Press Statement on NCUA Conservatorship Action

On Tuesday, March 31st, Chip Filson hosted a press conference to review his assessment of NCUA's actions after the Conservatorship became final overnight. This is his full press statement.

 
 

Chip Filson read the following release and answered questions, along with Jay Johnson, at a press conference in Washington DC on Tuesday morning at 11 AM Eastern. Click here to download the exhibits Chip and Jay are referring to in this analysis. After the reading of the statement, Chip answered questions from the press which is available on video now.

The conservatorship by NCUA of WesCorp and US Central, the two largest corporate credit unions with combined assets of $ 61.3 billion (Feb 28, 2009) became final yesterday.

We believe, and will demonstrate below, using the Feb 28, 2009 data that this action was based on unrealistic estimates of future credit losses that NCUA said could extend out as far as ten years before being finally known.

Furthermore these losses, which are impossible to determine with certainty, are nonetheless being used to impose today on all natural person credit unions the full expense of this projected $9-10 billion estimated outcome. Other good options were available. This approach did not have to be taken.

The result of these actions is to push the entire credit union movement to the middle of the worst financial uncertainty this country has faced since the Great Depression. Up to this time credit unions had been demonstrating their countercyclical capability by posting record lending results as late as January and February of 2009.

NCUA has taken a problem in the corporate network and turned it into an industry crisis. This approximately $10 billion expense will immediately reduce the collective net worth of credit unions by that amount. That event will force many credit unions to reduce their lending by seven to ten times or $70 to $100 billion at a time when members need their credit union more than ever.

Since NCUA first declared the Corporate network to be a $4.7 billion “systemic problem” on January 28, 2009 and asked for the system's total support, credit unions have responded very positively. Share balances in the six largest corporates have increased over $12 billion in just the first two months, virtually all external corporate borrowings have been eliminated, and confidence in and work on the restructuring via the ANPR process was well underway.

Now barely six weeks later NCUA has said the problem will cost credit unions at least $10 billion. It seized the two largest corporate and did so based on data and modeling that it said it would not release. Yet a primary rationale for taking control via conservatorship was the accusation that the corporates were not being “honest” when presenting their numbers.

Using the information that NCUA has released for its “case specific” loss reserves and the Feb 28 financials posted on the two corporate’s websites, the future losses implied by NCUA’s models appear unrealistic and highly improbable. To arrive at the gross credit losses NCUA is projecting, one would add together all credit enhancements, the stated capital and SIF specific case reserves. This results in gross credit losses on the combined $50.3 billion (book value) of securities of $16 billion or 32%. To have this level of loss occur, the derived default on loans would have to be 56% and the loss on each loan 56% or any combination of these two factors that result in an overall creditloss of 32%. Forecasting these levels of losses seems contrary to any reasonable scenario about the future.

The total credit losses of $16 billion NCUA is asserting exist to justify the conservatorships and specific case reserves to be charged to all credit unions, is higher by over $ 1 billion dollars than the fair market value of these same securities as of their February 28th financial statement postings. In other words NCUA is saying asserting two things:

 

  1. These securities are worth even less than they could be sold for today!
  2. Even more dramatic in their base case valuation, market dislocation does not exist, or if it does, it is actually overvaluing these securities.

For the past year, the best minds in the government, regulatory agencies and financial community has been trying to find a method to fairly price and then sell securities due to market dislocation. Now NCUA has asserted that the dislocation does not exist. They have the models to prove this. They are directing credit unions to write off their capital in WesCorp and US Central, replenish their insurance fund with billions for premium expenses and even asking Congress for further borrowing authority. Since none of these future losses have actually been spent and all of these actions are based on NCUA’s models, surely credit unions, Congress and even the American public are entitled to learn how these conclusions were derived. After all, NCUA is saying theirs are the “honest” numbers.

Credit unions are correct in being upset. The initial January 28 summary estimate appears to have “low-balled” the industry into accepting NCUA’s analysis only to be followed within a very short period with better data that they claimed demonstrated the losses will be double that first estimate. NCUA had guaranteed all of the deposits in the corporate. There is no safety and soundness reason not to release data. In not releasing its analysis, NCUA is exhibiting the same behavior for which it criticized the Corporates in its conservatorship statements to the press.

