For almost a year, the situation of falling market values in corporate investment portfolios, declining credit agency ratings, rising dependence on external borrowings, periodic OTTI losses and the slow withdrawal of deposits has been widely reported.
Multiple suggestions and plans have been proposed. These were often of two extremes: either wait out the market cycle or take over and remake the system in one fell swoop.
NCUA did neither extreme. Rather they made an initial effort to size the problem, mobilize resources, and create options for resolution that were not previously feasible.
Their first step was tempered, creative and holistic; NCUA did not try to single out individual corporates. Rather they looked at what it might take to make the whole network sound once again.
Further, the plan recognizes the collective ownership and benefit that the network provides credit unions. This step uses the combined capital of the NCUSIF to address a system problem collectively.
This is what cooperatives do—they walk towards problems, not walk away from them. This action is a defining moment that can give new character and meaning to cooperatives. Or we can, like many other industries, plead that we too must have a government bailout.
Crucial Next Steps
Not one dime of money has been spent. Yes, $1 billion is placed in a capital note at US Central, but it is much too early to tell if that capital will be used to cover losses.
Fity-six basis points is a heck of a one-time hit for any credit union. But if that initial estimate proves relatively accurate, it will mean that the credit union system lost about 5% of its net worth during this financial meltdown. Is there any other financial organization, or any individual, that can say they endured only a 5% diminution in value in 2008?
The problem, however, still exists in view of the continuing stress in both the housing and employment markets. There will have to be individual workout plans as further audit reports and investment review results come in. Structural issues are the subject of a proposed rule. Will NCUA spend its newly asked-for resources quickly or will it be patient and let both market events and credit union support cushion losses?
Can the Agency respond effectively to credit unions, already battling local economic problems, that will be hit hardest by this transfer of cash and reduction of net worth?
Will this very real sacrifice by every credit union and its membership be the foundation for legislative change that enhances the credit union model (for example, member capital shares)?
NCUA's actions crystallize what everyone knew, that the corporate situation is every credit union's problem and every credit union's opportunity. The new President in his inauguration urged that, "Starting today we must pick ourselves up, dust ourselves off and begin again the work of remaking America."
Will credit unions meet that call?