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

When Ed Callahan went to NCUA in 1981, the Illinois Credit Union League presented him with a framed memento to hang in his DC Office. The sign read: “We don’t run credit unions.” This wisdom was forgotten when last Friday, NCUA put itself in charge of the two largest Corporates with total assets of over $60 billion through conservatorship.


When Ed Callahan went to NCUA in 1981, the Illinois Credit Union League presented him with a framed memento to hang in his DC Office. The sign read: "We don’t run credit unions."

At one reading, the sign merely summarized Ed's approach to deregulation: boards and managers were responsible for their institution's business decisions. In a different context, it also captures the fundamentally different skills required to be successful in the competitive market versus a government regulatory agency.

That difference was forgotten last Friday when NCUA put itself in charge of the two largest Corporates, with total assets of over $60 billion, through conservatorship. This action raises profound questions about the Agency's wisdom in taking this extraordinary step. All credit unions should be concerned.

The Context

Seven weeks ago the Agency stated that the uncertainty in investments in the Corporate network was a systemic problem. As described in a speech by Federal Reserve Chairman Bernanke on March 10: "The world is suffering through the worst financial crisis since the 1930's . . .Its fundamental causes remain in dispute."

This context and the accompanying logic of patient, longer-term cooperative solutions to avoid any forced sale was overturned when the Agency acted to conserve. There are at least three areas where the Agency’s actions are, at the least troubling, and at worst, creating a crisis where one did not exist.

How Did the NCUA Board Reach its Decision?

The logic presented by NCUA staff in its webinar on Monday, March 23rd, and in writing was that the system loss of $4.7 billion six weeks earlier had now been revised to $5.9 billion. This was due to a more comprehensive and thorough modeling of the investments, NCUA said with the PIMCO expertise frequently mentioned. Moreover, the "specific case" loss provision had gone from $1.0 billion to $5.0 billion, or 500% in this same period.

These dramatic changes over such a short time period should have been enough to cause the Board to question the data presented by staff. Even more fundamental, the determination of a "specific" number in establishing future credit losses in a dislocated market is impossible. The best minds on Wall Street, in Treasury and in think tanks and academia around the world are unable to do this. The outputs depend entirely on the future assumptions put into the model and the "scenarios" selected.

But in this case the Board, less than 6 weeks from having one set of “facts” presented to it and taking systemic action, now has another set of “facts” for securities losses extending out over ten years and, based on this “latest information,” decides unanimously to conserve two Corporates.

The impossibility of point estimates is acknowledged by NCUA in their $7 billion to $16 Billion range of loss projections presented in the webinar. However based on their selection of the "base case" outcome, they are asking credit unions to record losses on their income statements of almost $10 billion. None of these losses have yet occurred. However the Board is asking credit unions to write-off their entire 1% deposit in the NCUSIF and for shareholders in US Central and Wescorp to additionally write-off their entire MCS-PIC holdings. All this based on a change in a "point estimate" of at least 500% in six weeks for two of the Corporates.

Surely the Board must have seen that this kind of numerical accuracy is impossible and will change with the next set of input parameters, tomorrow, next month and next quarter. The staff said that they have contracted for three more PIMCO model runs. Secondly, this certain information was presented by the same staff who as recently as last July in public statements were assuring credit unions that they were in daily oversight of the Corporates and that the policy of holding through the dislocations was sound.

Unfortunately the data was also being presented as "honest" in contrast to the numbers developed by the Corporates. If the NCUA was so sure of their superior knowledge, why did they not present the information to the Corporates, their auditors and boards and then let the consequences fall where they should if there was dishonest data? Surely the Board must have been aware that if the staff was saying the Corporates were presenting self-serving information by selecting favorable assumptions, then how did the staff validate their own assumptions?

The Second Issue:

There is a fundamental difference in the skills and mind set need to run a market-based institution trying to succeed in a competitive economy and the capabilities that lead to success in a governmental career. This is not about domain knowledge but about leading teams, reading customer reactions, and understanding competitors versus creating programs and policies with formal authority from a statute.

