Notes from NCUA's Townhall Meeting

Yesterday afternoon I went to the NCUA town hall meeting on the corporates.  Overall I came away impressed with the job that NCUA did cleaning up the mess.  They estimate the losses in the conserved corporates at between 13.9 and 16.1 billion.  I think that may be low particularly when rates start rising and the rates start putting pressure on the borrowers underlying the collateral.  (Almost all subprime and Alt-A.)  I wouldn’t be surprised to see that number increase by 2 to 4 billion.  The bridge corporates being put in place of Wescorp, Southwest and Members United will be in place for 24 months give or take.  The member credit unions can decide whether to charter a new corporate, form a CUSO to take over the services or sell the corporate.  Constitution is being merged out of existence.  Jay Murray the CEO of Mid-Atlantic our corporate was there and told me they were asked to merge Constitution but it made no sense to them.  Several corporates are pressing to merge in Constitution.  Like we’ve said before, put two dogs together and all you get is a kennel.  They acknowledged that credit risk was the problem at the corporates and incredibly have prohibited private label CMO’s at corporates.  The portfolio of a corporate can only extend from two years to two and a quarter years with a 50% slowdown in prepayments.  Basically NCUA is putting the corporates out of the investment business.  Corporates can do investments for credit unions through CUSO brokerage services because the SEC will monitor them.  (As though the SEC is some great regulator!)  The legacy assets will be used to collateralize NCUA notes that are guaranteed by the Treasury.  The ticker symbol for these notes is NGN.  They will be issued to market over the next four to five months.  There will be 30 to 35 billion of notes with 45 to 50 billion of legacy assets backing them.  The securities have a hard final of 10 years.  In some instances the hard final is shorter.  The first issue was brought to market last week in a floating rate of 3.3 billion and a fixed rate of 500 billion.  The floating rate came at a yield of labor plus 45.  The fixed piece was at the swaps rate plus 100 with a yield of around 1.8 to 1.9%.  In two months the management teams of the four bridge corporates will put proposals on the table for what to do with them and the members will have to decide.  If I was a betting man I’d bet on disposal of the bridge corporates.  NCUA will have a new lead examiner at each  of the 22 surviving corporate each year.  If they do not have expertise on staff they will bring it in.

The overall mood of the meeting was muted and attendance was light.  I think everyone is just worn out over this whole issue.  Like I said I was pretty impressed with the work they’ve done.  But I think credit unions will continue to pay for this mess long after I retire to my primary job as Irina’s Papa.  What fun times we live in,  Evan

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