This is an historic day for both the NCUA and the credit union system. After a decade of hard work both by the agency and our nation’s credit unions, we can declare victory in our collective efforts to resolve the corporate crisis. While additional work remains to be done, and while the magnitude of the victory remains to be determined, we can safely close the Temporary Corporate Credit Union Stabilization Fund and merge it into the Share Insurance Fund.
Closure of the Stabilization Fund in 2017 will allow us to pay unprecedented dividends to credit unions in 2018. This is only the beginning, because additional dividends are likely between now and 2022 as the remaining legacy assets are sold and converted to cash. Barring an economic downturn or unexpected increase in insurance losses, this is projected to be the first in a series of dividends, not just a one-time dividend. The total return is currently projected to be between $1.4 and $1.7 billion. In addition, when the legacy assets are fully disposed of, former capital holders in some, but not all, of the closed corporate credit unions are estimated to receive between $1.1 and $1.9 billion because, after legal recoveries, some of the depleted capital has been restored.
I want to begin my remarks by thanking my colleague, Chairman McWatters for his leadership. I agree with everything he has said this morning. We are in 100 percent agreement.
Because Chairman McWatters and staff have walked through the details of this merger, I’m going to focus my remarks on just a few of the big issues.
First, I want to thank our predecessors on this Board, and our staff, for their leadership. The corporate crisis was the largest challenge the agency and the credit union system have faced since the chartering of the first credit union in the U.S. more than a century ago. Without the creation of the Stabilization Fund, the $6 billion line-of-credit from the Treasury and our successful lawsuits, the corporate crisis could have caused the entire system to implode. That could have wiped out the savings of tens of millions of Americans or required a multi-billion dollar bailout by U.S. taxpayers.
It is important to note that, at every step of the way in resolving this crisis, the NCUA Board has been steadfast and united. Under four different chairmen—two Republicans and two Democrats —and with support from six different board members—three Republicans and three Democrats—every action taken has been unanimous and bipartisan. In a city and an era marked by constant partisan strife and squabbling, the NCUA Board has put aside partisan differences for a decade to resolve this crisis successfully. It demonstrates that government can work. So, thanks are owed to former Chairmen Mike Fryzel and Debbie Matz, as well as to former Board Members Rodney Hood and Gigi Hyland, and to our hardworking staff.
Second, I want to thank the credit union community for going back to the basics, paying special assessments, and rebuilding their own capital. This wasn’t easy, and we know you paid the special assessments when it was very difficult to do so. That is why we are so determined today to make sure we shore up the Share Insurance Fund in good times; so credit unions won’t again face the prospect of having to pay special assessments when they can least afford to do so.
It must also be noted that this resolution was accomplished at no long-term cost to U.S. taxpayers. While the Treasury did have to advance billions of dollars to provide a bridge loan to get the system through the crisis, those funds have been fully paid back with interest, unlike the tens of billions of taxpayer dollars that were used to address problems at other financial intermediaries.
Third, because those who forget the past are condemned to repeat it, we must not forget what probably would have happened if the Temporary Corporate Credit Union Stabilization Fund had not been created and if we did not get a $6 billion line of credit from the Treasury.
At the depth of the Great Recession, when the Stabilization Fund was created, the impact on the Share Insurance Fund of losses at the corporate credit unions was $7 billion. The Share Insurance Fund began 2009 with a balance of about $8.2 billion. If the Share Insurance Fund had paid all the corporates’ losses, it would have wiped out all of the fund’s retained earnings and about 87 percent of credit unions’ contributed capital in the fund. The Share Insurance Fund’s equity ratio would have dropped to one-tenth of the current normal operating level.
Credit unions would have had to simultaneously write off nearly all of their contributed capital, and pay special assessments to bring the fund back to the 1.30 percent normal operating level. That is a difference of 117 basis points; not the 9-basis point adjustment we are considering today. Few, if any, credit unions could have afforded those expenses in the middle of a major recession.
Write-downs and recapitalization would have resulted in the failure of additional natural-person credit unions, and the entire system could have collapsed. That is why the Stabilization Fund was created and why the NCUA Guaranteed Notes were issued, to give the system time to rebuild.