As the regulator now becomes the regulated, how will it manage the inevitable conflicts in those two roles? How will the board of NCUA career employees decide between pricing to gain market share versus building capital; between investing in customer service and reducing expenses; between evaluating risk as viewed by an examiner versus need from a member credit union that has just seen 10% of its net worth eliminated by an external event? How does the CEO build a business plan-what are the objectives? How does he communicate and get reliable input from a market that has just had to write off over $1.0 billion because of an estimate whose details are unavailable to members?

The questions will go on. One of the most disconcerting points in NCUA's webinar was the repeated request, or was it a threat?, that credit unions need to continue to support the Corporates because if there were a liquidity crisis that caused a sale, then the expense would just go higher. With NCUA now in control, can they still blame credit unions if it is their leadership that is in charge of the outcomes? Or does NCUA even intend to "run" the credit union or just liquidate the assets as quickly as possible?

The Final Concern:

The government, the Treasury and all financial regulatory agencies have one overriding responsibility: to maintain public confidence in the areas of the economy they oversee. If actions undermine this fundamental trust, then no matter what safety and soundness rationale is provided, the NCUA or any regulatory agency has failed its most basic function.

In the Corporates, all of the fundamental cash flows, external borrowings, earnings and member confidence were showing very positive signs. Preliminary audit results were provided to the Agency by outside auditing firms. Plans were in place to pay down the legacy assets and to set up separate settlement solutions. NCUA has identified nothing they wanted to accomplish that was not possible through the LUA process in place—and that includes, if deemed necessary, management and board changes. However, the only logic NCUA presented is they wanted to be "in control."

NCUA's actions have led to an immediate write-off of almost $6 billion in the NCUSIF deposit and another $3 billion in MCS and PIC shares. Not a single loss in the portfolios has occurred, rather this is all based on estimates by recent model runs that show potential losses going from 2-10 years in the future.

The cooperative model provides options that other industries do not have because there is not private ownership or taxpayer interest to parse losses between. The ability to recognize losses as incurred and match expenses was and still is feasible.

Now having created greater book losses, increased apprehension, and diminished the trust, confidence and support that every government agency relies upon, the Agency is saying it must go to Congress to ask for governmental assistance to be housed in the NCUSIF. Not one dime has been spent, even the billion dollars transferred to US Central is still on the books.

But this could be a very fortuitous event. Perhaps Congress could ask to see how the Agency arrived at numbers so accurate for credit unions to request a specific line of credit (to be used as capital), a challenge so far eluding Treasury, the Federal Reserve, other financial regulators and every market participant, except PIMCO. The whole country should have the benefit of NCUA's process and models, not just credit unions. I think Congress would welcome that insight for the whole country.

Ed Callahan said it best:

"A single regulator is sooner or later bound to become a lazy or arrogant regulator. The best ideas will not bubble up; the regulated will not flourish."
-- pg 47, The Coaches Playbook





