losses and the slow withdrawal of deposits has been widely reported.

Multiple suggestions and plans have been proposed. These were often of two extremes: either wait out the market cycle or take over and remake the system in one fell swoop.

NCUA did neither extreme. Rather they made an initial effort to size the problem, mobilize resources, and create options for resolution that were not previously feasible.

Their first step was tempered, creative and holistic; NCUA did not try to single out individual corporates. Rather they looked at what it might take to make the whole network sound once again.

Further, the plan recognizes the collective ownership and benefit that the network provides credit unions. This step uses the combined capital of the NCUSIF to address a system problem collectively.

This is what cooperatives do—they walk towards problems, not walk away from them. This action is a defining moment that can give new character and meaning to cooperatives. Or we can, like many other industries, plead that we too must have a government bailout.

Crucial Next Steps

Not one dime of money has been spent. Yes, $1 billion is placed in a capital note at US Central, but it is much too early to tell if that capital will be used to cover losses.

Fity-six basis points is a heck of a one-time hit for any credit union. But if that initial estimate proves relatively accurate, it will mean that the credit union system lost about 5% of its net worth during this financial meltdown. Is there any other financial organization, or any individual, that can say they endured only a 5% diminution in value in 2008?

The problem, however, still exists in view of the continuing stress in both the housing and employment markets. There will have to be individual workout plans as further audit reports and investment review results come in. Structural issues are the subject of a proposed rule. Will NCUA spend its newly asked-for resources quickly or will it be patient and let both market events and credit union support cushion losses?

Can the Agency respond effectively to credit unions, already battling local economic problems, that will be hit hardest by this transfer of cash and reduction of net worth?

Will this very real sacrifice by every credit union and its membership be the foundation for legislative change that enhances the credit union model (for example, member capital shares)?

NCUA's actions crystallize what everyone knew, that the corporate situation is every credit union's problem and every credit union's opportunity. The new President in his inauguration urged that, "Starting today we must pick ourselves up, dust ourselves off and begin again the work of remaking America."

Will credit unions meet that call?




