NCUA Calls On Credit Unions To Protect The U.S. Government’s Credit Standing

During Monday’s NCUA Board meeting, the Board took multiple actions that are significant for credit unions, their members, and the “full faith and credit of the U.S. government.”


In one of the most extraordinary NCUA Board meetings ever, the NCUA asked credit unions on Aug. 29 to bail out the agency’s $2 billion cash management shortfall of corporate assets. Even more dramatically, the agency stated that its failure to make timely payment of principal and interest under NCUA’s guarantee could result in “possible erosion in public confidence in the full faith and credit backing of the U.S. Government.”

The full statement in the Board Action Memorandum is:

 “Timely payment of principal and interest under the (NCUA’s) guarantee is critical. This involves substantial time and effort in monitoring multiple trusts, the underlying legacy assets, and the cash position of the TCCUSIF from which guarantee payments are made. ... Failure to perform under the guarantee would result in a default under the NGN documents and lead to accelerated legal and financial liabilities for the NCUA, immediate credit union assessments to allow for payment while in default, probable intervention by the Treasury Department, and possible erosion in public confidence in the full faith and credit backing of the U.S. Government." (Page 11, Board Action Memorandum, dated August 26, 2011. The bold emphasis is in NCUA's original document.)

This is one of the most ironic reversals of logic ever made by a federal regulator: credit union payments are now the foundation for the U.S. government’s full faith and credit versus NCUA’s previous assertions that credit union’s could rely on the full faith of credit of the U.S. government for their insurance fund and NCUA guarantee commitments. 

Management Systems Lacking

The 25-basis-point assessment is the single largest assesment ever required by NCUA. The assessment is needed, NCUA says, because of a funding shortfall occurring within months of NCUA’s seizure of $50 billion of corporate assets from five conserved corporates.   

As if the funding shortfall itself was not an urgent enough reminder of serious gaps in NCUA’s management capabilities, the agency itself acknowledged this same shortcoming. Almost a full year after taking the $50 billion of corporate investments, the Board indicated that it did not have the systems to provide oversight, compliance, analysis, operations, and reporting of these assets. NCUA’s step to remedy this gap was to establish an NGN Securities Management Committee. This involves adding five full-time employees and spending more than $10 million in consulting, vendor, software/data subscriptions, and legal expenses to build-out the necessary support systems.

With credit unions now expensing another $2.0 billion to send cash to refinance the assets removed from corporate balance sheets, the absence of timely and substantive data is even more noticeable. There is no audit of the TCCUSIF for last year. The previous audit dated December 31, 2009, showed a contingent loss liability of $6.4 billion for all corporate exposure. That audited figure is now more than a year-and-a-half old, although NCUA spokespersons have recently stated the number has not changed. With this assessment, credit unions will have expensed in the two most recent TCCUSF assessments almost 50% of this estimated loss. This is after legislation was passed to spread out the losses evenly or as incurred during the life of the securities.   

NCUA has not provided financial numbers for current portfolio investment  valuations, OTTI updates, or accounting for the $12 billion already in reserves and expensed by the five corporate credit unions; no monthly cash flow projections, no balance sheets nor income and expense statements. 

The $50 billion of assets has disappeared into a regulatory black hole. The audit and auditor are missing in action. This scenario feels like a rerun of NCUA’s previous pattern of missing audits and statutorily required reports in 2009 and 2010.   

Just one example of how quickly undocumented numbers are being changed: Between the June 29 NCUA voluntary prepaid assessment webinar and the August Board meeting the net cash needs projection for funding has been lowered by $250 million — this in a period of just more than six weeks.

All of the necessary, financial and portfolio information was provided monthly along with management commentary by each of the five corporates before they were nationalized by the NCUA in September 2010. The data was published on each corporate’s website, normally within a week or two after the end of the month. There have been no financial statements or portfolio information from NCUA on these securities since the last corporate update one year ago.

System Liquidity In Place

Even more remarkable is that the liquidity NCUA has or had available was more than enough liquidity to manage this funding gap. On October 13, 2010, NCUA announced it had prepaid $10 billion in CLF loans that, according to WesCorp and U.S. Central statements, were not due till December. Other sources include: $41 billion in current CLF borrowing authority with $0 loans outstanding plus $2 billion in credit union CLF capital; the TCCUSF line of $6 billion and an extended amount up to $30 billion; and more than $10 billion in the NCUSIF which is on deposit at the U.S. Treasury.  

Creating an expense to fund a liquidity shortfall is the most draconian option the NCUA could take, especially in this low-rate funding environment.

New Legislation Cited As Authority

Another unsettling aspect of the $2 billion funding assessment is that NCUA cited the routine housekeeping legislation passed by the lame duck Congress in late December 2010 as authority for this assessment. “On January 4, 2011, Senate Bill 4036 was signed into law adding a new provision authorizing NCUA to make premium assessments of federally insured credit unions to pay pending or future TCCUSF expenses directly.” (page 1-2 Board Action Memorandum)

The bill was passed in Congress without commentary or discussion and was claimed to be merely housekeeping clarification.  Under NCUA's interpretation, there is no limit as to the amount or frequency of assessments, and no data, oversight, or audit required for whatever amounts NCUA obligates credit unions to send to the TCCUSF.  

