There are graphs at the link


New Credit Union Regulations Will Enable Hundreds Of Takeovers By Wall Street
Bruce Krasting, My Take On Financial Events | Dec. 20, 2010, 5:57 AM | 1,376 | comment 5





Bruce Krasting




Bruce Krasting is a former hedge fund manager.



Last week saw a flurry of activity relating the nations credit unions. I’m not sure what it adds up to, but it is curious. For example, Congress passed a law on the subject:

111TH CONGRESS 2D SESSION

S. 4036

AN ACT To clarify the National Credit Union Administration authority to make stabilization fund expenditures without borrowing from the Treasury.

Just the heading of this scares guys like me. The purpose of the law is to avoid Treasury from forking out money to the NCUA? That would be a bailout. Everyone hates bailouts. But there is a large hole in the NCUA system that should be filled. If that bucket is not filled by Treasury then who will fill it?

I believe the plan for the empty bucket is to assess the individual credit unions for several years worth of insurance premiums. This is exactly what NCUA’s big sister, the FDIC, did last summer. The FDIC collected four years of premiums upfront to bolster their underwater insurance fund. In the case of banks, the prepayment shows up as an asset on the books, the expense is recognized over the four years, so there is no economic penalty for the banks to front the losses. The question then becomes, can the individual credit unions pay the premiums? That was addressed in the new law:

Any insured credit union that fails to make timely payment of the assessment or special premium is subject to the procedures and penalties described under 21 subsections (d), (e), and (f) of section 202.’’

Basically this means if they don’t/can’t pay, they are toast. How big is this issue? Consider the following:

As of November month end, 372 federally insured credit unions, with assets of $43.4 billion were designated as CAMEL code 4 or 5. In addition, there were 1,792 CAMEL 3 credit unions with assets of $158.2. Overall, 22.3 percent of all credit union assets are in CAMEL code 3, 4 or 5 credit unions.

What does CAMEL 4-5 mean? Answer: Dreck.

chart

chart

What does CAMEL 3 mean?

chart

There are of course losses embedded in this $200b of assets. How much? I would estimate $20-40b. That may sound like a big number, but it is not. There are about $900b of total assets in CUs so the problems are in the 5% range. They are also concentrated in a few large corporate CUs. Four-years of prepaid insurance covers the nut. The question becomes; “Who is going to step in to fill the roll of those that are in the process of failure?â€