Interview with Filson: NCUA Conservatorship & its Impact on Credit Unions

A follow-up interview with Chip Filson about events following NCUA’s conservatorship by CUtv’s Hunter Moss


An Interview with Chip Filson about events following NCUA’s conservatorship by CUtv’s Hunter Moss:

Why is this event so important that you held a webinar with 6 hours notice?

One prominent credit union CEO said that he thought the industry is heading for a train wreck. NCUA conserved the two largest corporates based on information that not even the credit union boards were shown. And, there is a tight time deadline, if credit unions want to see the approach modified.

But didn’t you support NCUA’s actions on January 28?

Yes, I did. I called it an important first step. NCUA said there is a systemic problem that requires an industry-wide cooperative solution. We all need to hitch up our belts and be ready to spend $4.7 billion. Everyone was aware of the problem, and I believed this approach was temperate and in the cooperative tradition.

So why are you questioning this next step and the conservatorship?

NCUA said that, contrary to their initial estimates, this was now, six weeks later, a $10 billion problem. This was based on information that they cannot show anyone.

They then said they need to conserve the two largest corporates in order to be “in control.” There was no discussion of why that was necessary, when both had signed LUAs that allowed the Agency to do anything they wanted.

Finally, I think the sequence of events led many to believe the Agency “low-balled” them in January to get their initial buy in. That impression has undermined the confidence in their regulator that any industry must have. This is especially true when there is also such wide discretionary power to bill the industry for problems.

Are you saying this is not a $10 billion dollar problem?

No, I’m saying the Agency’s own numbers show how difficult it is to reach any single conclusion about the cost of the problem. Let alone a conclusion that would cause credit unions to expense by March 30 an amount 400% greater than 2008’s net income, in order to pay for credit losses that will be not be discovered for as long as ten years into the future.

Why did the Agency decide to act, if it is so uncertain?

I don’t know. There was no explanation provided as to urgency, as was the case in January when US Central announced an OTTI expense of $1.2 billion.

Frankly, I think the action shows a failure of Board oversight. Frequently, political appointees are not industry experts; that is, they must rely on staff. In this case, the staff somehow convinced the Board that the numbers given to credit unions a short time earlier were off by a factor of 100% or more.

The board should have stopped right there and sent the staff back for more work. It should be common sense that the problem didn’t deteriorate 100%. Models produce widely varying results, depending on assumptions used. But those assumptions can be positive as well as negative. No one knows the future.

If a credit union CEO had taken a similar action with his board, saying there was a systemic problem that was going to wipe out all of the year’s earnings, the board would not like that. But they would probably be willing to step up to the problem, and let the CEO keep working. If the manager came back six weeks later and said I was off by 100%, plus our two largest mortgage loans are now in foreclosure, that board would be looking for a new CEO. If the board didn’t, the examiners would probably “suggest” it!

As political employees, one instinct you want a board to have is how the Agency’s actions affect credit unions and their members. This should also include the general public, press and the Washington DC constituencies. The board should have sent staff back for more options.

Is that the only problem you have, the short time span with new data?

Well, remember, I do not think a point estimate is the best way to understand this problem. The other issue, and why many credit unions are angry, is that all of the other actions accompanying this new estimate required months of work. The Agency said it had trained and deployed 70 examiners when they took control. How long does that take to do? Probably a lot longer than six weeks.

Corporates were asked to sign a LUA with a guarantee going out to 2010. All of the dialogue was about the need to avoid selling securities in this market. Everyone concurred that would be the worst solution. Every credit union was asked to support corporate funding.

Credit union’s believed and stepped up. NCUA’s own numbers show there was over $12 billion in new shares in the just first two months of this year. Confidence was growing. All the borrowings were paid off.

Then, bam, two conservatorships that had obviously been planned for months. New CEOs from outside the industry immediately took over. NCUA had control to do any of this, since the Corporates “accepted” the guarantees.

This action and the doubled estimate I think shredded credit union confidence. They saw the Agency saying one thing publicly and asking credit unions to support cooperative efforts, but privately planning their own unilateral actions.

Could something have been done earlier?

I don’t know. It is clear that no one was asking hard questions about the Agency. The corporate problems were obvious. The press was having a field day reporting the latest ratings down grades and OTTI losses, almost taunting the Agency to do something. A blogger was working hard to provide perspective, contradicting official assurances and estimates.

Then, when the Agency did act and failed to release the basis for its $3.7 billion reserve, there should have been harder questions asked.

Another frustrating part about recent events is that the entities we expect to ask the hard questions have not done so. Too often, the press, both trade and independent, has just appeared to be an outlet for the Agency’s point of view.

What about CUNA-NAFCU’s response?

I have not followed what they are saying. They are in a tough spot. Their members will be divided. And NCUA is offering to go to the Hill, with their support, to spread out the costs. I think that would be a grave mistake. But NCUA wants to co-opt them, so it makes it hard to take a stand against the very actions which NCUA is using as the reason for going to the Hill in the first place.

Why is it a mistake to go to Capitol Hill, especially if it would help spread the costs?

First, the NCUSIF and credit unions do not need $6 billion in cash. If the NCUSIF needs cash, then they can borrow at any time from the CLF.

The Agency has said this will allow them to spread the costs over a longer period. But they have that option already. A very similar proposal to put a cash “bond” into the NCUSIF was developed in February.

Finally, going to Congress now and saying we need help because of losses from this “systemic crisis” could just put credit unions in the same regulatory box that all of the other government-aided industries become a part of.

To forfeit the ability to argue for an independent system for a measly $6 billion loan is not wise. Go borrow from the CLF or credit unions directly!

