Posted on 02/14/2009 5:20:05 PM PST by Jet Jaguar
Federal credit unions, including those serving millions of military patrons, are fighting to keep off their books nearly $5 billion in charges that regulators have assessed to bail out their largest “corporate” credit union.
The U.S. Central Federal Credit Union was in danger of insolvency due to losses on mortgage-backed securities until regulators adopted a bailout plan Jan. 28 that would be financed by 7900 member-based credit unions.
“If we were to allow something to happen to U.S. Central, the impact on the industry would have been devastating,” said Michael E. Fryzel, board chairman of the National Credit Union Administration (NCUA).
But Fred Becker, chief executive for National Association of Federal Credit Unions in Arlington, Va., said NCUA’s “premiums” on member credit unions, unless lowered by September when scheduled to take effect, “would drive most of the industry’s income into the red” for calendar 2009.
Fryzel conceded that some smaller credit unions have warned that their part of the “bailout tax,” as some call it, would leave them undercapitalized, threatening their viability. Fryzel said none of these credit unions serve military populations. In any case, NCUA will “work with them,” he said, to ensure the special assessment doesn’t have such a dire effect.
Credit union officials say there is no reason for members to fear for their deposits. Individual accounts are insured by the government for up to $250,000. Military credit unions contacted for this column said they don’t even expect the bailout tax to force them to lower member interest rates paid on savings accounts or to raise interest charges for loans or mortgages.
However, other customer services could be affected. That might include, said one official, a smaller workforce to run customer call centers or delays in opening new branches or renovating old ones. Some credit union officers clearly were upset at the NCUA board for deciding on a bailout plan for U.S. Central before discussing alternatives with them.
“We do not believe that the federal agency has a moral and ethical right to steal our members’ capital,” said Frank Pollock, chief executive of the Pentagon Federal Credit Union. This credit union expects to take a $44 million hit, losing a third of earnings this year, if the bailout plan stands.
Cutler Dawson, CEO of Navy Federal Credit Union, the largest credit union in the country with 3.2 million members and $36 billion in assets, called the bailout plan “unacceptable and untenable.” Dawson estimates that his credit union would see return on assets fall by $80 million this year and by a total of $280 million over three years.
Credit unions are popular alternatives to banks. They are owned, in effect, by their depositors. Without corporate profits or shareholders to worry about, credit unions can offer higher interest rates on savings accounts and charge lower rates for mortgages, auto loans or other financial help.
Because many credit unions are too small to use support services available through the Federal Reserve, the industry decades ago set up a network of corporate credit unions. “Natural-person” credit unions rely on their “corporates” to invest excess capital, as a source of liquidity and to provide check clearing and other payment services. The 23 corporate credit unions, in turn, have their own credit union, U.S. Central Federal.
“Unlike natural-person credit unions that swim in a pretty calm sea, the corporates swim in a rougher sea, which now has turned out to be shark-infested,” said Becker. “They got wrapped up like everybody else in the current crisis” by investing in mortgage backed securities that turned bad.
Return on assets, ROA, is the yardstick credit unions use to measure annual performance. A one percent return is a good year and relatively few credit unions will reach it in 2009 just given the deepening recession.
The U.S. Central bailout, as structured, “makes tough times tougher,” said Dawson. It would force credit unions to lower their ROA a total of 62 basis points. The portion payable by fall would wipe out any ROA in ’09 for some credit unions and cut profits for many others at least by half.
“It means you can’t do the things you wanted to do like invest in more branches, give raises to your staff. You can’t paint the building. There are just so many things you can’t do,” said Pat Keith, spokesman for the Credit Union National Association in Washington D.C.
Fryzel said he and other NCUA board members have heard the complaints, met with credit union associations as well as with Pollock and Dawson, and are working together on alternatives to ease the negative effect of the bailout. Some proposed fixes require legislation including allowing a capital infusion from the Federal Reserve’s Central Liquidity Facility. Another option is to ask the Treasury secretary to allow corporate credit unions to use the Troubled Asset Relief Program, the fund behind the banks’ bailout.
Many credit unions were surprised by the assessment.
“When they hear why the board had to take the action,” Fryzel said, “they are more rational and say, ‘Okay, we understand what had to be done and we’re looking forward to the board mitigating our losses and cutting the cost to us.’”
“This is not a done deal by any means,” said David G. Elliott, chief executive of the Fort Bragg (N.C.) Federal Credit Union, where the bailout would cut return on assets by a total of $500,000.
“We would look internally to make sure our [53,000] members were not affected,” Elliott said. “We are fortunate that we have at Fort Bragg 11 percent capital built up, which is why you build up capital for a rainy day.”
Elliott said he doesn’t know of any military credit union put at risk by the bailout.
“The military is sort of recession proof with our members because they’re going to have jobs. That’s the good side of being a military-oriented credit union as opposed to [one serving] General Motors right now,” he said.
I think, the smarter than god ceo's of wall street and financing have already accomplished that. Has anyone ever ask any of them, where they thought the profit was a thirty to one leverage.
I chair my credit union board. We learned about this a week ago. The credit union industry is not protected directly from the federal govt like banks with the FDIC. We are a member owned organization that support each other. The main bank IS our FDIC. The next layer of membership is at the state level in which there are something like 28 of these (not each state has one). Credit Unions are members of this second tier. We borrow from this second tier, this second tier borrows from this large unit. They are hurting from this economy since any funds are invested. Fortunately credit unions investments are more controlled than most banks.