March 23, 2009


  • This media (and whitehouse) driven "crisis" is a fraud. Worst since the depression?! Not even close. This NCUA action is accident forgiveness for credit unions. Insure our insurance at the expense, and not just monetary, of every credit union in the country. PIMCOs "in control" verbiage closely models that of Obama's "take over" form of regulation he spoke about last night. The slow death march of private American industry marches on...
  • The more important question is why did the NCUA wait until now to do this? The signs that Wescorp and US Central were insolvent have been clear to us for over 18 months now. We pulled out our funds and the NCUA does an end around and charges us through the insurance fund. The NCUA is on par with our other government officials, Monday quarterbacks.
  • Very insightful, and thought provoking. Can we survive Federal regulators, that is the question. I hope someone is out there to watch over the Credit Unions true interest.
  • Thanks Chip for articulating what many are thinking and feeling. I have seen this industry face many challenges, such as taxation attempts and the FOM lawsuits. In each case, our leaders banded us together, like no other industry, and we were able to present a united voice and defeat our opposition. Little did we know that our own regulator would turn against us and attempt to bring an end to credit unions. This invasion and unnecessary occupation by the NCUA “axis of evil” has started a domino effect that they didn’t anticipate nor can they control. If this action has been in the works since September of 08, then this is either a complete failure of NCUA to perform their responsibilities as a watchdog or an intentional act to bring down the corporate system by withholding valuable information. At the very least, the on-site regulator sitting in the building at WesCorp should be fired for not raising the red flag earlier. In addition, the NCUA should be held accountable to explain why their PIMCO “guess” is so far off. Their selection of PIMCO seems very self-serving. What is up with their "SS" style secrecy and "blitzkrieg" mentality? It is time for us to once again band together to fight against this unjust and unnecessary action. Take the wheel Chip and call up the credit union warriors. I know you are just waiting to be called to duty, Mr. J. This is a call to arms for those of you who love this industry and the members we serve. Please Chip, bring us together.
  • Bravo! Least the NCUA forget... Like all other institutions that dared to challenge the fundamental credit union movement and foundation of "People, Helping People," credit unions will come together in the largest grassroots movement ever to be launched, and remind the NCUA that we will not go quitely into the night, we will not take their irresponsible actions lightly, and our roar will be heard by Washington!
  • The cost of maintaining my TAX EXEMPT CHARTER now exceeds its value. A conversion to a Mutual Savings Bank is our only option. This credit union can no longer afford the NCUA regulator. Within 72 hours of taking over the Corporates they have WIPED OUT our member capital & Paid In Capital. This is jusst installment #1. Good luck to those that may survive. This is an unjust taking - it is condemnation without compensation. Indeed the NCUA is a ROGUE agency
    Marianne Carpio
  • Chip, As always, I appreciate your perspective on these recent events. As you know, my credit union was the dark spot on the horizon of Ed Callahan's term as Chair of NCUA. At that time in fact, our losses would have been too great for the NCUSIF to bear. For a host of reasons, including prevailing sanity, we were allowed to remain independent and the market eventually corrected itself. We came back as a vibrant player in our community. But this recession has hit many of us in California very hard and the timing for NCUA's actions could not come at a worse time for us. I find it strangely ironic that we're again being pushed toward that edge by the very regulator that once spared us.
    Mary C.
  • Thank you for articulating the festering concerns that many of us have inherited! Unfortulately, how can we "un-ring" the bell?
    John R. Schaffner
  • Very nice site!
    Very nice site!
  • Very nice site! [url=http://aieopxy.com/osoxayv/2.html]cheap cialis[/url]
    Very nice site! [url=http://aieopxy.com/osoxayv/2.html]cheap cialis[/url]
  • Watch the trickle down to natural person CUs
  • Chip, this is the best writing and most thoughtful analysis you have ever done. The counter point of what should have been done ... NCUA thinking their number was the Right One ... you nailed all of the issues. Thanks partner
    Jeff Farver - San Antonio
  • Do you provide consulting services for conversions to mutual savings banks? That and/or private insurance is the only solution. The NCUA has completely lost its mind and is forging, as we speak, the doom of this industry.
    Larry B. Davis
  • Some sanity in a insane time. This article was "dead on" right!
  • Very thought provoking. The conflict of regulator and regulated is huge. I fear NCUA will make midiocre, if not poor, decisions whether they see this or not. Once our MCS and PIC has been written off the only master they need to serve is the government. This could make it easier to write the whole thing off and move on (remember CapCorp?). Afterall, the government is spending $1 trillion dollars fixing other institutions. Who'll notice another $16 billion? Does NCUA even care if we/they survive?
