The National Credit Union Association (NCUA) is planning to securitize more than $50 billion of what the organization has deemed to be “toxic assets that caused the meltdown.”
The NCUA, which serves the same regulatory and depository insurance role for credit unions as the FDIC does for banks, would be following in the fashion of its banking counterpart, turning to the secondary market to quickly dispose of loans. The FDIC has successfully completed three such transactions over the past month – an attempt to fast-track sales of failed banks’ assets as mortgage-backed securities (MBS).
At the annual advocacy meeting of the Missouri Credit Union Association last month, NCUA Chairman Debbie Matz, said, “Isolating these so-called – legacy assets – which are severely impaired securities – is a necessary first step in avoiding further damage.”
Matz prefaced outlining NCUA’s plans for securitizing the assets with, “First, let me say, this is very much a work in progress. It is an enormous undertaking. There is no easy way to un-bundle over $50 billion worth of long-term assets, repackage them into marketable bonds, and move them from corporates’ balance sheets without realizing the losses. This effort is so huge – and so important – that we are dedicating 20 of our top staff to work on it.”
While no specific details were given on the effort, Matz said NCUA “is close to proposing a plan that would remove the
riskiest legacy assets from ongoing corporates, while carrying forward the most valuable pieces of the corporate system,” and hopes to bring a comprehensive corporate resolution plan to the NCUA Board by the end of June.
“We feel we are on the verge of a breakthrough,” Matz said. “If the plan proceeds as we envision, it could even allow credit unions to recover future earnings from legacy assets that out-perform current loss projections.”
Matz noted, “If the recent financial meltdown taught us anything, it’s that – particularly in financial services – weakness, whether real or perceived, can trigger ripple effects very quickly.”
As the housing crisis and ensuing economic downturn set in, the nation’s credit union system faced the same type of challenges and threats as America’s banks. According to Matz, the global credit crisis of 2007 and 2008 exposed the four giant corporate credit unions to extreme shock, because they held a vast amount of residential mortgage-backed securities (RMBS).
When the market for those bonds suddenly plummeted, the corporates’ losses pushed them toward insolvency, Matz explained. NCUA placed the two largest corporate credit unions, Kansas-based U.S. Central Credit Union and California’s Western Corporate Federal Credit Union, in conservatorship in March 2009.
“Our aim has not been to ―bail out the corporates: We aimed to stop them from bleeding, as their assets were hemorrhaging value,” Matz said.
But the turmoil isn’t yet over.
“Many of the 7,600 federally insured credit unions – while still well capitalized – will be draining capital this year, due to negative earnings,” Matz said at the Missouri meeting. “At the same time, delinquencies and loan losses continue to increase. Undoubtedly, these will lead to an increase in failures.”
But Matz’s outlook wasn’t all doom and gloom. “Along with most economists, I believe that we’ve already endured the worst of the economic downturn. There are still some rough times to come. But we’ve survived the worst,” she said.
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