In Condemning WesCorp, Is NCUA also Indicting Itself?

NCUA’s description of the corporate problem dramatically changed tone after the initial January announcement. It has also gone back to rewrite the past. However, there is one solution that could unite the industry.


NCUA’s description of the corporate problem dramatically changed tone after the initial January announcement. In public statements following the March conservatorships, NCUA said it needed to conserve the two corporates to get “honest numbers.” In a later Reuters news story, the “senior managers” of Wescorp were accused of “preparing to report a credit loss significantly below what an external analysis had revealed.” Chairman Fryzel is quoted: “Some information was not as accurate as it could have been.”

Over the past several weeks, NCUA has published more high level summaries of its analysis. It has also gone back to rewrite the past. In April, the Agency reversed WesCorp’s March 2008 decision by reclassifying its $9 billion held-to-maturity portfolio back to available-for-sale effective December 31, 2008. This retroactive reclassification requires that an OTTI estimate be made in the year-end audit. However, NCUA goes on to state in the very same footnote, “it is our intent to hold these securities to maturity.”

In the same March 2009 financial summary, WesCorp is reporting a “credit loss” of $5.6 billion. Additional unrealized losses of $6.0 billion were also recorded “as an unrealized loss in other comprehensive income.” Of the $16 billion in bonds for which the $6.0 billion unrealized loss is recorded, the Agency also reports that $10.5 billion were rated AAA, $2.8 billion AA, and only $2.2 billion less than single A.

Managing the Numbers

At its highest level of financial summary, the Agency is now saying that WesCorp’s books were off by approximately $11 billion as of March 2009. This difference is magnified by backdating the reclassification of the held-to-maturity portfolio to December. For if the reclassification were done in March 2009 then the OTTI for market dislocation on these securities would not have to be booked due to the FASB change in OTTI accounting practice which took effect as of the first quarter 2009.

To arrive at these results the Agency first used its own internal models as of January, then hired PIMCO to reassess resulting in the conservatorship in March, and now is using Clayton Fixed Income Services to again justify its estimates.

No one knows the losses that could occur if the securities were held to maturity. These estimates using multiple models are based on assumptions that can vary literally week to week based on updated economic and financial data. However, even though these are estimates, subject to monthly change, credit unions are being asked to write off these future losses now, not as they are incurred.

One example of how fast estimates can change is the Agency’s original instruction in January that credit unions expense the capital infusion to US Central (an estimated 13 basis points of net worth). Two months later, the Agency’s estimates given to both the Corporates in a meeting with US Central and in their May 1, 2009 Corporate update, is that the capital infusion at US Central is not impaired. But that change has not been pointed out in any of their expensing requirements. That would just highlight the variability of all loss estimates.

Through its actions, NCUA is demonstrating the same behavior that it was ascribing to WesCorp—picking numbers to fit a preferred outcome. None of the underlying securities valuations have been released so that PIMCO could be compared with Clayton let alone the Agency’s own models—which would likely show how securities do fluctuate, both up and down, in value. With the vast majority of WesCorp’s mortgage backed $16 billion in AA and AAA rated securities, it is a reasonable assumption that as markets recover, value will return.

The System’s Dilemma

The credit union system is a single model. All capital is the members’, whether held by a corporate, the CLF, the NCUSIF, a CUSO or the FHLB’s. Because of that common interest, credit unions do not face the challenge of balancing the roles of private shareholders, depositors and the federal government.

An example of this common interest occurred in March when NCUA demonstrated that it indeed has the ability to use the CLF to lend to the Corporates without using the cumbersome marked-up process of SIP. In March the Agency “prepositioned” $10 billion in the NCUSIF for use with two large credit unions. When WesCorp published its March financials, it disclosed on its balance sheet an “NCUA CLF Loan” of $5.0 billion at .35% interest. By comparison, the rate on the SIP borrowing initiated in December was .91%. The Agency can therefore lend to Corporates using the CLF at significantly lower rates than the SIP structure, an option many had been pointing out since late in 2008. It is in everyone’s interest that this be done.

In trying to justify its conservatorship actions, the greatest risk run by the Agency is not the losses on the portfolio, but the loss of confidence in its own role. The Agency had examiners full time in US Central and WesCorp. All Corporates send detailed call reports monthly to NCUA showing their investment holdings and classifications. Most publish even greater detail on their web sites. These reports were sent for every event the Agency now wants to reverse—the March 2008 held to maturity reclassification, the December year-end filings, and every month thereafter.

By suggesting there is an $11 billion “adjustment” required in WesCorp’s balance sheet position, the Agency is opening itself up to one of two possibilities: its own oversight was not competent during this time but that today it is, even with the same leadership in place; or the professional integrity of the auditors, the portfolio managers, and the supervisory structure that reviewed these reports is suspect. Either outcome could create an enormous challenge to the unitary strength of the credit union system.