  • Why stay a credit union? The damage is done. The CCU situation is just a down-payment. The natural person credit union problems will be next to surface. In the end the facts will show credit unions are worse off than banks.
  • Excellent article! The NCUA has worried about transparency in executive compensation and approving community charters, while going asleep at the wheel with Corporates. The fox (NCUA) was charged with watching the hen house. If it was incapable of watching the hen house, how will the run the hen house? How much due diligence (interviewing) did they do in picking the new leaders of the Corporates?
  • Excellent article Chip. Thanks for your insightful comments. Hopefully someone at NCUA will read it and take note.
  • You Nailed It! In writing about the Hyatt Regency's bridge collapse in Kansas City (1981), noted Engineer and author Henry Petrosky surmised after hours of testimony, that one computer aided model does not support your argument. The proof is in the rubble. Just when this become rubble remains to be seen It's times like these that bring me back to an analogy written by Henry Petroski in the wake of horrific collapse of the
  • Excellent article and right on. Since when as an industry did we forget that our capital belongs to our members. Credit union members, as taxpayers, are being asked to bail out the rest of the banking industry, and are also being asked to bail out the corporate credit union system without any other assistance. How do you answer the question, "Why should I belong to a credit union?" Does anyone truely believe that the NCUA can manage a corporate credit union better than the professionals that were in place (Does Cap Corp ring a bell)? If the NCUA is trying to restore confidence in the system, their action will have just the opposite affect.
    Don Winstead
  • The Credit Union professionals in this country should go to church today and express their thanks that we have the great mind of Chip Filson working in our behalf. Perhaps now the congress and the White House will move the NCUA leadership circumstance higher on their priority list.
    Dick Johnson
  • Spot on! The Blind Faith in the infallibality of math and models is what got us into this mess. How well did Pimco fare since the summer of 2007 in "predicting" the current market condition and can it share its own "prediction" for the future? Andwhat will be the consequences for the NCUA board and staff?
    Franck Schuurmans
  • Spot on article. I do hope someone from NCUA gets this and wakes up. This corporate bailout and stabilization was delusional to begin with, and it only got worse yesterday. I hope there is still a credit union movement left after NCUA has their way.
  • Very thought provoking article. The NCUA is putting the entire CU industry at risk with their actions. I found their comments about PCA in regard to captial to be surreal. How am I going to build capital if they are billing me for almost 100bp? Never in yesterday's call was there any information on the acutal "economic loss" on the investments. Also, am I the only person who finds having PIMCO being allowed to buy these securities a huge conflict of interest?
  • Chip you seem to have done a 180 from the last NCUA gaffe when you were concerned about government bailout bringing the cry from bankers for credit unions to pay taxes. I would rather be taxable and regulated by an agency that knows what they are doing instead of watching the NCUA crash and burn.
    P O in CA
  • Chip, I couldn't agree more. The same modeling theory's that put the US economy on the rocks, is now embraced to the extreme. In the first NCUA bailout plan, I was skeptical and you were very supportive. The NCUA's arrogance and "Have Gun WIll Travel" attitude has removed the sheep skin that covered the wolf. I'm afraid the CU movement has been permanently moved off it's foundation.
    Larry Hoffman
  • As always, Chip, you have eloquently voiced what so many of us have been muttering in exasperated conversations with our credit union brethren. For a movement that was rendered speechless by NCUA's actions on Friday, we are grateful to have your voice.
    Caroline Lane
  • Having PIMCO do the analysis - HUGE conflict of interest!
  • The emperror has no clothes, Excellent article. It appears that careers were broken for making AAA investments and (in the Wescorp case) with staffed NCUA offices in the building providing oversight. Thank you Chip for saying what needed to be said.
  • You covered it thoroughly. Boards and Execs of natural person CUs need to read this analysis and prepare themselves for trickle down and fallout. I'm referring my clients to read it.
    Dan Clark
  • Chip you are so right! The best outcome would have been for NCUA and the Wescorp staff to compare their analysis of the potential losses. I doubt that Wescorp or any corporate would generate "dishonest" numbers. Two sets of experts who come to different conclusions does not mean that one of them is dishonest. I regret Chairman Fryzel's choice of words. If nothing changes I see little hope for rebuilding a corporate system. I was on the Wescorp Board when the Capcorp debacle happened. Those loses drove many credit unions out of the corporate system. This is likley to drive out the rest. The NCUA needs to show us the transparency they found lacking in the corporates and let us all see how they came up with their loss estimates. I also think that all of us working together can find the leadership and Board members needed to return Wescorp and US Central to member control. I agree that NCUA should regulate and let others run these institutions. Henry