Feb. 2, 2009


  • The time for thinking that this crisis can be handled within the CU Industry itself has come and gone. The problem is no less than a systemic emergency, and this action by NCUA will only serve to destabilze natural person credit unions, further restrict lending, contract the industry, and cause infighting. The time for denial is over, and it's time to face up to the reality that the problem is larger than we as an industry can handle alone. We will need TARP assistance, but the difference will be how we use that assistance. Instead of paying huge bonuses and buying jets, CU's can show the good things they have done, repay the taxpayers with interest, and keep our image intact.
  • Facts are that NCUA (according to the Act) can and will make us pony up the funds. My view is that the USC Board and Management should go. I am suprised that they have not yet gone. The Natual Person CU's will do the bailout but the price will be more than just money. A lot of us will simply go away. NCUA needs to reorganize and get rid of the people who failed to oversee and regulate the activities of the 6 or 7 Corporates who are giving us the problems. In this case smaller is better. The 3 tier system has got to go and be replaced by regional Corporates who tend to the areas of membership they serve. Transparency is paramount we cant afford million dollar execs who take all the joyrides and leave the responsibility behind. Back to issues of safety and soundness. USC go away. NCUA should go to if they can't restructure to oversee and protect the members money.
    Dennis Moriarity
  • Cooperatives are supposed to take extra care with the money that is entrusted to them. This action almost amounts to a double-punch for the people. As tax-payers we are being put on the hook for the bank bail-out and now as credit union members we will most likely see a drop in rates / or increase in fees as our credit unions try to deal with the corp bail-out. And although, I can apprecialte the dream of the new President, I really don't think bail-outs and capital infusions are a tool for re-makes. Punishing the many who had nothing to do with the current problems without punishing the "few" that did is not the American Way. Maybe the only small light I can see is at least (assuming the CU bail-out doesn't increase) this has a known cost. Chris Duncan Jumbo CD Investments, Inc
    Chris Duncan
  • Let he who is without sin cast the first stone. We've all made decisions that were well-founded at the time they were made, only to have them go south due to unforeseen/unforeseeable circumstances. Nobody saw this coming. Let's put the nooses up, for right now.
    Larry Davis
  • I find it amusing how we pick our spots to be "in this together". When Capcorp took the plunge a few years back involved credit union's took the loss. After that we were asked to embrace community charters and healthy competition between credit unions. These developments forced us to be accountable for our actions and work hard at creating lasting value for our members. Now when the going get's tough we are suddenly all in this together. How do you justify less competitive rates and increased fees to members when your credit union has no exposure to the corporate system? I understabd the good intent of this action. I acknowledge the complexity and severity of this problem. I am deeply concerned about the lack of accountability inherent in this solution. If natural person credit unions are going to help bailout the corporates, let it be the one's who enjoyed the above market rates of the last few years and have large member capital shares. If that is not feasible, let's swallow our pride and be open to a bailout from other sources. Ultimately all credit union members willl suffer if the proposed plan is enacted. I am curious if Callahan will help credit unions "meet the call" by lowering the price of their services while we struggle to "rebuild america".
  • Let's not forget who owns the corporates. It's us. Let's not forget why we accumulate capital. How many times have we explained it as the "rainy day" cushion? Well guess what, it's pouring outside. If you check with the FDIC the SIF funds we call assets aren't ours at all. They're insurance premiums to acquire the full faith and credit of the US government. The NCUA is not the FDIC but I think the FDIC has a little more experience in handling troubled institutions. Perhaps we can learn from them. It's time to roll up our sleeves and fight with the big boys. I think Chip is correct in referring to this as a turning point. We're as strong as anyone in the game. Let's prove it.
  • Let me first start with some of Chip’s numbers, 90 million consumers are also do business with Credit Unions, Credit Union’s generated $1 billion in equity last year, Credit Unions are 5% of the Banking industry. First, last time I checked those 90 million were also tax payers, and it is the tax payers that are fronting the money for TARP. For CU’s to snub TARP is to force our members to be double charged; first to pay the interest on the money the Federal government needs to borrow and then second to absorb the cost (lower deposit rates / higher loan rates and fees) the NCUA is going to charge natural person credit unions. Not quite what the movement had in mind I think. Second point. Only 250 credit unions would be but under 6% capital ratio as a result of this? $1 billion in equity was 2008. Provisioning levels across the entire banking industry including CU’s are at least doubling compared to 2008 levels. Add to that, in 2009 natural person credit unions will begin to feel the same pressures to write-down investments as the corporates are now feeling. So all told instead of looking at capital creation you are actually looking at capital reduction in the amount of $1-$2 billion. At those levels you are looking at probably 25% of credit unions being at risk not the mere 250 that everyone seems so willing to sacrifice. Final point: Nothing is going to stop the consolidation of the regulators, that has been in the works for years and refusing TARP money won’t stop that. Taking TARP money won’t kill the tax exempt status. If that day ever comes it won’t be because TARP money was injected into the CU system, it will be because of the community charter so many have adopted. Something to Crow about: If CUs are 5% of the banking sector we are entitled to $35 billion of the $700 billion TARP. If we only need $5 billion that is something to crow about; shore up 5% of the market at only 1/7 the cost if that 5% was actually made up of banks. This is my opinion and the numbers presented here are anecdotal in nature, many of which are based on Callahan and articles/presentations and other industry reports.