As one concerned CEO wrote me: “NCUA was privy to internal documents and had full access to all investment practices. The same portfolio evidence that damns WesCorp management will also damn NCUA.”

The Way Forward

Some credit unions just want the corporate problem to be over, so that they can get on with running their business. They, like most, have written off the 1% or more, and will survive. Others are saying never again, vowing to have no interaction with any corporate or proposed new structure. Some think there is a magic solution that will somehow make this all come out right, maybe some TARP or other government funding - forgetting what makes cooperatives different.

The one solution that unites everyone is for NCUA to commit to the least cost outcome by holding the bulk of securities as they are paid down or until there is clear evidence of default. No loss has yet been incurred on these securities. But there have been multiple estimates of what could happen.

The final die is not cast; however if security sales begin, it won’t be the financial losses that cause the crisis to flare up anew. It will be the realization that the members’ interests were not everyone’s true first, and final, concern.





May 11, 2009


  • Chip tells the unvarnished reality. I believe that the investment managers at Wescorp should have been more conservative -- True! HOWEVER, the greatest culpability lies with NCUA, it's lack of transparency and "chicken little" fear & knee-jerk reactions. NCUA's actions have had and will continue to have serious reprecussions for our cooperative credit union industry for years. Perhaps Congressional hearings are necessary to provide full transparency so everyone can clearly learn about each analysis.
    Bonni Bergstrom, CEO of a small $39M CU
  • Maybe its time that the President & Congress focus on NCUA and its policies, practices, etc. Wouldn't be the first time its been accused of being a rouge agency with documentation to support that again because of its practices.
  • Anyone remember Y2K and the criticism NCUA took then and the miraculous overnight turnaround how it changed on a dime thus becoming the leader of the financial regulators after the criticism.
  • NCUA should be more accountable! The agency should conserve or liquidate ongoing problem credit unions rather than selectively allow some to get by with whatever they want. Seems almost like CapCorp all over again.
  • Might we ask what BROKER/DEALER(s) sold this toxic waste to USC & WESCORP? The least we can do as an industry is boycott and discontinue doing business with those responsible for selling this crap to the Corporate FCU's. Publish the names of these BROKERS/DEALERS - so we can hold them up to the shame and ridicule they so richly deserve. I would hate to think I am doing business with these PIMPS of toxic waste...PUBLISH THIS PEDDLERS OF PUKE.
    marianne carpio
  • It is clear the NCUA no longer functions. They are more concerned about proving they were right in the decision to conserve USC and WesCorp than they are about properly managing the problems. There lack of transparency and logic in explaining themselves only proves their incompetence. If any of us ran our financial institutions the same way; being vague and elusive in light of mounting losses, we would be shut down. By its actions the NCUA is proving it no longer has a right to exist and should be absorbed by a superior regulator. It’s almost as if community banks were able to plant people on the NCUA board with the intent to destroy credit unions.

    However we must also look inward to blame as well. Compare our response to how the Banks responded. In late 07 Banks began lobbying congress and their regulators to create and make legal certain mechanisms that would allow receiving support from the government. Granted these were money center banks, but corporates are essentially money center banks to credit unions. The NCUA, Corporates and ourselves took no such similar action. I think our biggest mistake was sitting back and thinking the NCUA would take care of us and make sure we got our piece of the support. First the NCUA Board and senior executives didn’t have the slightest idea what was happening or what the systemic risks were and second we did not take ownership either through CUNA or individually (until too late, or almost too late we’ll see) to state what needed to happen (like the Banks did). Never again will I sit back and assume the NCUA will do the right thing, let alone actually know what to do.

  • As to NCUA being " a rouge agency " ( comment # 10 ) ....well, I guess we all are a little red in the face about the corporates ....
    Jim Blaine
  • Jim Blaine should be appointed to the NCUA board.
  • All the credit unions want from NCUA is full transparency and disclosure, the same thing that all regulators expect and demand.
  • Chip--you are correct that the NCUA is culpable in this too. It's difficult to say who's more at fault, the regulator who let the problem grow to this scale, or the investment managers who didn't understand the risks involved in their purchases. The order of your critique makes me think you believe the NCUA to be the bigger culprit, but let's not forget that WesCorp actually made the terrible investment decisions.

    Again, I think you offer false hope on the subject of credit losses. Yes, it is impossible to know what the final bill will be. But we are required by GAAP to come up with an estimate and book it now. Waiting 10 years for the final loss figure is not an option.

    You also overstate the quality of WesCorp's investments. The 4-10-09 report on distressed securities shows just 47.2% of WesCorp's $23+ billion in securities to be AA or AAA rated. An almost identical amount is below investment grade (BB or lower).

