Paul Gentile, President/CEO of the New Jersey Credit Union League
Despite the language coming out of NCUA and the ho-hum comments from some industry leaders in the trade press, the recently released Government Accountability Office report on the NCUA’s handling of troubled corporate and natural person credit unions is both historic and groundbreaking.
This report goes “on record” with the loftiest of audiences (Congress, other financial regulators, consumer watchdogs, etc.) with an historically accurate account of what led to the conservatorship of 5 large corporate credit unions that together represented 75% of the corporate credit union assets in the system which triggered an unprecedented financial burden for natural person credit unions. Beyond that it details the steps NCUA took to mitigate the failures, which came on the backs of natural person credit unions that are paying billions for the mitigation. NCUA has testified on the corporate disruption and its own OIG has addressed it, but this is the government watchdog’s account. It is a different level of acknowledgement of the regulator’s handling of the situation. Since credit unions are still paying the tab, the report isn’t just a history lesson, it is a living, breathing document for all the future payments credit unions will make.
We are all so used to this story that it sometimes gets lost that the No. 1 reason credit unions created corporates was for liquidity and payment services. NCUA, which has its own Office of Corporate Credit Unions dedicated to the safety and soundness of corporate credit unions and which had examiners on-site at the very large corporates, has always regulated corporates with the two areas of liquidity and payments as job No. 1.
The GAO report lays out NCUA’s shortcomings as well as corporate credit union management that led to the disruption. Consider the following excerpt:
- “….U.S. Central and the failed corporates overconcentrated their investments in private-label, mortgage-backed securities, investing substantially more in private-label MBS than corporate credit unions that did not fail.
- In particular, Wescorp and U.S. Central had invested 74% and 49%, respectively, of their portfolio in private-label MBS. In contrast, 10 of the 23 remaining corporates had also invested in private-label MBS but at lower levels—for example, from 1 to 19%.”
The concentration was further aggravated by corporates’ high level of investment in U.S. Central. The GAO noted that in 2007 Members United had more than 40% of assets in U.S. Central and Southwest and Constitution each had 30%.
The GAO also picked up on something that many said early on in the disruption—the corporates became too competitive. It cites:
- “U.S. central shifted towards an aggressive growth strategy to maintain and increase its market share of corporates. This strategy led its management to increase its holdings of high-yielding investments, including private-label MBLs. ….The other failed corporates implemented similar business strategies.”
As corporate leaders often said, the investments they held were all permissible under NCUA regs and were very highly rated. The GAO makes clear that NCUA was simply too slow to react to the concentration risks:
- “NCUA examiners had observed the substantial concentration of private-label MBS for U.S. Central and three of the four other corporates that failed prior to 2008, but did not take timely action to address these concentrations…..NCUA examiners observed Wescorp’s growing concentration in private-label MBS beginning in 2003; but they did not limit or take action to address this issue until late 2008.”
The GAO goes on to cite that examiners noted the “excessive” exposure some corporates had to MBS, but did not put those concerns in a DOR or any other actionable format. This is very different from what we hear from natural person CUs where now more than ever NCUA is clamping down on risk in a lending environment where CUs have to get involved in new areas. Credit unions are also seeing an unprecedented number of items in DORs. But when it came to the institutions that held a massive 75% of corporate assets, the examiner action was slow. Credit unions should be thoroughly disappointed in how NCUA handled this, especially since they are paying for it.
Let’s move to the mitigation strategy. The GAO recounts the new corporate regulation that limits concentration risk, puts new capital earnings standards in place, and a host of other items. (It’s worth noting that the GAO on a few occasions cited the ineffectiveness of simply regulating to capital. It noted that capital was overly focused on by NCUA.) The report also examines, or tries to, how NCUA passed on the costs to credit unions. The problem is the GAO cites numerous times that it was unable to verify NCUA’s estimated losses of both corporate and CU failures. Even the GAO couldn’t get data out of NCUA. This is something the industry has been asking of NCUA for a very long time—more transparency. NCUA should note that part and parcel with transparency is timeliness. You can’t have transparency without timeliness, where the information is still relevant. There too NCUA has failed. Or as the GAO put it:
- “We requested documentation adequate to support NCUA’s estimate of losses from corporate failures, but NCUA was not able to provide….it is not possible to determine the full extent of losses resulting from corporate credit union failures. Moreover, without well-documented cost information, NCUA faces questions about its ability to effectively estimate the total costs of the failures and determine whether the credit unions will be able to pay for these losses.”
