On August 31, NCUA filed an amended complaint against 15 former officers and directors of Western Corporate Federal Credit Union that seeks recoveries of $1.4 billion. There are two probable outcomes from the suit.
- The suit significantly lessens the possibility of WesCorp restructuring with the help and capital of its members. The credit unions whose personnel include the 15 former officers and directors that are named in the suit are unlikely to participate in future WesCorp business entities, and other credit union members will be reluctant to consider future governance roles. Today, WesCorp is financially stable, profitable, and gaining market traction. The suit could critically damage its recovery.
- The only money that will pass hands in this action will be among lawyers. The suit’s logic is as far-fetched as the fiction that there are assets worth the $1.4 billion sought in damages.
So why did NCUA do this? What is the motivation for an action that has no practical result and deters credit unions from supporting WesCorp and other Corporate Boards? Is this just regulatory theater using credit union props and money?
The following factors might have influenced NCUA’s decision to re-file the suit.
- NCUA had to do it. The initial complaint of the seven credit unions has now been withdrawn. If NCUA had not stepped in, it would have been the accused rather than the accuser. It had a legal-political problem.
Perhaps, but then why did the NCUA amend the filing and add more names? Why spend resources when the impact on WesCorp’s future will be nil or hurtful?
- There is a loss. Someone caused the loss. Therefore, NCUA must find and punish the guilty.
Finding a scapegoat and holding someone accountable is a widespread motive when disaster occurs. In this situation, there are two problems with this logic.
A. The complaint alleges management and directors caused the loss in their specific actions and general oversight responsibilities (see the complaint’s risk concentration/leverage interpretation of WesCorp’s financial history under the “WesCorp’s Era of Growth” section). The logic of this section is like blaming New Orleans for Hurricane Katrina’s damage (e.g., the city got in the way of the storm).
B. The complaint omits the fact NCUA was on-site the entire time with examiners conducting daily reviews and regular in-depth exams (for more information, NCUA publishes its Corporate Examiner’s Guide on its website). The Corporate exam process involves as many as two full, separate exams at mid-year and year-end. The exam CRIS rating system gives two categories of ratings from highest (1) to lowest (5). The first category measures five financial empirical ratings; the second, more qualitative category reviews seven areas of risk management. These exams are an in-depth, direct, contemporary record of what the Agency thought, said, and did during the build-up to the crisis.
We don’t need to review the examination transmittal letter of the report in 2008 to know what the Agency thought about WesCorp’s management, expense control, and risk concentration and leverage or what the Agency thought about the pending crisis. Board members, OCCU, and senior staff as well as the Agency’s annual report are clear in their numerous public comments (see page 2 of the linked-to Callahan Report). The situation was closely monitored and under control.
If NCUA’s logic is to blame people who were there, regardless of causality, then the Agency will become a part of a circular firing squad. Lawyers will depose all participants for what they said and did at that time and not rely on retrospective reconstructions of what should have been done.
Reviews of compensation plans, including SERP transactions, are another important aspect of the Corporate examination process. Such reviews are routine by on-site Agency personnel as well as by the Washington office. If the Agency finds these transactions inappropriate now, what did it say then?
- The NCUA staff is doing this. This is a common speculation. It’s the zealous Agency staff run amok with its personal agenda telling the Board what to do. Some NCUA staff persons are zealous and some are close-minded. After all, NCUA personnel are no different from the rest of us. But for the most part, this staff was in place long before the crisis. This staff was, mostly, in comparable positions under the prior Chairman when big events occurred (Katrina as well as financial ones), and there was no comparable posturing. Yes, staff filed the complaint, but that is akin to blaming the war on the soldiers sent to fight it.
- It’s tit for tat. Two Corporates filed suit against NCUA and U.S. Central, and this is its message back. “If you shoot at us, we’ll shoot at you.” This is too petty to refute.
