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:
- These securities are worth even less than they could be sold for today!
- 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:
- 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.
- 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.
- 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?
- 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.
- The PIMCO analysis should be released.
- 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.
- 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.