I trust you had a safe and enjoyably Memorial Day weekend with family and friends. Welcome to Summer 2022!
I wanted to use today’s platform to talk about a little credit union history. Just over a decade ago, on April 29, 2011, Midwest Corporate Federal Credit Union, which at one time was operated through the league and was located in our headquarters here in Bismarck, officially closed its doors as the liquidation process, final stock settlements and National Credit Union Shared Insurance Fund (NCUSIF) capitalization deposits were refunded to the North Dakota credit union owners. This ended a chapter that had lasted 69 years, as Midwest Corporate FCU (first known as North Dakota Central Union) was formed in 1942.
Let’s rewind a little further. Originally, most states operated their own corporate credit unions, which had strong ties to the credit union leagues operating in each state. In fact, both North Dakota and South Dakota leagues owned and operated a corporate office.
These corporates, or central credit unions as they also became known, provided services to natural person (consumer) credit unions. In the credit union industry, we often referred to them as "the credit union’s credit union." These central (corporate) credit unions provided credit, long term investment options, as well as financial settlement services such as electronic funds clearing transactions and payments to credit unions in the state.
Prior to the financial collapse in 2008 – 2009, the largest corporate credit union in the United States was U.S. Central Federal Credit Union (U.S. Central), which only provided services to other corporate credit unions, in effect acting as the "corporate credit union's credit union." These third-tier corporates provided liquidity (credit) needs to regional and state corporate credit unions. U.S. Central also provided other services, such as payment systems, electronic funds transfer services and item processing, as well as economic services and forecasts specific to the credit union industry. The system was very similar to that of a central bank that serves commercial banks.
Fast forward to early 2009, when credit union leaders and volunteers got a quick lesson on things like OTTI and TARP. Other Than Temporary Impairment (OTTI) occurs when market value of an investment is less than its book value or carrying value, or impairer, however, these “impairments” can be temporary. The Troubled Asset Relief Program (TARP) was the response by the U.S. Government to purchase toxic assets and equity from financial institutions to strengthen its financial sector to address the subprime mortgage crisis. In response to investment losses incurred at U.S. Central, the NCUA implemented the Corporate Stabilization Program and placed U.S. Central into conservatorship. The remaining corporate credit unions showed a level of portfolio risk that NCUA considered “manageable from the standpoint of capital adequacy.”
Fast forward again as the NCUA set out to recover those assets lost through OTTI and TARP. The NCUA also accessed federally insured natural person credit unions an additional insurance premium to the NCUSIF in 2009 to make up for the investment losses at U.S. Central, which were estimated to be close to $6 billion. The NCUA then issued a $1 billion capital note to U.S. Central. The investment losses at U.S. Central exceeded their Member Contributed Capital, which led to the extinguishment of nearly all the contributed capital. The corporate restructuring plan also called for corporates to recapitalize, merge, or liquidate. Basically, what you had was a government forced liquidation. At that time, there were 26 corporate credit unions in the country and the stabilization plan also included strategy to restructure the corporate system. Today there are only 11 corporate credit unions.
Eventually, Credit Suisse was forced to pay $400 million to resolve claims that it sold faulty mortgage-backed securities to U.S. Central Federal Credit Union.
Fast forward to October 2010 when the NCUA Board issued Midwest Corporate FCU a Claim Receipt for Member Contributed Capital representing the value of “paid in capital” (PIC) and Membership Capital Accounts (MCA) balances as of November 20, 2008. For North Dakota credit unions, that estimated at $10.5 million MCA and $3.3 million in PIC.
The Claim Receipt also states that it enables Midwest Corporate FCU owners “to share pro rata in the net proceeds, if any, to the extent of the PIC and MCA Balances as of the record date,” and, “no further action is required on their part to file or activate a liquidation claim.”
Now, we can fast forward to April 2021 when the NCUA board authorized the 100 percent reimbursement of member capital accounts and 3 percent of paid in capital. Yet, North Dakota credit unions received letters stating that since Midwest Corporate FCU dissolved in 2011 and the legal existence of the charter was officially canceled three years later, that Midwest Corporate was ineligible to receive reimbursement.
Yet, the MCA and PIC accounts were investments owned by North Dakota credit unions, entities that still exist and are currently providing financial services to their members.
So, here is a simple but necessary question: What happens to these recovered assets after a liquidation? Where are the North Dakota owned assets going? Are they being distributed to other surviving corporates in different parts of the country? Or, is the NCUA keeping them?
These are fair and important questions to ask. My simplistic (non-legal) opinion believes these recovered assets should be returned to their rightful owners. We know what these investments were, and we know who had member capital accounts. We also know what our North Dakota credit unions had to write down due to the U.S. Central failure.
Clearly, North Dakota credit unions were not willing to take additional risks and recapitalize Midwest Corporate or join or merge with another corporate where they would have had to ante up. Plus, North Dakota credit unions had access to the Bank of North Dakota which provided many of the services of a corporate credit union without having to have a member capital account.
The bottom line is that the financial crisis and fallout had a very negative impact on our credit unions and the financial service landscape across the country. Here in North Dakota, we have lost a total of 16 credit unions through mergers since 2009. Clearly the lost revenue, shared insurance premium assessments and ensuing regulations had a lot to do with the consolidations.
Does NCUA, the liquidating agent of U.S. Central, have the authority to just “take” Midwest Corporate’s share of assets and distribute them to whomever they feel like? What is the legal basis for this authority?
The NCUA needs to do the right thing and return these recovered member capital account assets to the rightful owners.
Have a great week!
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