Some wonder about regulatory process with $2.3+ billion still in loss reserves
WASHINGTON, DC (July 17, 2013) -- NCUA’s actions to liquidate U.S. Central Federal Credit Union in 2010 reverberated throughout the credit union industry. It resulted in putting the wholesale corporate out of business; exacerbating the financial condition of the corporate network; demolishing the industry’s proprietary liquidity safety net; and destroying capabilities, careers and the spirit of cooperative ownership. A new analysis on the status of U.S. Central’s investments taken for NGN collateral related to its liquidation should have many scratching their heads and asking questions; namely, what lessons do these actions offer for NCUA leaders and the industry going forward?
The analysis follows in real time the actual losses on U.S. Central’s legacy assets, and follows a similar review of Constitution Corporate Credit Union released last week. Both the analysis and interactive spreadsheets are posted to www.Coops4Change.org.
“This interim data should encourage participants at every level of the credit union system to learn from these events and find solutions for the future,” said Chip Filson, Founder of Co-Ops for Change and Chairman of Callahan & Associates.
Key among the analysis’ findings: U.S. Central’s losses are far less than projected. Of the total $3.5 billion of U.S. Central securities classified as other-than-temporary-impairment (OTTI) future loss estimates, more than $2.3 billion remains unused nearly three years later. Further, the corporate’s June 2010 balance sheet showed positive capital of $310 million – even after these losses were expensed. The NCUA made its projected loss estimates during the depths of the financial crisis, forcing U.S. Central’s members to extinguish $300 million of paid-in-capital and nearly $1.7 billion in member capital accounts. Today, these OTTI losses have yet to be realized.
It’s of interest to note that when NCUA placed U.S. Central in liquidation in October 2010, it acknowledged the possibility of erroneous lost estimates by issuing “claim certificates” to the corporate’s owners for member-contributed capital.
The analysis also raises issues tied to the Agency’s use of its own projected numbers. Assuming the OTTI numbers were within range, and knowing securities continue to pay principal and interest in full until default occurs, NCUA’s decision to book the losses and resell the investments to others outside the industry caused loss of cash flow and income possibilities for credit unions and the surviving corporates. NCUA’s actions forced a guaranteed loss and eliminated the upside potential.
Ironically, the Agency also sought out banking solutions and advice to implement its NCUA Guaranteed Notes (NGN) program. And the firm it trusted to implement NGN was Barclay’s Capital – the same firm NCUA sued for misleading U.S. Central when the corporate was sold mortgage-backed securities in 2006 and 2007. NCUA lost that case this past week, although an appeal is pending.
“The findings in this analysis should magnify the importance and critical need of having NCUA leadership that places cooperative principals and capabilities at the foundation of its decisions,” said Filson. “This is an opportunity for all to learn from the past and strengthen our industry as we plan for our future.”
About Co-Ops for Change
Co-Ops for Change is a grassroots movement to increase awareness both within the credit union community and among elected policymakers that our regulatory leadership should understand and support the seven cooperative principles. The regulatory process should consider credit unions’ cooperative character, as well as the shared economic value they create for people and communities. Credit union members, volunteers, professionals and industry supporters can learn more about the campaign at www.Coops4Change.org.