U.S. Moves to Bail Out Credit Union Network, and Costly New Bank Bailout, and Businesses Gets Share

[Mrs. Sharon B. Hodge]

U.S. Moves to Bail Out Credit Union Network
by Mark Maremont


In the latest effort to prop up a sector of the finance industry, federal regulators on Wednesday guaranteed $80 billion in uninsured deposits at the powerful institutions that service the nation's credit unions -- a maneuver that shows how the economic crisis continues to ripple across the U.S.

Regulators also injected $1 billion of new capital into the largest of these wholesale credit unions, U.S. Central Federal Credit Union of Lenexa, Kan., after the firm on Wednesday posted an unexpected $1.1 billion loss for 2008. U.S. Central serves essentially as a main clearinghouse for the others in the network.

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Where credit is due - graft chart

The vast majority of regular credit unions -- the bank-like cooperatives familiar to millions of account-holders nationwide -- are considered financially sound. Wednesday's moves affect only these wholesale credit unions, which number 28 and operate in the background to service regular credit unions.

In general, credit unions are considered to be among the most conservatively managed financial institutions. Nevertheless, a few of the wholesale credit unions have been hurt by losses on mortgage investments. As a result, regulators took action to minimize the chances of pain spreading.

The National Credit Union Administration, the industry's federal regulator, announced the steps late Wednesday after a special board meeting called at short notice. "We are trying to institute confidence in the system, and we think this will do so," said Michael E. Fryzel, NCUA's chairman, in an interview.

Mr. Fryzel also said the agency will hire investment-management firm Pimco to evaluate the investment portfolios of the wholesale credit unions. The goal will be to gauge the depth of the industry's losses on mortgage-backed securities and other investments.

Though smaller than the likes of Citigroup or Bank of America, credit unions reach into virtually every community in the nation. Some 90 million Americans held accounts at credit unions at the end of 2007, according to an industry trade group. Credit unions, some affiliated with individual corporations, trade groups or geographic regions, are common sources for auto loans, mortgages and other products.

The little-known network of wholesale, or "corporate," credit unions affected by Wednesday's move provide financing, check-clearing and other tasks for the retail institutions. These wholesale credit unions are owned by their retail credit-union members.

Some of the biggest wholesale credit unions have been grappling with substantial paper losses on investments, primarily mortgage-backed securities. As of the end of November, five of the largest such institutions posted unrealized losses on their investments of $11.6 billion, up from $9.4 billion just a month earlier and about double the level of last May.

U.S. Central, the institution that posted the loss Wednesday, said it was due to a decision to writedown $1.2 billion in losses on its portfolio. U.S. Central previously had reported $5.6 billion in paper losses on its investments, but until recently believed it wasn't necessary to write down some of those on a permanent basis.

NCUA's Mr. Fryzel said regulators found out about the losses on Monday, and immediately began to plan how to cope. He said the size of the losses "gave us greater concern" that other wholesale credit unions might accelerate their withdrawal of funds from U.S. Central.

NCUA's board voted to inject $1 billion in new capital into U.S. Central. The money will come from the industry's $7 billion insurance fund, which is funded by a fee on credit unions and is separate from that run for banks by the Federal Deposit Insurance Corp.

Mr. Fryzel said the fund had been used to bail out retail credit unions, but had never before been used to recapitalize one of their wholesale brethren.

To further shore up confidence, the NCUA also issued the blanket guarantee of the $80 billion in uninsured deposits in the network of wholesale credit unions. (Depositors in federally insured retail credit unions already have their accounts guaranteed up to $250,000.)

Mr. Fryzel said some retail credit unions had been withdrawing funds from the corporate system, and the guarantee is designed to keep that trend from accelerating in light of the U.S. Central losses.

NCUA said the initial guarantee would last through February 2009. After that, each wholesale credit union would be included on a voluntary basis for a new guarantee program that would last to Dec. 31, 2010. Mr. Fryzel said he expected all the wholesale credit unions would join that voluntary program.

Although the guarantee covers far more in deposits than the industry's $7 billion insurance fund, Mr. Fryzel said it was backed by the "full faith and credit of the United States government."

To fund the $1 billion bailout of U.S. Central, regulators are increasing the insurance fee levied on all credit unions.

