Pub. 5 2010-2011 Issue 4

www.nebankers.org 24 Extraordinary Service for Extraordinary Members. T HE RECENT FAILURE OF THREE CORPORATE CREDIT UNIONS—IN ADDITION TO THE two that failed last year—has left the credit union systemwith a huge mess; one that is projected to cost $13 billion to $16 billion. Following the fed- eral takeover of these corporate credit unions, the National Credit Union Administration (NCUA) now holds roughly 70 percent of the assets of the corpo- rate credit union system, including $50 billion in toxic assets 1 . Congress already stepped in once with a $6 billion taxpayer-funded program to rescue these huge, billion-dollar credit unions, and now Treasury has agreed to act again, extending the life of the “temporary” fund through 2021. Chasing Higher Yields With Tax-Free Money Accumulates Toxic Assets The enormous financial hole in the credit union industry was created by cor- porate credit unions leveraging their tax-exempt status to chase higher yields. In an attempt to grow more rapidly, these institutions strayed from the practice of securely managing the funds of traditional natural-person credit unions. In so doing, these billion-dollar credit unions accumulated $50 billion in toxic private mortgage-backed securities. If left alone, losses on these problem assets would have to be recognized and it would cause the credit union industry to crumble, spreading the losses across large and small credit unions alike. Speaking to the dire nature of the situation, Deborah Matz, chairman of the NCUA board stated, “Total capital in the credit union system would have been reduced by $40 bil- lion, and as many as 30 percent of the federally insured credit unions would have potentially failed 2 .” A failure of such magnitude would have led to the impairment of customer confidence and runs on credit unions. Borrowing From Taxpayers To backstop the collapsing corpo- rate credit unions, the NCUA requested congressional assistance. Congress stepped in via legislative action and extended a $6 billion taxpayer-funded revolving line of credit—despite the fact that credit unions pay no federal taxes. NCUA has already drawn down $1.5 billion of this fund and expects to tap it again as it implements a new plan to manage the $50 billion in toxic assets it has acquired. In contrast to the NCUA, the FDIChas not needed to drawon any taxpayer lines of credit, even with the losses from bank failures. NCUA’s plan would isolate the toxic assets on the books of the five corporate credit unions and securitize these as- sets as NCUA issues bonds backed by the full faith and credit of the taxpayers. Credit Unions Left With Massive Obligations Although small credit unions will not face the crushing blow that would come from realizing the losses on the toxic assets now, they are still left with the obligation to pay back the taxpayer dollars borrowed to rescue the huge corporate credit unions. Credit unions also will be required to pay interest on the NCUA bonds created to fund hold- ing the toxic assets. Z 1 Maremont, M. and V. McGrane (2010, September 25). Credit Unions Bailed Out. Wall Street Journal, www.wsj.com 2 Chairman Matz’s transcript from Track 3 of NCUA’s Webinar on “Understanding the Corporate Crisis” Taxpayer Intervention Into Corporate Credit Union Crisis Mako Parker and Deanne Marino , American Bankers Association Reach Mako Parker and Deanne Marino by e-mail at mtparker@aba.com and dmarino@ aba.com .