by J. Mark McWatters, NCUA Board Member
The late New York Senator Patrick Moynihan once famously noted that we are all entitled to our own opinions, but not our own facts. That came to mind recently as I saw another inaccurate posting from a credit union detractor that the Temporary Corporate Credit Union Stabilization Fund constitutes a “bailout” for the National Credit Union Share Insurance Fund.
As a former member of the Congressional Oversight Panel of the Troubled Assets Relief Program, I am well aware of what a bailout is and what it isn’t. In this summer of distorted facts and hyperbole, I want to address this mischaracterization and hopefully help correct it.
In 2009, the Share Insurance Fund and federally insured credit unions faced a dilemma. According to the agency’s estimates at the time, the costs associated with dealing with the five failed corporate credit unions exceeded the retained earnings of the Share Insurance Fund, and would have required federally insured credit unions to write down their 1 percent deposit by as much as 69 basis points.
Under the Federal Credit Union Act, if the operating ratio of the Share Insurance Fund drops below 1.20 percent, as was the concern if the costs of dealing with the failed corporate credit unions were handled through the Share Insurance Fund, NCUA must assess a premium to restore the fund’s equity ratio. Further, under GAAP, credit unions would have been required to recognize the impairment of the 1 percent deposit as an expense in the accounting period in which it was incurred in their income statements, and replenish the 1 percent deposit.
While the Share Insurance Fund and the credit union system had the capacity to absorb this cost all at once, the agency and Congress recognized this added to the challenges already facing credit unions during the Great Recession. Thus, a plan was developed to mitigate the timing and impact of the corporate resolution costs.
Section 204(f) of the “Helping Families Save Their Homes Act” was passed by Congress and signed by President Barack Obama in 2009. It included a new section of Title II of the Federal Credit Union Act, 217, establishing the Stabilization Fund. That provision gives the Stabilization Fund carefully proscribed access to the agency’s standing line of credit with the U.S. Treasury to fund the costs associated with the corporate credit union resolution program. However, all amounts advanced must be repaid in full to the U.S. Treasury with interest, and to make the repayments to Treasury, the NCUA must assess federally insured credit unions. Thus, this clearly is not a bailout.
This arrangement allowed NCUA to manage the costs associated with the failed corporate credit unions. This benefited federally insured credit unions and their members because it lessened the severity of assessments during the recession, thereby not compounding the effects of the downturn and helping credit unions continue to meet the lending needs of their members. It also benefited the Share Insurance Fund, which could maintain its resources, without having to face the added fallout an extraordinarily large assessment would have caused.
An additional benefit of this strategy was to allow for an orderly disposition of the assets of the failed corporate credit unions. The largest component of the disposition plan is the NCUA Guaranteed Notes program, which securitized over $40 billion of unpaid principal balance of distressed securities these failed institutions held. The NGN program allowed NCUA to avoid selling those securities into a deeply depressed market at “fire sale” prices.
As of May 31, 2016, the outstanding balance of NGNs has declined to $9.2 billion from a peak of over $25 billion. The outstanding balance of the NGNs has declined from principal and interest payments on the underlying securities. Also, NCUA has achieved over $4 billion, as of Sept. 29, in legal settlements related to the distressed securities. Total projected resolution costs are now significantly lower than original estimates due to the legal settlements, along with a better than expected recovery in the housing market and the sustained low interestrate environment. In fact, if projections as of year-end 2015 hold, potential total refunds and depleted capital recoveries for the credit union system range from $1.6 billion to $3.2 billion.
A rationale, disciplined and patient approach crafted at the height of the financial crisis is working for the credit union community, the Stabilization Fund and the agency. The benefits of this approach have been very significant as the agency worked through the financial crisis and its aftermath. They provided a favorable repayment plan conferred by Congress, but it is clear from the provisions of Section 217 of the Federal Credit Union Act that the Stabilization Fund did not provide a bailout, which was not needed, requested or created.
Credit union opponents cast the creation of the Stabilization Fund as a bailout in part to emphasize supervisory deficiencies at the agency and mismanagement within credit unions. The financial crisis did exacerbate problem areas, which we continue to address, but we must also continue to recognize that credit unions are stronger than ever and performing extremely well throughout the country. Likewise, we must not fail to remember the serious consequences the Share Insurance Fund and the credit union system would have faced in the absence of the Stabilization Fund.
Mischaracterizations continue when they are not sufficiently refuted. Based on what credit unions continue to tell me, key facts about the Stabilization Fund are not fully understood. NCUA will need to do more to explain important aspects related to the fund as it approaches the remaining few years leading up to its closure in 2021. That is why I plan to work with Chairman Metsger to provide a thorough explanation of issues, such as the value of the NCUA Guaranteed Notes, as raised recently by former NCUA Board Chairman Mike Fryzel, and whether the remaining outstanding Treasury borrowing can be paid off sooner than 2021, so we can get this issue behind us.