David Dickens, an executive vice president at U.S. Central, said the $1.2 billion write-down came after further deterioration in some of its mortgage-backed securities. He stressed that the bonds continue to pay principal and interest, but that the company believes it will eventually suffer some losses on the securities. He put the current estimate of the losses at $420 million, but said accounting rules require U.S. Central to write down the bonds to their current market value, which he said is artificially depressed.

Major ratings agencies recently downgraded debt of some of the biggest wholesale credit unions, citing risks associated with investment losses. In downgrading U.S. Central in late December, Moody's Investors Service said the company's ratings would have been even lower if not for the "very high prospect" that it would be bailed out by the U.S. government and other wholesale credit unions.

Moody's also noted that U.S. Central's deposits shrank by 22% between October 2007 and October 2008. Banking experts say that's a sign that other credit unions were nervous about U.S. Central's financial health.

For the most part, the troubled wholesale credit unions have insisted that their investments are more conservative than those that have wreaked havoc on Wall Street. Some have retained outside firms to value their holdings.

In hiring Pimco to evaluate those same investments, NCUA's Mr. Fryzel said he wants an independent check. "I'd feel a lot better if the individuals who are giving those numbers are working directly for me," he said. He said the valuations would "give us a pretty good idea of what other actions the board needs to take."

Write to Mark Maremont at [e-mail]


New Bank Bailout Could Cost $2 Trillion
By DEBORAH SOLOMON, DAVID ENRICH and JON HILSENRATH

WASHINGTON -- Government officials seeking to revamp the U.S. financial bailout have discussed spending another $1 trillion to $2 trillion to help restore banks to health, according to people familiar with the matter.

President Barack Obama's new administration is wrestling with how to stem the continuing loss of confidence in the financial system, as it divides up the remaining $350 billion from the $700 billion Troubled Asset Relief Program launched last fall. The potential size of rescue efforts being discussed suggests the administration may need to ask Congress for more funds. Some of the remaining $350 billion of TARP funds has already been earmarked for other efforts, including aid to auto makers and to homeowners facing foreclosure.

TARP Participants

See how TARP funds break down by state, plus review details on participating institutions. Chart link below.
http://online.wsj.com/public/resources/documents/st_BANKMONEY_20081...

The administration, which could announce its plans within days, hasn't yet made a determination on the final shape of its new proposal, and the exact details could change. Among the issues officials are wrestling with: How to fix damaged financial institutions without ending up owning them.

The aim is to encourage banks to begin lending again and investors to put private capital back into financial institutions. The administration is expected to take a series of steps, including relieving banks of bad loans and distressed securities. The so-called "bad bank" that would buy these assets could be seeded with $100 billion to $200 billion from the TARP funds, with the rest of the money -- as much as $1 trillion to $2 trillion -- raised by selling government-backed debt or borrowing from the Federal Reserve.

The administration is also seeking more effective ways to pump money into banks, and is considering buying common shares in the banks. Government purchases so far have been of preferred shares, in an effort to both protect taxpayers and avoid diluting existing shareholders' stakes.

A Treasury spokeswoman said that "while lots of options are on the table, there are no final decisions" on what she described as a "comprehensive plan." She added: "The president has made it clear that he'll do whatever it takes to stabilize our financial system so that we can get credit flowing again to families and businesses."

Treasury Secretary Timothy Geithner said Wednesday that he wants to avoid nationalizing banks if possible. "We'd like to do our best to preserve that system," Mr. Geithner said. But given the weakened state of the banking industry, with bank share prices low and their capital needs high, economists say the government probably can't avoid owning at least some banks for a temporary period.

Stock-market investors have grown confident that the bailout plan will help the banks without wiping out their investments. Just over a week ago, investors dumped bank stocks, sending shares of some of the most vulnerable down to their lowest levels of the financial crisis. But as fears faded that the banks would be nationalized, financial stocks have rallied, and soared nearly 13% on Wednesday.

In one of the steps under discussion, the government may shift how it injects money into banks, choosing to buy common shares. Bolstering banks' common equity is important because when a bank takes a loss, it has to subtract that amount from the value of its common equity. As losses mount, investors increasingly believe banks need to find ways to bolster this first line of defense on their balance sheets.