Impact On Credit Union Members

One of the reasons presented by NCUA staff for the $2 billion funding assessment was that credit unions could afford it. The assessment takes $2 billion out of the system’s net worth, or more than 2.1% of June 30’s total. As members and consumers are looking for safe havens during a volatile markets, credit unions find they have a 25-basis-point expense for every dollar of savings. Additionally, the expense lowers their ability to take in as much as $28 billion in new shares, using the 7% well-capitalized as a benchmark, without lowering current net worth levels.

This burden is levied during a time when all depository institutions are seeing unusually high cash inflows as nervousness about alternative investments grows.

The assessment’s impact is not even. Credit unions with low earnings or reporting a loss will find themselves even further from the break-even point. The burden is disproportionate. Credit unions that have lower capital and earnings ratios and those in the most troubled states of the economy will be more hard pressed than those performing at or above average ROA.  

Navy Federal Credit Union, which has $44 billion in assets, will pay $76.8 million, but Birmingham Financial, which has $1.4 million in assets, incurs a $3,000 extra expense, pushing it further into the red. Using earnings through June 30, 2011 only, this 25-basis-point expense, if applied in full at that point in time, would result in 4,214 (58.2%) of credit unions with $227 billion in assets reporting new or even further negative ROA for the first six months of this year.

As in society at large, the weaker will be harmed more by this burden.

A Missed Opportunity

NCUA staff furthermore stated there would not be an NCUSIF premium in 2011, and unlikely one in 2012. What was left undone was to acknowledge that the loss reserve in the NCUSIF is today overfunded by at least $1 billion. A dividend refund of this overcharge would have demonstrated leadership that recognized the new burden being imposed late in the fiscal year on every credit union. 

Instead of encouraging credit unions to be a place for member savings in times of uncertainty, NCUA is increasing the cost and lowering the return for member savings. This extra expense burden can only inhibit credit unions ability to help members in a time of slow economic recovery.

Systemic Risk

The most systemic impact on credit unions is NCUA. Ineffective or erroneous regulatory judgments cost every credit union member. Lack of transparency erodes credit union and public confidence. NCUA has multiple roles — supervision and oversight, a liquidity lender of unfailing reliability, a manager of credit unions’ collective capital — and is struggling to carry out those roles successfully. Now it has tried to take over and manage $50 billion of corporate assets. The expertise and systems to do this do not exist at NCUA. The corporates were managing their assets, disclosing full results monthly, and relying on credit union funding all while improving net income.  

NCUA said the $2 billion assessment was necessary because “failure to uphold NCUA’s responsibilities under the NGN Program may expose the agency to legal and reputational risks. ... (that) if realized are untenable.” NCUA has already defaulted. It's credit unions that are upholding the industry’s reputation.




Sept. 1, 2011


  • Chip, your are not only on target with your comments but you're "on the money", our members money!

    We need the same call for accountability from the trades who seem to be cooperating with the agency on these issues of grave concern.

    Where is CUNA and NAFCU on this issue. How can they remain our paid advocates and remain silent. We just got a bill for two billion, and all they talk about is some legislation or threat they are fighting for our benefit.

    When the threat is really our own agency.

    NCUA and NAFCU, go to the hill, demand accountability and transparency, call for change, it is time !
    Chip is on the money - CUNA NAFCU Missing in Action!
  • Looks like NCUA is going to help shrink the Federal Government payroll. Eventually putting themselves out of a job by crashing the entire CU movement, and thus, eliminating the need for NCUA Completely.

    They have handled this from the beginning, as typical, inept, self serving, job protecting government employees (Aren't they supposed to be public servants) that only care about themselves.

    We could collaborate and work and stand together to tell them where to go, but I'm afraid even in these unique times, most CU's will simply be led to slaughter by these creeps.

    Here they are regulating an entire industry, and their biggest concern is themselves. Most Credit Unions are strong, and getting stronger despite the current economic conditions, and ironically, they are going to make us all, collectively weaker.

    Time to revolt!~
    Bob Jobb
  • We have a right to expect more accountability from NCUA and from our national government as a whole. It is uncomfortable turning over large sums of money to a system is still broken.

    Justice and a productive turnaround will not be achieved by blanket solutions. Those who have been weakened by irresponsible actions (even credit unions), i.e., weak ALM structuring, poor lending decisions, high exectutive level compensation or other actions that have prevented them from having the capital needed to ride out this unforeseen event. Those who took risk without adequate knowledge, leverage and capital reserves are at fault too. Stop rewarding their actions by continuing to pool them in with the weak and vulnerable.