The article is correct, smaller and under capitalized credit unions may collapse. Fortunately my credit union is solid due to our management principals. however, we anticipate a negative income rate this year. Basically, our assessment equals what our projected income was to be.
We set our budget in December and we tie in management and employee incentives to ratios that will be affected by this decision. Our employees stand to lose due to this decision but our members and their money will be fine.
I will be presenting this issue next month at our annual meeting. For us we are at least able to get out in front to our members.
Support your credit union as they are generally managed more conservatively than banks. Most people have access to a credit union.
Thanks for the info.
Time to sharpen the pitchforks and soak the torches in pitch. Who do these sonz@bitches think they are?
Credit unions are popular alternatives to banks. They are owned, in effect, by their depositors. Without corporate profits or shareholders to worry about, credit unions can offer higher interest rates on savings accounts and charge lower rates for mortgages, auto loans or other financial help.
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Another thing Credit Unions don’t have to worry about? TAXES! Credit Unions are a dinosaur, they should be held to the same standards as commercial banks.
Did your colleague mention that Credit Unions don’t have to abide by the Comm Reinvestment Act? Did he mention that they don’t pay taxes? Did he mention that Credit Unions are available to ALL citizens in the counties in which they operate vs. previous rules that only allowed members within a specific class (ie., work for a specific company, etc.)
I think they deserve it.
RushingWater:
Credit Unions are able to NOT charge service charges because they do NOT have to pay income taxes.
When you say "main bank" and "large unit" are you referring to the Central Federal that just went bust? I may be really old-fashioned, but I always thought that CU's paid interest to depositors from interest received on loans. I thought, in the case of smaller ones I was in years ago, that they were economically self-sufficient. Then about 6 years ago my small credit union in Virginia was "bought" by a large credit union.
The board decided and browbeat the members to turn over their assets and members to the borg. I voted "Hell no". The Borg turned out to be more of a scam than a credit union. Loan rates went up a bit, but savings and CD rates went way down after the takeover. In fact I usually had a lot of cash sitting around in the old credit union and there were several times when they called me and asked if they could put some in a CD at a favorable rate in order to get their long term ratio up.
In contrast, the new credit union sent me literature on how I should send my money to their "partner" brokerage. They would make it really easy and have lots of intricate ties between the not-for-profit credit union and the very much for-profit brokerage. The loans rates then went down in 2002-4 with the credit bubble, which is the advantage of being part of the larger financial system (our members mortgages were sold as ABS). But when the larger financial system crumbles (it is arguably dead already), you die with it.
Why in the heck are they buying mortgage-backed securities? That is not part of the mission of a credit union.
Not true. Navy Federal, for example, is only available to Defense.
Perhaps you're talking about credit unions like the one in my area: UVA Community Credit Union, which does have a community charter and serves its members in several counties in Central Virginia.
However, not all credit unions are of that flavor, and the membership of many remains confined to specified eligibility groups.
Until then, please don't falsely claim that all credit unions offer geographic eligibility rather than those "previous rules" (which haven't gone away at all). It all depends on the credit union's charter.
Who are you, Joe "Patriotic to pay taxes" Biden? I take it you are opposed to free associations among US citizens.
Bailout, it’s the gift that keeps on giving.
Are you saying that the main US credit union insures all depositors' FCU accounts? That does not sound right. My deposits are insured by the NCUSIF. According to my credit union, "All deposits are federally insured by the full faith and credit of the US Government to at least $250,000 through the NCUSIF - the National Credit Union Share Insurance Fund."
Maybe different credit unions have different ways to insure doposits.
doposits->deposits
Someone needs to see where Obama puts his money and how much he is making on his investments, etc. Not that I wish any bank or S & L to fail, but I hope he looses everything he has ever saved and is forced to take in tenants/rent out rooms in his million dollar house just to pay the mortgage like I have seen many others have to do already! After all, Obama needs to practice what he preaches - socialism does not allow big houses for one family. His place needs to be made into apartments for the poor so he can "spread the wealth."
I worked in the banking industry most of my life, spending 2 years at a credit union. They need to be assessed to bail out U.S. Central Federal Credit Union.
Keep in mind, CU’s don’t pay federal tax or any tax - now, on it’s surface that seems fine, but looking at it from the inside out - it’s a taxpayer rip off. Now, I know that they are owned by members, but the fact is they are not out to service the little people as they say they are with being the reason they were created in the first place.
Second step, CU’s should pay tax just like any other business.
If I understand “fractional-reserve banking” enough, banks and such only receive about 1/5 of what they actually lend out, with all the rest being “loaned” by the Federal government, and with all of it being monies the bank or credit unions can loan and receive interest back on.
I think you're both on the wrong board. People who think of themselves as “little people”, and call free enterprise and group financial cohesiveness “a taxpayer ripoff” are usually found on the more liberal boards where those ideas are now running our country....into the ground! The ideas that the two of you are espousing are socialist garbage and make me sick!
Navy Federal has opened their membership quite a bit in the recent past.
When I first joined in 1985 even though they had branches in San Diego you couldn't join them there. You had to join overseas on a deployment. IIRC, it had to do with there being other credit unions that were chartered to serve the military in the area. I joined Navy Fed in Subic.
Eventually they were able to sign up Navy and Marines anywhere in CONUS. Then they started taking active duty from any service. Now they even take immediate family if a member sponsors them. My father has a Navy Federal account through me.
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