The GAO even says that without the data it is uncertain if “risks to the taxpayers remain.” It notes that it could not determine whether NCUA could meet its obligation to repay Treasury. The last thing any credit union wants to see in a GAO report is a concern about risk to taxpayers.
NCUA has quickly come out and says it agrees with the GAO’s and is moving quickly to address the GAO’s two overall points:
- NCUA should provide the agency’s Inspector General the necessary documentation to verify loss estimates for the Corporate Stabilization Fund; and
- NCUA should consider additional triggers for PCA that would require early and forceful regulatory action and offer proposals to Congress on how to modify PCA, as appropriate.
NCUA said in a press release that the GAO’s call for more information on corporate losses is addressed by the “clean” audit for 2010 of the corporate stabilization fund. The audit raises more questions than it answers in key areas. It points out management weaknesses at NCUA with the corporate losses and documents its delays in NCUA’s valuation process of the conserved corporates and NCUA’s problems with its accounting and reporting. It also lacks details and analysis of the portfolios.
Not to defend the conserved corporates, but there were positive signs of portfolio performance before and after NCUA stepped in. Did NCUA get the correct value for the NGN notes it issued? That was their role as conservator.
The reason all of this old news and the historic account that the GAO so thoroughly documented is relevant in today’s world is credit unions are still paying. Think back to last year when we hoped NCUA would lower assessments given the tough economy and the struggles CUs were facing. NCUA cited the need for liquidity for medium term notes coming due. The GAO report’s finding on that was telling as well:
- “According to NCUA officials, the primary driver for the $2 billion Stabilization Fund assessment in 2011 was interest and principal on maturing medium-term notes that the corporates issued and that were to be repaid by the Stabilization Fund. NCUA officials told us that if they had found that the credit unions could not afford the Stabilization Fund assessment, they would have considered other options, such as issuing additional NCUA-guaranteed notes or unsecured debt.”
NCUA determined that credit unions “could afford” the 25 BPs in assessment? At the same time it claims there were more “troubled” CUs in its growing category for that, which now includes CAMEL 3s. Once again NCUA did not go the extra mile to try and find ways to mitigate the costs of the stabilization fund during one of the worst economic environments in credit union history. If it turns out that the portfolios are indeed performing better, NCUA can stop assessments, but can’t go back in time and help those CUs that have been severely hampered by the corporate tab.
We urge NCUA to become even more transparent and to understand that “timeliness” is transparency. Getting data to CUs that has historical gaps or is too little too late before they do things like issue NGN notes flies in the spirit of transparency. Credit unions are paying for all of this, not NCUA. It should have a higher regard for those that are paying the freight for its obvious oversights in the corporate disruption. Instead we’re seeing an agency that is turning its past mistake against natural person CUs with a litany of new regs that are continuing to bog down credit unions.
Speaking of transparency, Alloya Corporate continues to do a great job of communicating its financial performance to its members. It has issued another update today, and there are some promising signs looking at November, which was its first full month as a newly chartered corporate. One notable item is that its retained earnings ratio of 1.2% puts it way ahead of target to meet NCUA’s next earnings milestone for corporates.
Paul Gentile is the president/CEO of the New Jersey Credit Union League, the state trade association for New Jersey’s credit unions. New Jersey is home to 215 credit unions serving 1.2 million credit union members and with a combined $10 billion in assets. Gentile has helped re-energize the New Jersey Credit Union League by launching new branding efforts, programs, and political action. Prior to his role with NJCUL, Gentile served as the editor and publisher of Credit Union Times, a national weekly publication covering the credit union movement. He is a well-know figure in the credit union industry and has written hundreds of stories on all aspects of the industry.