    More representation concerning the solutions, better thought out (even if complicated) solutions that look at the reasons behind the problems and target accountability for, future prevention of and when relevant repayment for the problems created by any responsible parties.
  • Chip, great expose of NCUA.
  • A voice of reason in a world filled with confusion. Your articles are always insightful and spot on!
    Susie Fair
  • The NCUA is way out of control. The need to hire additional people and while indicating that much of the cost associated with the NGN Securities Management Committee with be used for consultants is ridiculous. Why are they hiring additional people if they are paying consultants? The NCUA has turned into a bunch of bureaucrats looking for their next meal ticket. I guess if their pensions ever have cash flow problems they can just issue an assessment to the NPCU gravy train and pass their pension needs through the TCCUSF. This entire mess is disheartening and sickening.
  • It has become increasingly tiring and frustrating to consistently see the agency, and its politically motivated leadership, continue to focus on what it can do to look good in the eyes of the U.S. government rather than on what it can do to help credit unions better serve Americans. It is equally frustrating to have our trade associations continue to welcome these same people with open arms to national gatherings of credit union volunteers and professionals. As they do so those in the audience are expected to treat them graciously and respectfully as they give speeches filled with venomous insinuations that credit union people were idiots for not seeing the severe economic downturn coming and preparing for it and the governmental bureaucrats (and possibly Suze Orman) were the ones who saved us from ourselves.

    What would be wrong with our national associations considering an alternative approach? Perhaps it could be something along the lines of saying "Thanks, but no thanks Ms./Mr. NCUA official for your offer to appear at our meeting, but we are no longer interested in granting you public forums that help you build your personal résumé while you continue to take actions that put the interests of government ahead of the interests of the people that it is supposed to serve." (By the way, the "Thanks, but no thanks Ms,/Mr. NCUA official" clause qualifies as both gracious and respectful.)
    Gotta good reason...
  • It really is becoming one large Credit Union, managed by the NCUA. The scary part is, many at the NCUA, including their Executive Management Staff, have absolutely no idea how to do it. We all suffer every time NCUA makes a decision. Why is that?
    Dan Babcock
  • Where the heck is NAFCU? Where the heck is CUNA? Our trade associations are in bed with the regulator - figuretively speaking. Actually NAFCU & CUNA are too busy protecting our tax exempt status and seeking alternative capital to be concerned with the real actual issues confronting us today. Once again our trade associations are no where to be found. They remain once again consistent.
    stuart perliltsh
  • I agree with Chip on this article. The NCUA should just wear a mask or pass a note to one of our tellers. But if they did that the GPS in the bait money might tell us where the money is really going. Oh well.

    As a small credit union this assesment is a hard hit to take at a time like this.

    It is very difficult to explain to our members who attend our annual meeting why our credit union is only profitable when you minus out the NCUA assesment.

    And yes as a small credit union we get a large turnout at our annual meeting and our members are not dummies. With our with the NCUA mandatory financial training.
    Gary Bell
  • "probable intervention by the Treasury Department" - Intervention by the Treasury department would be the best thing that could happen. CUNA and the leagues remain mute at best and cheerleaders at worst. If a corporate issuer of an ABS made these kind of statements they would probably be violating securities laws. Brokerage firms are already backing away from handling this paper due to these statements. The fear liability if a bond is sold in the primary or secondary markets and the client did not have knowledge of ncua's talk of possible defaults.
  • Very well said. I am torn by the situation we find ourselves in. The need for an independent regulator (which I believe is absolutely critical to our survival) vs. the need to totally clean house with existing leadership, Board and staff.

    As someone alluded to previously, the idea that our regulator is more concerned with their survival than ours doesn't bode well for the next few years as we continue to work through a struggling economy.
    Kelly Diven
  • Why don't they just conduct a risk assessment, that fixes everything!

    Seriously, when our members are suffering our regulator keeps placing stress on our capital and ability to help them when they and the nation need us to help boost the economy.
    Dennis D. Degenhardt
  • I echo all the comments about our trade associations. They've had us chasing the debit interchange issue like chicken little's, meanwhile the NCUA is killing us with expenses and ill advised suggestions during the examinations. Where are our associations?
    Todd Sheffield
  • Onace again,Chip has summarized the concerns that I believe most of us have felt, but could not articulate. Thank you Chip for providing us so much needed information and warning.

    However, instead of casting stones at the trades or CU's for that matter (from posted comments I see) especially since it was the economic meltdown which has been the primary reason for the majority of the investment/loan losses, just suggest that those that are so critical of others(it only shows a lack of immaturity and weak leadership)use that energy and put it in good use to get things done for the sake of our future.

    Each of us can start now and communicate to our other colleagues that we each need to voice our concerns to our respective trades. They will have no choice but to direct their attention and represent our concerns to NCUA. Let's just do our part constructively instead of venting to each other and again, use this energy and frustration and start working together to get back our industry.

    PS - I do not work for or have any association with the trades. I'm just a long time employee of my CU wanting us ALL to do better for our members and our industry.
    Responsible Action
  • So, how can NCUA be forced to account for all the money we have sent them in assessments and NCUSIF replishments?