It was no small irony that moments after voting to bar corporate credit unions from investing in risky CDOs, the National Credit Union Administration (NCUA) Board gave its approval to a plan to shed as much as $50 billion in toxic MBS held by the corporate system by repackaging them for sale to the public as CDOs.

Under the so-called 'legacy assets' plan, NCUA will take the cash flows on these troubled bonds and aggregate them into new bonds. These CDOs (NCUA prefers to call them NCUA Guaranteed Notes (stock market ticker: NGN)) however, will carry the imprimatur of an NCUA guarantee. That is, they will be backed by the full faith and credit of the federal government.

The government guarantee will make the bonds permissible investments for credit unions, according to NCUA.

The irony is private-label CDOs were singled out as one of the main factors for the failure of WesCorp FCU, which lost almost its entire investment on some $620 million of CDOs, prompting the new NCUA ban on the investments.

Private label CDOs also were behind the spectacular failure of Eastern Financial Florida CU in 2009, the biggest failure ever of a natural person credit union. CDOs have become the scourge of Wall Street, where they have caused billions of dollars of losses as investment banks used them to park and repackage failing mortgage investments.

"We are securitizing the cash flows with an NCUA wrap," said NCUA chairman Debbie Matz, avoiding the term CDO. This way, she explained, only the actual losses, the credit losses, on the bonds will be realized. This will provide credit union members of the failed corporates an opportunity to recapture any funds on the bonds if the losses turn out to be less than projected. However, NCUA conceded that is unlikely.

"The credit union community has long hoped to see a coordinated, market-based, least-cost solution to the corporate crisis, and we have delivered that today," said Matz.

The vast majority of the NGNs will be comprised of cash flows accumulated from the bonds of the two corporate giants taken over by NCUA in March 2009, WesCorp and U.S. Central FCU, with the remainder coming from the portfolios of three corporate failures taken over by NCUA on Friday: Members United Corporate FCU, Southwest Corporate FCU and Constitution Corporate FCU.

What that means is that ongoing principal and interest payments on the bonds will be passed on to investors in the NCUA guaranteed notes. NCUA contemplates a securitization, also known on Wall Street as a re-securitization, of as much as $35 billion of assets, most of it mortgage-backed bonds of some type (commercial, residential, etc.). The notes will have maturities of 10 years or less.

The massive offering, the biggest ever among credit unions, will be managed by Barclays Capital.

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