But buying common shares raises the likelihood that weaker banks will become largely government-owned. Bank share prices are so low that any sizable government investment in a bank would give the U.S. effective control of it.

The best approach is to have banks "under pretty heavy government control as briefly as possible -- basically long enough to take off the bad assets and recapitalize -- and sell the back to full private control as quickly as possible," said Adam Posen, deputy director of the Peterson Institute for International Economics in Washington.

Another way being considered for the government to inject money into banks is the purchase of convertible bonds -- in which the government would be paid interest now but have the option to get common equity later. That would give banks a chance to pay back the bonds as they recover, and avoid government control. Some critics of this approach say it would do little to solve the banks' current shortage of common equity.

The government is also likely to create a "bad bank" that would buy distressed assets from firms, helping them to avoid more damaging write-offs. The tricky question is figuring out how much the government should pay for these assets. That issue helped scuttle the Bush administration's plan to buy distressed assets. If the U.S. pays too high a price for the assets, it would essentially be shortchanging taxpayers. But if it pays too little, banks would have to take further losses.

Another option under discussion is insuring some of the assets against further losses. That is the route the U.S. has taken in its rescues of Citigroup Inc. and Bank of America Corp. Insuring the assets would limit the amount the banks could lose but wouldn't remove the securities and loans from their books. The government would cover any losses in the assets' value beyond agreed-upon levels.

Charles Calomiris, the Henry Kaufman Professor of Financial Institutions at Columbia University, said that approach is preferable since it leaves the assets in private hands while giving investors confidence to put money into the institution.

"You have to eliminate prospective stockholders' concern that there's a bottomless hole at the banks," Mr. Calomiris said. "Getting them off the books solves that problem, but insuring against the downside would have a huge positive effect and might end up costing nothing."

Write to Deborah Solomon at [e-mail], David Enrich at [e-mail] and Jon Hilsenrath at [e-mail]

Business to Get Share of Relief
By JOHN D. MCKINNON and MARTIN VAUGHAN

WASHINGTON -- The economic-stimulus bill winding its way through Congress would give tax breaks to a range of industries hit hard by the country's economic problems, from banking to automobiles, and aims to help the struggling construction sector by facilitating borrowing by state and local governments.

Clean-energy companies would also benefit from the stimulus package designed to boost the country's ailing economy, reflecting the priorities of President Barack Obama and Democratic congressional leaders.

Yet the grab bag of tax breaks does "not provide a particularly large economic benefit," economist Mark Zandi said recently of the House bill.

On Wednesday, the House approved its version of the stimulus package, estimated to cost $819 billion. The Senate is set to vote soon on its version, which carries a price tag nearing $900 billion. Mr. Obama and Democratic leaders hope to pass a unified bill by mid-February.

Struggling businesses are lining up to win a share of the tax cuts outlined in the package. The highlight for many businesses is a set of provisions that would allow companies to get cash refunds from the federal government to offset current losses, as well as for tax credits they can't use because they aren't making enough money.

The tax code already allows companies to apply current losses to reduce their tax on future profits. The change would allow companies to use those current losses to offset tax on past profits, and file for a refund. The change would allow refunds on current losses going back as much as five years.

Companies would also be able to get cash for tax credits they have accumulated but haven't been able to use. These include research credits, clean-energy-related credits and others. U.S. auto companies have been among the leading advocates of expanded use of such credits, and won a limited provision in a 2008 measure to prop up the housing market.

The House and Senate bills contain an array of provisions to help local governments borrow more money, at a time when demand is low for some government-issued bonds. A main aim of the provisions is to speed up construction projects by making financing more easily available, analysts said. A "Build America Bonds" program, for example, would let local governments apply for federal subsidies if they have trouble raising money through bond issuances.

Another provision in the Senate bill would expand use of government-issued bonds for local school construction.

The U.S. Chamber of Commerce and a range of companies have pushed for easing federal taxes on companies when they buy back their own debt at discounted rates. Among those seeking such a change are private-equity firms, home builders, casino operators and telecommunications firms.

Both the House and Senate versions contain many similar tax breaks, such as for depreciation, but whether billions of dollars in other such provisions end up in the final stimulus package will depend on how the two chambers reconcile their respective versions of the bill.

Write to John D. McKinnon at [e-mail] and Martin Vaughan at [e-mail]