The $4.8 billion in special assessments paid by credit unions over the next several years definitely made a difference, but on their own, they weren’t enough to keep the system from drowning, much less pay dividends. They were not enough to get the Stabilization Fund above water or to replenish the Share Insurance Fund to its statutorily required level if the Stabilization Fund had never been created.
It was the nearly $4 billion in net legal recoveries, plus the recovery in the values of legacy assets made possible by the issuance of the NGNs, that enabled us to get our heads above water and be in a position to pay dividends. But, we won’t know how far above water we are until the final legacy assets are disposed of and the NGN noteholders are paid off. That’s why we can’t refund all of the money we received from the legal recoveries—much of which was used to pay off the obligations of the corporates—and why we can’t tell exactly how much will be left over yet.
That brings me to my fourth point. I want to dispel the myth that we are somehow hoarding credit unions’ money, or as one trade association disingenuously said, “engaging in a cash grab.” That’s just untrue. They know, or should know, that the special assessments and corporate capital were all used years ago to resolve the corporate crisis and to keep natural-person credit unions and their members safe. Even with those funds, we still had to borrow billions of dollars from the U.S. Treasury to keep the system afloat.
There are only two reasons why it is possible to pay dividends to credit unions starting in 2018. The first is, by issuing the NGNs, we avoided a fire sale of toxic legacy assets in the depth of the recession and we allowed those assets to recover part of their value. However, the most important reason why we are in a position to pay dividends and return some depleted corporate capital, by far, is the success of our lawsuits, which have netted almost $4 billion.
The reality is that neither the NCUA, nor the failed corporates, nor the credit union system had the funds during the Great Recession to wage these lawsuits on an upfront, hourly basis, especially given that most people thought we would recover very little, if anything.
It should also be noted that, under the Extender Statute, only the agency had the ability to file timely claims. Many of the successful lawsuits that recovered hundreds of millions—if not billions—of dollars would have failed if they were filed by anyone else.
Without the recoveries from these successful lawsuits, we would not be in a position today to make any rebates, and we would almost certainly have been required to levy additional special assessments. Instead of getting money back, credit unions would be paying more in. In addition, credit unions that invested in the failed corporates would not be getting any of their depleted capital back.
We also have to remember that, even if we wanted to, there isn’t a lot of cash to “grab.” Much of what we have is not cash, it is receivables or it is funds on hand needed to make upcoming NGN guaranty payments. When the rescue plan was created, it was never anticipated that credit unions would ever get any of their special assessments back.
The suggestion that credit unions are owed a “full refund” is a myth. The special assessments were never an “investment” in the traditional sense. They were funds that were needed to pay off the obligations of the failed corporates and keep the entire system from collapsing. If they had been an investment credit unions could have held them on their books as a receivable. But, they were neither investments nor receivables.
We also can’t forget that between now and 2021, cash reserves have to be built up to pay more than $3 billion dollars that is still owed to the NGN noteholders. Three billion dollars is a lot of money. The legacy assets that will be sold ultimately to make those payments, and if things go well to pay additional dividends to credit unions, will fluctuate in value. We cannot be certain how much they will ultimately yield. Some of them, for example, may be real estate in Florida or Texas that has been literally and figuratively underwater. It would be fiscally irresponsible to make dividend payments based, primarily, on receivables and projections for the values of the remaining legacy assets. Credit unions pay dividends based on what they have actually earned, not on what they think they will earn in the future. We need to do the same.
There has been much hand wringing over the fact the Board is raising the normal operating level to “unprecedented” levels. While the normal operating level has never been raised this high before, it is important to note that this is intended to be a temporary increase and the statute anticipates this need, which is why it allows the Board to set the operating level anywhere between 1.20 percent and 1.50 percent. Like the equity ratio, the normal operating level was never intended to be a static number—it was expected to fluctuate based on facts and circumstances. That is why the Congress authorized a range and not a specific number.
