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.
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.