    Henry Wirz
  • Chip, you hit the nail on the head. You said what all of us have been thinking since last Friday. I don't know if I'm just being cynical but once the rest of the corpoates write off their memberhsip PIC 1, PIC 2 and membership shares in US Central how many will still be solvent? Then what would stop NCUA from waltzing in and taking them all over? Then they could create just 4 or 5 super regional corporates they would run. And how much fun would that be? It wouldn't suprise me considering from what I hear that balloon has been floated at NCUA before. Time will tell.
    Blake Strickland
  • Thanks for giving us a voice, Chip. Unfortunately, the agency is too arrogant to listen (no matter what Gigi H. has to say...) All the authority and none of the accountability -- nice gig. What's the benefit of this industry again.... Anyone??
  • I have disagreed with most of Chips comments (at least the early ones) on the NCUA's Corporate bail out plan. He seemed to laud the NCUA's plan as a very good one and just what we needed. I on the other hand have thought the NCUA's plan has sucked from the begining. However in this article I find myself very much aligned with Chip's observations. The NCUA has completely miss-managed the dislocated markets for the last 18 months, I have no confidence in any plan created or implemented by them.
  • Chip, what a terrific piece -- one I can share with my senior management and board. I'd like the NCUA to have access to this piece along with all of the comments. As the reorganization of the financial services industry is underway, it will be extremely difficult for the Congress to see any value added from the NCUA.
    Fred Healey
  • Very thought provoking. Where are the checks and balances?
  • If I didn't know better, the best thing to happen to the banks battle to eliminate credit union is NCUA's efforts to make sure we lose all of our hard earned capital forcing us to go away or become a bank. Instead of having CUs be the answer helping so many people in this terrible economy, we need to worry about losses that may occur in 10 years and reduce our ability to weather the storm that is occuring today. What happens when they stop trying to help?
    Dennis D Degenhardt
  • The argument that since NCUA's analysis cannot place a "specific" number on credit losses that this analysis is somehow irrelevant is essentially flawed. Any good forecast should be providing a range of values under different scenarios. This is called stress testing and sensitivity analysis. Until someone invents the crystal ball that allows us to see into the future this is the only way forecasts should be carried out. Of course assumptions will have to be made. Natural person credit unions do this very same thing while building their allowance for loan losses. It is becoming strikingly obvious that these corporates did not understand the securities they were purchasing. I would put forward that the conservatorship was initiated not out of NCUA's desire to "be in control" but rather to avoid any interruption in payment/liquidity services which would have far greater consequences to natural person credit unions than the NCUSIF deposit impairment. Such an interruption would signal (falsely) to credit union members that NPCU's can no longer cover their liabilities and the rest would be history.
  • This appears to be the beginning of the end of the corporate system as we know it. The timing of the takeover is suspicious at best. The regulator is just barely able to examine credit unions well so how will they effectively manage two of the largest in the country. Why would Wescorp members want to support a credit union run by the regulator, will Wescorp be acting in the best interests of its members or in the best interests of NCUA and the bureaucrats in WDC? The failure of Wescorp and/or US Central will be a self fulfilling prophecy, just as CapCorp was. Why cannot valid disagrements occur without someone having to call the other dishonest?
    Jim McPheters
  • First thanks for the insight. The honesty of the Chairman is more suspect than the honesty of the corporates. And the conflict of interest with PIMCO begs the question did they answer what the NCUA want to hear? Sort of reminds you of the "NORM" era and NCUA Staff's lack of understanding of CMOs.
  • I doubt if Mr. Filson intended to do so, but he just made a compelling argument to fold the NCUA and NCUSIF into a consolidated federal “prudential” financial institutions regulator under the U.S. Treasury. Either NCUA messed up with the conservatorship or it messed up with the prior supervision of the corporates. Either judgment doesn’t bode well for retaining a separate federal credit union regulator and insurer.
    Marvin Umholtz
  • So WaMu is suing the FDIC. Is it possible that WESCorp shareholders will have a claim against NCUA, especially in light of PIMCO's apparent conflict of interest?
  • Great article Chip - please do more. AND - by the way, where was NCUA before the problem started? Why didn't they see this coming if there job is oversight? Mmm - who wasn't doing there job?