Credit unions, as both shareholders and the ultimate insurers in this situation, should receive the following information:

  1. The full external audits that were underway and nearing completion when the conservatorships took place. This information is a vital, third party benchmark for all.
  2. The complete cusip numbers for all the securities in both institutions. Publicly releasing this data is becoming standard practice by all corporates and provides the essential transparency users should have available to conduct their own due diligence. This level of disclosure is standard practice today, for example in the mutual fund industry.
  3. The full correspondence and terms on which the two CEO’s were hired. They are now employees of a government managed firm. Credit unions as owners need to know whether the new CEO’s have at-will or a specific term employment, the goals or expected performance standards, any criteria for bonus, and to whom they report their business plans. The CEO’s were brought in as change agents-what is it they were asked to do?
  4. Leading credit unions need to be brought into the conservatorship process in an explicit and meaningful way. They need to have access to relevant information, expertise and management’s intention to provide counsel and guidance for these new CEO’s. The new CEO’s have a very difficult job, not just in making investment decisions, but in restoring market confidence. As was demonstrated in CapCorps and in more recent Agency actions, significant errors of judgment leading to irreversible decisions seem to occur more easily in the early period of a change of administration.
  5. The PIMCO analysis should be released.
  6. Any posting of “estimated losses” should be delayed until the audits and further data is available to validate this analysis. By imposing a write-down using a point estimate based on highly improbable future outcomes, will only lead to further uncertainty and potentially needless loss.
  7. The monthly financial statements of US Central and WesCorp with full analysis and disclosures must continue to be published and the persons responsible for their preparation, be available to the press and members of the corporates for full discussion.

In both the NCUSIF and corporates, credit unions are not merely members or customers. They are the owners of the NCUSIF; they have the right to withdraw their 1% deposit. They have purchased at risk shares which is part of the capital in the two corporates. As cooperative owners, they have rights to information and to due process that the shareholder of any organization would have.

By acting in a unilateral manner without presenting their superior information to the Directors for comment and action, NCUA has failed to protect the interests of all shareholders and more importantly, the well being of credit union members. Credit unions were designed for their members and in their institutional structure, to be a “sanctuary from the market.” The cooperative, countercyclical capability is critical in times of extraordinary market stress and uncertainty. By continuing to lend, they have maintained and enhanced member confidence and trust.

Contrary to this cooperative role, NCUA has chosen to impose an immediate write-off in an amount of approximately the 1% share insurance deposit and additionally, for members of U S Central and WesCorp, the membership capital shares. Even though none of these losses has been incurred, NCUA has elected to charge credit unions in full now for these future projections.

Using this kind of modeling and future loss estimates which they have disclosed to neither the institutions or the credit unions being sent the bill, every corporate and every credit union becomes vulnerable to similar arbitrary NCUA decisions and actions. Such a process is not only contrary to standard due process; it violates a person’s sense of fairness and reasonable behavior.

These decisions by NCUA have created uncertainty, fear, and confusion by the very organization entrusted with maintaining system confidence. At a time when credit unions were emphatically demonstrating their countercyclical role, especially in record mortgage refinancings, the NCUA board has dragged the industry into the center of the nation’s financial turmoil. There were alternative methods and solutions available. These actions show a serious failure of judgment not to mention, common sense.

 

 

 

 

March 30, 2009


Comments

 
 
 
  • NCUA needs to put the skids on.
    Vonda Burkhart
     
     
     
  • Chip, As always, I enjoy your comments and review. I am curious as to the "solutions" available you reference and how you see the implementation of those solutions. Thanks
    Glenn Strebe, CEO Air Academy FCU
     
     
     
  • Thank you for being the rational, yet poignant voice when the industry needs it the most. Bravo!
    Michelle
     
     
     
  • Thank you for continuing to voice your concerns. We agree that other options should be considered!
    Anonymous
     
     
     
  • Chip, I hope your thoughtful (and thought provoking)commentary makes its way to the NCUA board and staff. It should give them great pause...! And cause prompt corrective action from NCUA!
    Bill Raker
     
     
     
  • Excellent article! The question is: After it is all said and done, what can we do? This movement needs a leader; where is Dan Mica? Having lunch with Obama in England?
    "Fed" up
     
     
     
  • Chip, Your continued brilliant analysis of this problem just proves that the pen indeed is still mightier than the sword.
    Mary C.
     