- This is the way Washington works today. There is a new sheriff in town. Persons will point to Goldman Sachs’ SEC fine of more than $500 million. Wall Street viewed it as a shakedown. Political leaders in Washington want to be perceived as tough and decisive. There was a crisis with enormous costs, failures, and real mistakes. And there was a change of political leadership.
There IS more testosterone in the Washington regulators' water supply than a few years ago. Institutions have failed. Congress legislated to correct real abuses and wrongs. But this complaint has nothing to do with the consumer issues Congress took on (see point two about management responsibility).
- It is Agency policy or standard operating procedure. Anytime there is a loss, the Agency looks to recover assets. This is just one insurer suing another. Good SOP, but there will be no recoveries; only lawyers will get paid.
- It’s just regulatory theater. The Agency wants to remind credit unions it has clout. It will exert its authority whenever and however it best sees fit. The Agency wants to make clear it cannot be accused of being in bed with the industry. This interpretation, at its harshest, says the action is meant to embarrass, if not intimidate, today’s leaders as well as any future persons who might oppose Agency policy or actions.
There is probably an element of truth here. Abuse of power is one of the failings that can occur in any formal authority-power structure. However putting leaders in a public stock, as in colonial times, to embarrass them risks the same press attention on the Agency when events turn out differently than the actors thought they would. The press can be fooled or manipulated for a time, but ultimately the full facts are disclosed, more facts revealed, and different judgments are made of the actors.
- There were real culpable wrongs committed that need to be prosecuted. The retrospective financial history the Agency creates in its complaint has certain plausibility — with the benefit of hindsight. We are all smarter today than in 2007 and 2008. Nobody saw the problem (see No. 2 above) but someone should have.
The difficulty with this theory is some parts of the complaint are just plain silly. The complaint uses silly words, “defendants at all relevant times acting as…conspirators,” and makes the most absurd assertion that Bob Siravo did not work hard enough; presumably he played too many rounds of golf with members. “In addition, the Conservator is informed and believes, and based thereon alleges, that Siravo breached his duty of care by not devoting sufficient time and effort to his duties as President and CEO of WesCorp,” (paragraph 115).
- All of the above.
Undoubtedly, NCUA considered many factors. But that doesn’t answer the question, “why now?”
What We Know and the Intent of the Re-filing
We don’t know the reason. There has been no public discussion or comment as to why now. What we do know is a lawsuit’s timing is a managed announcement; it is not driven by some external force or event. It is part of a pattern of activity and reveals a mind set. This is about future Agency intentions, not past actions.
However, one thing is certain. The Corporate network, of which WesCorp is a major component and exhibit No. 1 for the problems that descended on credit union system, is having one of the best years ever in terms of earnings.
Record low interest rates are generating an average ROA through May of more than 45 basis points. This earnings rate on the current asset level ($75 billion plus U.S. Central’s $25 billion) would make a major contribution to the capital restoration and offset losses on securities. That result is certainly more reliable and beneficial than the made-up claims in the complaint.
Moreover, Corporate shares are stable, expenses are down, retained earnings are growing, and new business models are being created. The Corporates, like problem credit unions across the country, are recovering, renewed by their own efforts and helped by record low interest rates and a stable, recovering economy. The most important contributor to the Corporates' recovery is the yields from the legacy assets, which have been marked down fully and thoroughly.
NCUA deserves credit for the actions it took to keep the Corporate system intact and functioning in January of 2009. It was correct in acting in a “systemic manner” versus each Corporate trying to survive on its own with a maximum insured shares limit of only $250,000.
The system is now healing. We have the time, the resources, and the willingness of many to resolve the two-to-four individual Corporate’s futures that may not have sufficient earnings — depending on the ultimate timing of the cash losses incurred — and not immediately expense “losses” taken in OTTI write-downs. These resolutions are manageable — if there is good will and common cause by all parties.
The intent suggested by the timing of the lawsuit, and the unstated No. 10 reason, is this successful, in-place, system-funded solution that is bearing fruit will not be allowed to continue.