But what if credit unions decide to go to the Hill?

While I think that would be a mistake, the one benefit it would bring would be to clarify two issues.

The first is transparency on PIMCO’s analysis. NCUA is claiming to have good knowledge about future losses on $64 billion of mortgage securities, a challenge the best minds in Wall Street and Washington have been unable to resolve. I’m sure Congress will want access to this model, so everyone else holding these securities can also learn their value and we can go about solving the problem.

The second issue is about the Agency’s own actions. The current loss estimate of $10 billion is huge. In the 37 years of its operations, the total NCUSIF losses are only $1.5 billion. This loss occurred while NCUA had examiners in these two corporates almost daily, as these investments were being made. They have monthly call reports with NEV stress tests. The entire portfolios have been available to them. So, when did they first learn they had a problem of this magnitude and what did they do about it?

Congress will want to know this before giving the Agency more money, no matter how urgent the request. If the corporate problem is on the order of this magnitude, which we cannot now know, then a lot of people had poor judgment, including the most senior leaders in the Agency.

So what is next, if you think a train wreck is on the way?

As long as people want a solution, there does not need to be a wreck. I think there is broad support around common goals of minimizing losses, matching expenses with premiums, supporting credit unions’ lending efforts, and funding a long-term wind down of problem securities.

Some hard-line stands are going to have to be modified. Credit unions need to have a say in how the conservatorships are managed. Agency staff needs to develop a better way to match the write-downs with insured loss assessments. There needs to be support for the ANPR process instead of an imposed blueprint. More open discussion of facts with the individual corporates, privately, and the industry is vital.

In sum, the Board needs to take control of the Agency and require options that truly represent the best, most creative, opportunities of the cooperative model.

But isn’t it too late, if Monday, March 30, is the deadline?

Only if people think that is the case. When I first became a regulator in Illinois, credit unions had just passed a major reform bill, several years in the planning. The governor had the power to amend legislation as part of the signing process. Ed Callahan gave me the bill and asked if I could suggest any changes for the governor’s office. I had just come from the First National Bank of Chicago, was learning about regulation, and thought I knew more than I really did.

Well, the governor amended the bill and sent it to the legislature for approval. Within minutes, I got a call from Dick Ensweiller, asking what the hell I thought I was doing. He then chewed on me for about 20 minutes. I didn’t like the call. Dick did not challenge my defense that this made the bill better. Rather, he challenged the arbitrary and unilateral way I had gone about it, thinking that I had some superior knowledge about what was good for credit unions.

Fortunately, I had two cohorts in Ed and Bucky Sebastian who were good teachers. Together, we learned the benefits of working with credit unions, while still taking some of the controversial actions regulators must do.

So, people must be creative, willing to listen, compromise and remember to always ask what is in the member’s best interest.

Any final thoughts about what credit unions should be doing?

This is not a one-week emergency. But, in the short term, I think one effective action any credit union and their board can take is to email* the Agency board directly. Tell them how this action will affects the credit union, your corporate relationships, and most importantly the members. If I came to the office and saw a couple of hundred emails, it would certainly get my attention.

Realistically, there will be added insurance expenses hopefully spread over a multi- year wind down of the securities. Credit unions will need to plan for this.

Further into the future will be discussions about the future of the cooperative system. These will be about the corporate’s roles and the broader regulatory change that will follow the current need for bailouts.

I believe cooperative solutions can provide a valuable example for America today and in the future. We don’t want to sacrifice that future because of intemperate decisions today.

We are working to provide some ongoing ways to help credit union think about actions on these issues in the coming weeks.

Email addresses - NCUA Board of Directors:



Related Resources:
Letter to NCUA re: The Math on the Credit Loss Estimate

Timeless Wisdom in a Timely Moment: We Don't Run Credit Unions

Special Webinar Recording -- NCUA's Corporate Conservatorship: What's at Stake for the Credit Union System?





March 23, 2009


  • Thank you Chip for this excellent insight. Very informative.
    Dave Wordhouse
  • Thanks chip, this is some of the most straightforward thinking on this I have seen. Hope many people see this and get the word out.
    Charlie Fulks
  • Well thought out and to the point. The NCUA could use your insight.
    Stuart Weiner
  • Provides new insight and intelligent speculation regarding NCUA's distorted decision.
    W. Milner
  • To add to this almost worst-case scenario, the rhetoric about pulling together, unity, etc. is great, but who are we pulling together/unifying against? Our own deposit insurer/regulator. Is that a battle anyone wants to fight? Wait `til the ABA gets their hands on this. Thanks, Comrad Fryzel.
    Larry B. Davis
  • We have now reduced our balance from $50M to $2M at U.S. Central. We will wire in enough to cover our daily settlement requirements. The NCUA can figure out how to manage the liquidity at USC. This is our IN YOUR FACE NCUA protest from this $500M credit union.
    Joan Sanchez
  • Chip, Thank you for expressing so brilliantly what many of us have wanted to say and to ask regarding the actions and attitude NCUA has taken towards the corporate debacle. I forwarded your interview to Chair Fryzel.
    Bill Raker
  • Chip, Great article and a great webinar. Having nearly 30 years in the financial industry, the first 18 regulated by the OCC and the balance by the NCUA I have always been taken back by the fact that the NCUA has always tried to run the credit unions they regulate either indirectly or directly. If they had the skill set they would be CEOs and not regulators. The risk to reputation and safety and soundness is in fact the actions of the NCUA and not the credit unions.
    John Revilla
  • Well said, Chip. It's time that the NCUA gets back to enforcing the regs and stops pretending they know best how to run any and all credit unions.
    Rita St. Arnauld