NCUA Tries To Tame An ‘800-Pound Gorilla’

Credit Union Journal Daily Briefing  |  Friday, November 20, 2009
ALEXANDRIA, Va. – NCUA, which is managing the two biggest corporate failures ever, is continuing to try to work down billions of dollars of toxic mortgage bonds held by U.S. Central FCU and WesCorp FCU, lest it be forced to realize the diminished value of the bonds in a fire sale.

The future of the impaired assets, as much as $40 billion worth in the two corporates and as much as $50 billion throughout the corporate network, was the major problem in the network not discussed during yesterday’s NCUA Board debate on a new corporate rule – the so-called 800-pound gorilla in the room, according to NCUA Board member Gigi Hyland.

Despite taking over the one-time $52 billion U.S. Central and one-time $34 billion WesCorp almost nine months ago, NCUA still sees no clear path to disposing of the troubled assets without taking on major losses for the two corporates. "We’re not going to sell them. I can tell you that much," Larry Fazio, NCUA deputy executive director, told The Credit Union Journal yesterday. "We don’t want to lock in a market loss." He questioned whether the market for some of the assets will ever be good enough to warrant a sale.

Instead, NCUA plans to hold the bonds for as long as possible, hoping to recoup as much of the principle through time and that realized, or actual, credit losses turn out to be less than the projections under so-called other-than-temporary impaired, or OTTI, he said. But that could be many years, according to Fazio. He said an average life on some of the assets in question is four years, but "some of these have a tail of 20 years."

The actual losses realized on the assets, most of them mortgage-backed securities, will determine the future, if any, of U.S. Central, WesCorp and as many as half-dozen other corporates dealing with lesser concentrations of toxic assets.