  • First - We need to stop this "unforeseeable..etc." nonsense. Investments have known risk and the type they bought are known to be the riskiest. They took yield over structure and we have to pay for it. They were wrong and need to be held accountable. They NEVER EVER should have put their funds in these types of investments. Many cu's choose to invest during the same time in sound structure and actually have a mark to market with a POSITIVE number...AND the yield was the same or better than being offered at the Corporate. The corporates tried to obtain a marginal increase in rate and took OUTLANDISH risk to do it. It backfired, to no one's amazement (except those that buy from the corporate and go back to sleep). SECOND - NCUA is using the "insured shares" as the basis for the assessment according to the last broadcast. This makes no sense. The Corporates did not ask if the shares invested were uninsured or not at the NP cu. AND the larger cu's have a disproportionate amount of uninsured shares that now get a "free ride" on the assessment. Then NCUA states that all corporate shares are now insured.... Where is the logic here? Assessed on only insured shares, but the full amount is insured? Who thought (or lack thereof) this scheme? They need to calculate the amount needed and then divide by total shares. That way, those that "fed the beast" will better pay for the price of upkeep. THIRD - GAAP requires all the assessments to run through the income statement. Look at the Accounting letter. That's a 1.1% (or more) hit to your ROA... it gets to the equity based upon your meager earning offset for the year. SWEET!
    Gregg Stockdale
  • Our CU capital is owned by our membership, not us and by the way, they are all taxpayers. To take these funds so that our regulator interlocking interest groups can say "we never took a dime of taxpayer money" is self serving at best. In doing this, they are gambling that they won't have to go to CUs again for funds, that the bottom of the meltdown is near, and that the PIMCO valuations will be in their favor. It weakens our ability to deal with loan losses and global recession at a time when our members' owned institutions have never needed it more. If NCUA is wrong, they have put the industry into a potentially lethal position going forward. Don't do this. Get the rules changed, get accounting to back off, get our voices heard. Our 90 million members deserve better. They deserve a seat at the table...
    Chris Owen
  • To the last comment (#10): do you honestly believe that if credit unions get access to the "backstop" (TARP funds) that the trades and enough credit unions will not ultimately use it -- regardless of credit union's ability to solve this issue internally? The "backstop" argument is a thinly veiled attempt to get and ultimately use the funds by disarming credit unions who rightfully don't want anything to do with this. It is designed by the trades to play both sides of the issue while they seek to get the government bailout. Sure, we won’t use unless we really have to but we want that option. Yeah, right. Don’t fool yourself or buy into the propaganda. Credit unions will and can weather this fine as a system without reliance on government bailouts. That is what is being laid out and will work. We will do this even if it means one-time seeminly bad year for ROA (don’t worry, you can explain this to your Board). Move on with our heads held high. We are not part of the problem. We are part of the solution.
  • Is denial one of the first phases before acceptance? I don't think any credit union would have a problem with funding the NCUA $5B if that was a one time payment, the problem is that it is more likely to be just the down payment. What if the problem is $30B or $50B do we still think we can do this internally? To not have a backstop in place is irresponsible, you need to be prepared for the worse even if it doesn't happen, but if it does and you are not prepared are you willing to risk the survival of the credit union industry against it? If we were protecting just npcu I think we would make it through without assistance from the Treasury but add in the Corporates, mainly USC and Wescorp who have over half of their investments in private label mortgages and commercial backed securities ($27B) which are high risk, and I'm not feeling to comfortable about the only loss being $5B.
    Jason Scott
  • Seems like we have some short memories. Wasn't it the Credit Unions that said "give us competitive rates for our investments or we will put our investable funds with those institutions that do". Credit Unions would not have a corporate system if they were not competitive. Many will recall the days when every credit union kept their excess funds in banks (or savings and loans). And the banks advertised they offered "free" checking if balances were kept with them. "free"my foot. The credit unions have built a marvelous cooperative system that they own. Think of the alternatives to not having a Corporate system. I am sure there must be some, but why reinvent the wheel? And the the thought that we should "throw the bums out" to be replaced with others with little or no experience, does not seem logical. The Fed Chairman, the Treasury Secretary, the brain thrusts at the largest banks and brokerage houses were not able to see this crisis coming. Isn't this a "world wide" problem? How can anyone believe that Corporate Credit Union CEOs, their talented staffs or their boards (all of whom come from credit unions) would have the clairvoyance to avoid this massive economic downturn? Finally, anyone who knows Chip Filson also knows he does not offer "top of the head" suggestions. They are well thought out with no personal rewards for him. I have always been thankful he wakes up each morning saying "how can I help Credit Unions be better today". Thanks for that.
    Dick Johnson
  • Boy, I'm so relieved to know that there's at least one person out there who saw all this coming and knew that all those AAA MBSs were going to create all these losses. I'm truly in awe of you, Gregg. Make sure Bernanke keeps your number handy. I move that we get rid of all these corporate and US Central guys and put Gregg in charge.
    Larry Davis