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.

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.’’

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.

New subpart C of Part 708a establishes procedural and substantive requirements for converting a credit union to a bank through merger.

The new requirements apply to direct mergers as well as transactions where the credit union first converts to a mutual savings bank (MSB) and then merges with another bank without operating as a stand-alone MSB.

Finally, the proposed amendments to Parts 708a and 708b revise existing rules to enhance the secrecy and integrity of the voting process in MSB and insurance conversions.

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: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:Basically this means if they don’t/can’t pay, they are. How big is this issue? Consider the following:What does CAMEL 4-5 mean? Answer: Dreck.What does CAMEL 3 mean?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; “The answer to that (I think) lies in the minutes of a board meeting by the National Credit Union Administration. The meeting took place on December 16th. The exact same day that Congress was voting to approve S.4036. (If you believe in coincidences, stop reading) The language:They change the rules so that the commercial banks can play in this space? This change to the charter is also interesting:This suggests that a CU can become a MSB in the morning, and in the afternoon it can merge or sell itself to a commercial bank. What do they need to get all of this done? SECRECY, of course. From the NCUA 12/16 minutes:Given that this can now be accomplished with the desired level of secrecy I would anticipate that the process will commence sometime in 2011. I anticipate that some of the big banks will step in and buy up the shells of a number of the corporate CUs.Should this happen many will call it a success. The alternative was a federal bailout that would have cost taxpayer dollars. This outcome is the objective of S.4036. But here is my rub; the CUs provide important banking services to millions of people. Were it not for the legacy assets of 2006-08 the CU’s would be muddling along just fine today. They provide an important alternative to the big commercial banks. But now some key players who provide important services to the smaller CUs are going to get gobbled up by fat cat bankers from Wall Street.There is big money to be made in this consolidation. Big players will no doubt be involved. At the end of the day the big banks will make another bundle. The cost, over time, from less competition and higher fees to consumers will be more than the $30b that is being avoided.This is another of those examples where if you are big and have muscle you can bend the outcome and come out ahead. Guess who brought you S.4036?of course (surprised? I hope not). These two guys have been the best friends the big banks ever had.