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Denied recoveries unconstitutional.

One of the core principles in the U.S. Constitution is the notion that government should not take a citizen's property without just compensation. Our country upholds the rights of people to own property without unnecessary government intrusion. If government were to unlawfully seize one's property, it would be an offense to this basic democratic philosophy. This is precisely what I think could happen if the NCUA proceeds with its public position that credit unions' rights to recoveries from written-off corporate investments will be extinguished.

Corporate credit unions are member-owned cooperatives. As such, the members have an inherent property interest in the net assets of the corporates. Investments held by corporates ultimately belong to the members of the corporate.

Some investments held by U.S. Central, and many other corporate credit unions, saw massive unrealized losses. In some instances, these unrealized losses exceeded capital. As a result, the capital that corporate credit unions held in U.S. Central, and the capital natural person credit unions invested in WesCorp, were declared impaired. When the extent of impairment became other than temporary, the losses were recognized on credit unions' financial statements.

Other-than-temporary impairment is an accounting recognition in which the economic value of an instrument is no longer recognized. OTT impairment means the holder of the instrument has no expectation of a return on investment. However, such accounting recognition does not mean abandonment. Abandonment is an instance in which an owner relinquishes all interest in the property.

To my way of thinking, OTT impairment is likened to a natural person credit union charging off a member's loan. If the credit union believes that receiving repayment of the loan is remote, the board may mark down its assets. In many instances, the credit union does not abandon its property right to a creditor's claim. The mark down of capital in U.S. Central and WesCorp, based on OTT impairment of investments, was based on the expectation that the repayment of certain investments was remote. This accounting treatment was a reaction to forecasted performance. The thing about forecasts is that predictions are sometimes wrong. It may well be that the predicted losses in these investments will be less than forecasted. If this is the case, it would be reasonable for member credit unions to someday receive a recovery from the impairment write-offs.

Credit union boards reacted to the write-downs at their corporates by recording an expense to their operations. This was an accounting exercise. Like charged-off loans, the boards may not have necessarily abandoned their property rights. Without an abandonment act, credit unions have presumably retained their property right to the capital and underlying claims on the assets of the corporates.

Having written off the investments in corporate capital based on estimates, many credit unions undoubtedly held out hope that a recovery was still possible. Reportedly, the NCUA has stated that credit unions should not expect a recovery, even if the actual losses are less than forecasted. In other words, the NCUA will extinguish credit unions' property rights.

Maurice R. Smith President Local Government Federal Credit Union Raleigh, N.C.
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Title Annotation:LETTERS
Author:Smith, Maurice R.
Publication:Credit Union Times
Date:Feb 24, 2010
Previous Article:Message to credit union leaders: the emperor has no clothes.
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