     
     
  • I think this arbitrary decision will greatly affect CUPAC donations due to donors not feeling they are being properly represented. As credit unions we have to behave differently than our banking counterparts to justify our existence. I hope a change of heart is realized on this very important matter.
    David Branham
     
     
     
  • I agree! Either give us all the info you have to warrant these major adjustments to our bottom line, or we won't comply. My concern is: Where was NCUA when US Central and Wescorp were booking these types of investments. Will there be other corporates on the conservatorship chopping block soon?
    Anonymous
     
     
     
  • Thank you so much Chip. This premature and rash act by the NCUA will directly affect millions of Americans. At a time when credit is desperately tight, the NCUA has needlessly taken 100 billion out of the lending pool. Does the Obama Administration think this is a good thing? Wasn't transparency a cornerstone of his campaign? If I were a Republican trying to poke holes in Obama's programs, I would start right here. It's the perfect storm -- millions of Americans impacted, a regulator showing no signs of transparency, navel gazing to the point where the numbers don't make any sense, and worst of all, an ivory tower- behind the beltway mentality, that ignores the suffering of real Americans. If this is the Obama Administration, I'd like to take back my vote -- and so will everyone who is denied a loan because of this.
    Anonymous
     
     
     
  • Relying on gubment regulators, especially with the current administration, to use common sense in fixing this situation is a futile exercise. Of course, I am ever the cynic.
    Everthecynic
     
     
     
  • Chip, Rock and Roll! Government bureaucracy is still alive and well.
    Rick
     
     
     
  • Thank you for saying what needed to be said!
    Anonymous
     
     
     
  • WOW!!! Thank you for stating in a public forum what the entire industry is thinking!!! We need some common sense and level headed thought process applied to this unique environment. Thanks again Chip for leading the charge!
    Dennis Barta
     
     
     
  • This is a statement that any custodian of credit union member capital must ask to be deemed a credible fiduciary. The suspect seizure of this capital by the government, cloaked in secrecy, is so incredibly incoherent with the spirit of democracy and the rule of law as to shock the imagination. I see Mr Filson and team leading the charge. It does make me wonder what kind of backroom dealings are transpiring with the other industry organizations who need to be in the open and committed, as well as clear, and compelling (CUNA, NAFCU, etc.). Perhaps we may want to rethink the payment of dues to those who acutally work on our behalf!
    Wisely Anonymous
     
     
     
  • The NCUA's rash behavior and overreaction with conservatorships makes me wonder if there isn't some unknown NCUA agenda that is being served by the action. Does our regulator want to change the corporate cu model through hostile takeover?
    Anonymous
     
     
     
  • Hi Chip, maybe the reason they(NCUA) are not telling us the whole story is the OTHER corporate CU's are in bad shape too. Remember there are 26 of them, oops 24 now and counting. I wonder when the next e-mail from the NCUA with more bad news will show up ??
    Anonymous
     
     
     
  • Amen to this! We need a voice!
    Anonymous
     
     
     
  • Chip, Thank you for continueing the discussion. Your comments are welcome and helpful. NCUA, credit union leaders, credit union volunteers and others in the credit union movement should now resolve to work together to come up with the best solution. The current solution is not the best solution. The rhetoric about "honest numbers", perks, and the lack of tranparency will work against NCUA. Just as some of the rhetoric about NCUA will work against credit unions.. If we want to restore the corporate system; if we want to retain an independent credit union regulator; and if we want to continue the credit union system as an alternative to for profit banks then we have to find a way to work together to solve this problem. Your leadership shows that credit union leaders are serious about solving this problem. The FDIC has recognized that they could not replenish their insurance fund in one year. The FDIC recognizes that anything they do that adds an undue burden on banks during this crisis will only prolong and deepen the crisis. NCUA should follow the lead of FDIC. We need to mitigate the burden on credit unions. We need to restore trust. We need to understand how NCUA determined the loss reserves. NCUA should share the PIMCO report with the credit union system. If they want us to be part of the solution we have to understand the problem. There is now a lack of trust. There was no advance warning, there was no build up--just a sudden and unexpected monumental loss. The first step in restoring that trust is to share the analysis and the PIMCO report. NCUA has said that they want credit unions to continue making deposits in corporate credit unions. The furture corporate credit union system will likely depend on capital supplied by member credit unions. Given the level of trust that now exists that seems unlikely. Henry
    Henry Wirz
     
