Winston Churchill is famous for having said that, “Many forms of government have been tried and will be tried in this world of sin and woe. No one pretends that democracy is perfect or all wise. Indeed, it has been said that democracy is the worst form of government, except for all the others that have been tried from time to time.”
The same can be said of the final distribution rule we consider today. It isn’t perfect, but it is better than all others that have been tried.
I appreciate the many thoughtful comments we received on our proposed rule. We deliberately laid out several options in the proposal and asked for comments on a number of issues. The final rule is a compromise, which probably will not satisfy everyone, but it does represent what my colleague has referred to as, “rough justice.”
As I articulated when the Board voted to close the Stabilization Fund and distribute its assets to the Share Insurance Fund last fall, it is as important to remember what we are not doing today, as it is to remember what we are doing. We are not rebating to credit unions the special assessments that were levied between 2009 and 2013. Those special assessments were all used to make up for losses at the corporates, to minimize borrowings from the Treasury, and to create the NCUA Guaranteed Notes program. That money has been spent. It is gone. Even if those funds were not all spent, the law does not permit the Stabilization Fund to rebate funds directly to credit unions.
The Stabilization Fund borrowed, and then repaid with interest, billions of dollars from the U.S. Treasury. The fund would not have transitioned from red ink to black ink if the NGN program had not been created to allow the legacy assets to recover, and if the lawyers the agency retained had not been far more successful than anyone predicted in recovering funds from the Wall Street firms that sold toxic assets to the corporates. Without the NGN program and without the legal recoveries, there would have been no recovery and no surplus.
While the statute does not allow direct rebates to credit unions from the Stabilization Fund, it expressly authorizes the agency to close the Stabilization Fund and distribute its assets into the Share Insurance Fund. That is what the Board did last fall. The law further allows, and actually requires, the Share Insurance Fund to make pro rata distributions to insured credit unions after each calendar year if, as of the end of that calendar year, certain conditions have been met. Specifically, any loans from the federal government have been repaid with interest, the Share Insurance Fund’s equity ratio exceeds the normal operating level, and the fund’s available assets ratio exceeds 1.0 percent. All of these conditions exist today.
While this final distribution rule makes a number of changes that improve on the existing rule, the principal advantage is that it provides a special, temporary, rule that applies to distributions made possible primarily due to our legal recoveries and the successful completion of the Corporate System Resolution Program. Under this temporary rule, distributions made in 2018 to eligible credit unions will be based on the proportion of insured shares they held during a “look-back” period that covers the time when special assessments were levied to fund the Stabilization Fund. Specifically, there will be a 36-quarter or nine-year lookback for distributions made this year, and the look-back period will increase by four quarters or one year, every year through calendar year 2021, when the look-back period will be 52 quarters, or 13 years. This is a longer look-back than the current rule, and it is longer than the four-quarter average that will be used for any distributions for calendar year 2022 and subsequent years.
This is “rough justice” because while it takes into account insured shares held by a credit union after it merged with other credit unions, it only accounts for those insured shares after the merger, and not before. Under the law, that is the only look-back we can do. We can’t take into account the insured shares of a credit union before its merger into another credit union. It is also “rough justice” because while we can make distributions to credit unions that filed at least one Call Report in 2017, we cannot make distributions to credit unions that paid special assessments between 2009 and 2013, but converted to private share insurance before they filed any Call Reports in 2017. It appears there were two credit unions that converted to private share insurance in 2017. They are comparable in size. One of them will receive a distribution because it filed at least one Call Report in 2017, the other converted before the first Call Report filing deadline in 2017 and thus is not likely to receive a distribution. Similarly, credit unions that paid assessments but relinquished their federal share insurance prior to 2017 will not receive distributions. Bottom line: If you sell your stock prior to its ex-dividend date, you are not entitled to receive a dividend.
I do want to note we have created a system of “heads I win; tails you lose” for credit unions that relinquish their federal share insurance. If they expect a premium will be assessed in the coming year, they can relinquish their share insurance before the end of the year and avoid an assessment. If, on the other hand, they expect a distribution will be made, they can time their conversion so that they receive the distribution.
That is why the Board proposed to provide distributions only to credit unions that were insured as of December 31 of the previous year. As with most dividends in the private sector, we would only pay credit unions that were insured as of the date the distribution was calculated. Unfortunately, this final rule does not include that proposal, and thus allows credit unions that have left the federal deposit insurance system to receive distributions, even though those same credit unions would not be paying premiums if they, like all federally insured credit unions, were required this year to replenish the fund back up to the normal operating level. This is not a level playing field. Credit unions that are not required to pay special assessments when they are needed should not be eligible for distributions.
Fortunately, the number of non-federally insured credit unions that will be unjustly rewarded is quite small, and the total distributions they will receive are not material. Thus, while I object on principle to making payments to non-federally insured credit unions, I will not allow the perfect to be the enemy of the good. I will support this final rule because, on balance, it is better “rough justice” than the existing rule. The rule’s other principle advantages are that it is transparent and relatively easy to calculate, much more so than several of the other alternatives we considered. In fact, we will put a tool on the NCUA website that will enable credit unions to see their distribution. That is as transparent as you can get, and I hope it will be helpful.