  • Chip's article is right on the money! NCUA made a horrible judgment with CapCorp, and obviously did not learn from it. Now, the irreparable harm they have done our industry is likely to end the NCUA's reign as regulator. How fitting...under the circumstances. Perhaps we should question whether Mr. Fryzel already has a job lined up with PIMCO after his NCUA appointment ends. This is way more than a super power trip gone bad!
  • @Comment 30: The concern is not solely the fact that the NCUA used mathematical models to make a range of estimates that is the primary concern, but that they are not transparent about the assumptions underlying these models. Then, on top of that, they are forcing credit unions to write-off deposits based on these models. Even more, much of modeling is based on unrealized losses, which the NCUA has yet to justify why these kinds of funds need to be raised RIGHT NOW in conjunction with conservatorship.
  • Like Ed Callahan, there are among us public servants who walk humbly and with reserve in the exercise of their regulatory role on behalf of the public trust given to them. While making no assertion about the political leanings of the current NCUA leadership, we can pretty safely say that they are most definitely intoxicated with a world view described below by economist Thomas Sowell in this excerpt from "Presumptions of the Left." "Many on the left may protest that they do not believe in the ideas or the political systems that prevailed under Hitler, Stalin or Mao. No doubt that is true. Yet what the political left, even in democratic countries, share is the notion that knowledgeable and virtuous people like themselves have both a right and a duty to use the power of government to impose their superior knowledge and virtue on others." We can pray that these guys sober from their delusion that they actually understood what they did and are doing. I know! It is a miracle when any one in this state of mind ever rethinks their thinking once they have imbibed. We can hope! (Great work Chip!)
    Scott Vandeventer
  • The idea of funding our own analysis is intriguing to me. Get all of the corporate CUs to submit their security portfolio details and have an independent (truly independent, not an investment firm) provide their analysis. Give the NCUA, who would have to hand over the USC and Wescorp data or be considered transparancy hypocrites, a chance to step up. WIth so many retail credit unions being impacted, the funding for this should be readily available. Only then can we get a clear picture of the NCUA's intent.
  • Well said Chip. I only hope the end result of this is a realization by policymakers that the regulated, in this instance credit unions, have far more capacity to make good business decisions than do the regulators. While a "trickle down" effect is possible, so is a "trickle up" effect, whereby desparate policymakers finally wake up and ask those who have been effectively and conservatively managing their institutions to prosperity for many years, "How should you be regulated?" This is our opportunity to make our voices known to policymakers who, it is becoming increasingly clear, have no clue how to fix the mess. How about asking the institutions who have largely avoided it? Let's collaborate as an industry and let them know.
    Steve French
  • I'll avoid the obvious issues of conflict of interest, PIMCO and their interest in these types of securities at bargain basement prices, and the NCUA's issue of not wanting to be rolled into the FDIC or other body, and try to take a more constructive approach. If enough CU's were willing to provide the data, we could hire any of a number of securitiy analysis services that are commonly used for this type of work and arrive at our own values. I think most of the remaining corporates would go along with this approach, which would put the NCUA in a difficult position; emphasizing the need for transparancy, but then not providing it. The argument would likely be that this information would get out and put U S Central and WesCorp at a competitive disadvantage, which is bunk given that there is no trading in these securities anyway. Alternatively, they could provide the CUSIPs directly to the analytic firm of our choice and we would never need to take possession of the data. I write this because I saw where the new (and former??? What's up with that??) CEO of USC is considering creating a bad asset fund that would hold these assets and then be sold to non-CU investors. This would necessitate a marking-to-market of these securities, ensuring that the losses that we are trying to avoid by keeping the corporates liquid (which is why we're being pinched for assessments and premiums) would be realized since the assets would need to be moved at reduced prices. Search "Jim Nance" on the Kansas City Star website if you don't believe me (www.kansascity.com) . Is anyone inttrigued with this idea?
  • We have a regulator who believes it knows what is best for all credit unions. Members who really don't care one way or another. And very little political clout. My big worry is when our 2009 numbers come out. Members will not care or understand what a corporate CU is. All they will see is a huge loss for my CU. What is there to stop a run on the CU? Of course the NCUA may come in and put me under PCA for not having the required capital before then. Was any of this capital lost due to my having poor judgement? Yes, I listened to the NCUA and supported my coporate.