‘Bailout Tax’ Angers 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.

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. 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. Some 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 officer of Pentagon Federal Credit Union, which 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 estimated 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, maintain a source of liquidity and 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 1 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 NCUA’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 North Carolina’s Fort Bragg 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,” he said. “That’s the good side of being a military-oriented credit union as opposed to [one serving] General Motors right now.”