     
     
  • Excellent discussion,. Now these facts need to be disseminated to Congress members to inform them of what NCUA has already done and is now trying to get a law passed to legalize after the fact.
    BL
     
     
     
  • I'm glad that we have a strong advocate for the credit union movement. Congratulations Chip for being out in front on this issue from the beginning.
    Dennis C.
     
     
     
  • It is truly ironic that after years of hard work at successfully building a strong, competitive image, credit unions must suffer yet another unnecessary and unrealistic attempt at CYA by Regulators who know not what they do.
    Tom Reimholz
     
     
     
  • We should learn from history. Did we learn anything from CapCorp
    Anonymous
     
     
     
  • How can you trust the people who continued to tell us these losses are "temporary" for the past two years now? What exactly does temporary mean then, to maturity? That doesn't seem too temporary. The NCUA was on this same line of reasoning until recently (thank goodness). The PIMCO report is the tip of the iceberg, things will most certainly get worse.
    Anonymous
     
     
     
  • Chip, as the past President/CEO of Corporate Credit Union of Arizona and Vice-Chairman of U.S. Central, I could not agree with you more! The actions by NCUA are clearly NOT in the best interest of the movement at large and certainly of the Corporate credit unions. CapCorp is not the only Corporate that the agency tried to bully. NCUA tried to put the Corporate Credit Union of Arizona into convseratorship in 1984 but thanks to R.C. Roberston and the credit unions of Arizona, the effort was thwarted and the corporate is still alive and well today. In that instance, the agency forced the immediate sale of investments resulting in a $4 million loss. If the investments would have been held 1 more year, the net profit would have been $4 million or an $8 million swing! NCUA clearly does not understand investments or investing and is in my opinion, totally responsible for the current Corporate credit union dilemma.
    Ron LaMascus
     
     
     
  • Great article, thank you for posting it! I agree with many reader comments and find the CapCorp comment spot on. I think NCUA's days are probably numbered. The dire situation we're all in, as well as how we got here, will likely justify the Obama administration's desire to expand powers for the Treasury and FDIC, as well as consolidate the regulatory function. Hello Super Regulator.
    Anonymous
     
     
     
  • Thanks for your article Chip. Will you expand on the alternative methods and solutions that are available to NCUA to resolve the current situation?
    Donna Jackson
     
     
     
  • Chip, I elect you our leader to help us get through this mess. What should be our next steps? March on Washington to get Obama and Geithner's attention? We need TARP funds for the NCUA and natural person credit unions that are extremely impacted by the recession. Otherwise, if the NCUA continues on this warpath, we are going to see more failures. It worries me that they are launching a tv commercial campaign to boost consumer confidence in credit unions (during the basketball championships!). Is this a preemptive strike before more takeovers???
    Anonymous
     
     
     
  • Chip: Your comments are spot on. The first time I met the NCUA chair was at a large credit union meeting in DC in Nov. last year. His comments included words to the effect that he was "going to fix the corporate CU problem". None of the attendees had heard this prior to the meeting. There was obviously something going on at the NCUA then which resulted in the subsequent actions. The proposed write downs will result in increased NCUA costs as more credit unions are impacted by the HR 1151 legacy of PCA. More income from the insurance fund will be used to support this. Additionally, some credit unions ability to grow will be stymied because growth may result in PCA for credit unions whose reserves fall below 6%. The future consequences of NCUA's precipitous actions will cause additional negative consequences. Gordon
    Gordon Dames
     
     
     
  • Chip, It is so clear that your comments reflect a true appreciation for the credit union movement and an understanding that there will be unintended consequences that will put increased pressure on the industry at the worst possible time. The assessments will impact natural person credit unions' ability to serve their members - loan production is already slowing, asset growth will be next, fees are rising, and innovations will be put on the backburner. Doesn't sound very healthy to me.
    Peter Sainato