“I'm no accountant, but FASB is pretty unforgiving,” Umholtz said. “I think the NCUA Board is stuck with the losses one way or the other, and premium assessments represent the only way to deal with legacy assets.”

The majority of corporate legacy assets, which the NCUA has defined as any investment that will not be permitted under proposed changes to Part 704, belong to the $17 billion Western Corporate FCU and the $30 billion U.S. Central FCU. Both institutions were seized by the NCUA in March 2009.

According to June 30 financial statements, WesCorp's nonagency securities have a fair market value of approximately $10 billion, and U.S. Central reported a legacy assets fair value of a little more than $17 billion. The combined amortized costs for the two credit unions' investments total $35 billion.

NCUA Chairman Debbie Matz and other NCUA officials have repeatedly quoted a $50 billion legacy assets price tag, which means the plan could include up to $15 billion worth of investments owned by corporates still under regular supervision.

The $9 billion Southwest Corporate FCU reported a $3.2 billion amortized cost on its portfolio of nonagency securities available-for-sale as of June 30. The $8 billion Members United Corporate FCU reported a $4.3 amortized cost as of June 30 for its investments that could fall under the legacy assets umbrella.

According to its May 5310 report, the $1.3 billion Constitution State Corporate CU, which is currently in a negative-equity status with a negative 1.89% capital ratio, reported $366 million worth of private-label MBS, asset-backed securities and commercial MBS on its books.

The $3 billion Southeast Corporate FCU reported $346 million in privately issued structured securities in its June 2010 portfolio snapshot posted on the corporate's website (www.secorp.org). The $3 billion Central Corporate Credit Union reported a $60 million amortized cost of its nonagency securities.

Callahan & Associates President/CEO Chip Filson said he has no idea if NCUA will seize additional corporates or force mergers and said he doesn't know what legal or accounting roadblocks might be preventing the NCUA from executing its legacy assets plan without taking such drastic measures.

Filson said he thinks the plan, when released, will merely be part of the NCUA's corporate stabilization plan that has been in place since January 2009 when the regulator ensured 100% of corporate deposits. So far, that plan is working, he said. Overall, the corporate system overall is stable, and Filson said he doesn't know why the NCUA would risk that stability with dramatic seizures or forced mergers.

“The uncertainty isn't about the legacy assets plan itself, it's about NCUA's intentions,” Filson said. “And, NCUA can resolve that by being more open.”

Until the NCUA provides more transparency regarding its plans for corporates, discussions regarding what path the regulator may take are purely hypothetical, he said.

Corporates still rely upon yields from performing legacy assets to produce their bottom line, he said. If the NCUA were to remove those assets and provide corporates with cash in return, they would be unable to invest the funds and earn a comparable spread.

“That could become a major problem for every corporate affected,” he said.

Umholtz said the NCUA Board's original corporate stabilization actions were largely designed to buy time to avoid a catastrophic loss scenario and the demise of the credit union system. Because the economy has not yet recovered, the agency might think that waiting will not help the situation and may be considering more aggressive action.

Although it seems like a radical move, additional NCUA corporate conservatorships might be a blessing in disguise, he said, because they would inject some certainty into a largely uncertain situation. However, Umholtz said he instead envisions a plan that would produce an environment for corporates with the best chances of survival to rise “like a Phoenix from the ashes.” But, he warned the mythical bird may crash and burn instead of fly, and “could resemble an Albatross” instead.

NAFCU Senior Counsel and Director of Regulatory Affairs Carrie Hunt declined to speculate whether or not NCUA will seize additional corporates or which accounting or legal roadblocks may be preventing a successful legacy assets plan.

Hypothetically, the NCUA could seize all corporates if it needed to do so in order to stabilize the system, she said.

“Certainly, our members want as much transparency as possible and NAFCU does as well,” she said. “We think we need to weigh in on whether NCUA's solution is best for credit union system as a whole.”

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