It is absurd to suggest, as one trade association has, that we should lower the normal operating level to its statutory floor of 1.20 percent. That is something you would only do in a time of economic utopia, when you have no risk on your books and there are no clouds on the horizon. We are adding risk to our books and there are clouds on the horizon. Lowering the normal operating level to 1.20 percent would be the equivalent of waiting until your gas tank was empty before buying more gas, or waiting until your credit union’s net worth dropped to the statutory floor of 6 percent before trying to increase it. It would be an unsafe and unsound activity.
Some of these same critics complain that we are keeping too much in the Share Insurance Fund and that anything over 1.20 percent or 1.30 percent should be rebated to credit unions. They claim that if they over-reserved their allowances for loan and lease losses, we would write them up.
Setting aside the fact that they are confusing the role of loan loss reserves with the role of capital, imagine their reaction if the NCUA required credit unions to refund to their members anything above 9 percent net worth. More than three-quarters of all credit unions in the U.S.—77 percent—would have to rebate funds to their members, regardless of the risk in their portfolios or changes they may anticipate. Even if we raised the threshold to 10 percent of net worth, nearly two-thirds of all credit unions would have to rebate to their members. Yet, for good reasons, those credit unions have made informed decisions to hold on to that “excess” net worth. They understand how difficult and painful it is to raise capital during an economic downturn.
The equity ratio of the Share Insurance Fund is currently a little over 1.25 percent. Just to bring it back to the existing normal operating level of 1.30 percent would require nearly $500 million dollars in premiums in 2018. Economic projections tell us that in order to avoid having the fund dip below the statutory floor of 1.20 percent in just a moderate recession, the normal operating level has to be raised to 1.33 percent—even if we don’t merge the funds. Thus, the Share Insurance Fund would be about $300 million dollars short of the level it needs to be. By merging the two funds together, credit unions can avoid paying hundreds of millions of dollars of premiums in 2018. Instead, we project they will receive somewhere between $600 and $800 million dollars in dividends.
Furthermore, if the Board were to hedge the risk of the kind of severe adverse recession we actually experienced only a decade ago—which the Board is not doing—it would be required to raise the normal operating level by at least 21 basis points to at least 1.50 percent. We are only requiring a hedge against the much more modest, but more likely, risk of a moderate recession.
The current period of economic expansion is unprecedented in modern history and many economists, including prominent credit union economists, are predicting a downturn in 2019, well before all the NGNs have matured and we can sell the legacy assets that support them. We also know that losses to the Share Insurance Fund are at historically low levels and are likely to increase due to institutions we already have in conservatorship, and losses that may result from the recent hurricanes. We can’t ignore these risks. They are real.
By way of comparison, our proposed 1.39 percent normal operating level is 61 basis points lower than the FDIC’s 2-percent target for its Deposit Insurance Fund. The composition of the FDIC’s fund is also very different from the Share Insurance Fund. The FDIC’s fund is comprised entirely of premiums collected that banks had to write off their books. The first 100 basis points of our Share Insurance Fund—the vast majority of it—is a deposit credit unions are allowed to count as an asset on their books. If the Share Insurance Fund’s equity ratio drops below 1 percent, credit unions have to impair and replenish their 1-percent contributed capital deposits. The same is not true for the FDIC’s fund. Credit unions are not being required to pay premiums, as banks are today, to raise the FDIC fund to its 2-percent target, because we recognize that the balance sheets of credit unions are significantly less risky than the balance sheets of banks.
The increase in the normal operating level may be unprecedented, but so too is the risk. Never before in the history of the Share Insurance Fund have its assets included billions of dollars of receivables whose values fluctuate. Under the statute, the Share Insurance Fund can only invest in government securities backed by the full faith and credit of the United States, which are highly liquid. In merging the two funds, we are now adding assets to the Insurance Fund that are less liquid and whose values are subject to fluctuation and are not backed by the full faith and credit of the United States. Is it really a surprise that we need to raise the normal operating level modestly to hedge against that risk?
The NCUA and credit unions should be justly proud of the work we have all done together, in the spirit of the cooperative movement, to rebuild and strengthen the credit union system in the wake of the biggest challenge we have ever faced. The system and the Share Insurance Fund are much stronger today than they were a decade ago because of the actions we have all taken.
I will continue to fight to protect members, their credit unions and U.S. taxpayers.