    On borrowing costs, the difference between the 35 and 91 basis points isn't being lost to the ether. Some of the extra CU SIP interest expense is going to NPCU's via the 25 bps of incentive built into the CU SIP program. This income boosts NPCU capital, mitigating some of the loss caused by the corporates. Some of it is the difference between a 1-year funding rate and the shorter-term nature of the more recent CLF loans. As long as the corporates borrow in-network, it doesn't really make a difference whether they fund themselves through overnight CLF loans, one year CU SIP advances or 2-year certificates to members. The size of the pie is the same in all cases and we're just shifting a relatively small amount of interest income and expense between the corporates and the NPCU's.

    However, your conclusion is spot on, and I must commend you for that. If we keep sufficient liquidity in the system, we deprive the conservator of the excuse they need to sell the securities. The least costly option is to hold these investments to maturity or till the dislocation abates, but that requires NPCU's to keep liquidity in the system.
  • Thanks for having the courage and integrity to take the positions you have to keep us informed on these mind-boggling developments. It seems that no one else has the guts to to take a stand (read: tell the truth). If not for you, we'd be totally in the dark, which is precisely where Der Fuhrer wants us to be. How can he (Fryzel) get away with this stuff?
    Larry B. Davis
  • I was shocked to see the NCUA transfer the securites from held to maturity to available for sale while at the same time NCUAwas telling credit unions that the securites would be held to maturity. NCUA is doing a great job of showing how not to run a credit union. Imagine what NCUA examiners would say if a credit union said one thing and did just the opposite!

    The NCUA should take a lesson from the FDIC and make the data and analysis public to support their loss estimates for Wescorp and US Central. The FDIC stress test process has proved that the best regulatory oversight is transparent. Wescorp members should not have to guess whether NCUA's analysis and estimates are right. If Wescorp was still member controlled we could force the Wescorp Board to disclose their analysis.

    The NCUA conservatorship is certain to convince many in Congress that credit unions would be far better regulated by a new regulator (perhaps FDIC).

    If I were examining the NCUA Conservator and the Conservation Board I would be concerned about their stewardship;

    1. We are now five months into 2009 and NCUA has not yet issued audited financial statements.

    2. NCUA has spent $4.5 million dollars on the PIMCO study. NCUA has said that the PIMCO study was not used as a basis for conservatorship and they have already commissioned another study. The members of Wescorp have been denied access to the information. NCUA is wasting member money without any benefit to the members.

    3. NCUA has not held an annual meeting with the members.

    4. NCUA has not given any date for returning the credit union to member control. NCUA is essentially telling the credit union system that there are no competent credit union leaders that can run Wescorp and that NCUA's leadership is more competent to run Wescorp. What does that say about the credit union system? If NCUA's leadership is so much better then how did Wescorp and US Central get into this mess? NCUA was on scene and had full access to more information than members ever received (this begs the question--why are exam reports private. Isn't the best way to hold management and the Board accountable the sharing of examination findings. In the end members pay for everything).

    5. NCUA is redefining the relationship between members and their credit union. The new definition is that members should not be privy to the facts. Just trust us. Transparency is gone.

    6. NCUA is also reminding us that accountability has no place in the credit union system. If the US Central and Wescorp Board and management were so bad that conservatorship was the only answer then lets see some accountability. Who is going to held to account for the mistakes? Where is the due process? What about the rating agencies that rated the securities? Is NCUA going to hold them accountable? And of course who holds NCUA accountable?
    Henry Wirz
  • !
  • On May 6th Sheila Bair, the Chairman of the Federal Deposit Insurance Corporation (FDIC), testified before the U.S. Senate Committee on Banking, Housing and Urban Affairs on Regulating and Resolving Institutions Considered “Too Big To Fail.”

    “In a properly functioning market economy there will be winners and losers, and some firms will become insolvent and should fail. Actions that prevent firms from failing ultimately distort market mechanisms, including the market’s incentive to monitor the actions of similarly situated firms. Unfortunately, the actions taken during the past crisis have reinforced the idea that some financial organizations are too big to fail. The most important challenge now is to find ways to impose greater market discipline on systemically important financial organizations.”

    Bair’s testimony continued, “Reliance solely on the supervision of these institutions is not enough. We also need a ‘fail-safe’ system where if any one large institution fails, the system carries on without breaking down. Financial firms that pose systemic risks should be subject to regulatory and economic incentives that require these institutions to hold larger capital and liquidity buffers to mirror the heightened risk they pose to the financial system. In addition, restrictions on leverage and the imposition of risk-based premiums on institutions and their activities would act as disincentives to growth and complexity that raise systemic concerns.”

    Real world events demonstrated that corporate credit unions were synonymous with systemic risk, at least within the limited context of the credit union industry. Whatever NCUA decides to do to rework and retool the capital challenged, liquidity-reliant corporate credit union network, it must ensure (or should one say insure?) that the resulting structure includes no entity that is too big or too interconnected to fail.

    Marvin Umholtz