Five Corporate Estates Gain $570.1 Million In Second Quarter, But NCUA Secrecy Remains

The latest news should be good for credit unions invested in the failed corporates, but lack of regulator clarity makes it hard to know what's really going on.

 
 

The corporate credit union bailout appears to be a financial success, but it’s hard to say.

That’s because of the NCUA’s continuing secrecy about how it’s managing and distributing the assets of the Temporary Corporate Credit Union Stabilization Fund, money it has yet to begin distributing to the natural person credit unions who are the rightful owners of those funds.

The five asset management estates created to manage and then liquidate the remains of the corporates seized by the NCUA in the depths of the Great Recession report a $570.1 million gain in total equity in the quarter ending June 30. This is on top of the $161 million gain the regulator said the five AMEs saw in the first quarter of 2016.

Read more in, "The Corporate Bailout Fund Grows While Credit Unions Wait."

The primary source of the second quarter increase was approximately $714 million in legal recoveries from the investment houses that sold toxic securities to the corporates. That $714 million resulted in a net gain of $519 million after the lawyers were paid $195 million. Each of the estates also recorded an increase in asset values and net spread income, according to NCUA figures, bringing the total gain for the second quarter to $570.1 million.

But the NCUA has not made public how the funds were distributed among the AMEs. And the agency has yet to return a single dollar of the $3.1 billion the agency has recovered from Wall Street to the credit unions that invested in these corporates.

The need for transparency and clarity only grows as the 2021 date for the TCCUSF to be shut down draws inexorably nearer.

Three AMEs Growing Their Net Worth

The financial position of each AME, and therefore the status of the credit union capital accounts, is very different. Three AMEs will be refunding capital holders some or all of their share balances. (Currently Southwest shareholders are projected to receive more than 100% of their holdings.)

Therefore, the allocation of the legal recoveries is a critical factor in determining which shareholders will benefit from legal settlements. Unfortunately, there was no discussion or information about how the NCUA allocated the cash from these latest funds, let alone earlier recoveries.

Here is status of each AME at the end of the second quarter on June 30, 2016: 

AME Name  Net Legal Recovery (In Millions) Net AME Position (In Millions)* $ Shareholder (In Millions) % Recovery
Southwest  $62.1 $405.9 $403.7M 100%+
Members $60.4 $262.5 $259.6 52.7%
U.S. Central** $13.3 $1,415.2 $408.3** 24.2%
Constitution $0 ($3.7) $0 N/A
WesCorp $383.0 ($3,583.7) $0 N/A
Totals $518.8 ($1,504.5) N/A N/A

*Data as of 06/30/16
**Shareholder recovery after payment to NCUA/TCCUSF of $1.0 billion capital share note.

How Are Legal Recoveries Allocated?

The NCUA made no announcement of the receipt of the settlement funds. Nor was it disclosed how the funds were allocated to the different AMEs. Constitution, which is near solvency, received no funds whereas WesCorp was given 75% of the settlement. Who made the decision to distribute the funds as reported? And what was the basis for the allocation?  

A different distribution decision would make the shareholders of four of the corporates whole, whereas there is very little chance that WesCorp’s current net deficit of $3.6 billion will ever be positive. Yet there was no announcement or any other information about how this half a billion dollars in credit union members’ funds was earmarked for individual AMEs.

Transparency And Confidence Begins With The Board

Neither current NCUA Board member was at the agency when the corporate takeovers and subsequent liquidations were set in motion. Thus, chairman Rick Metsger and board member Mark McWatters have the opportunity to chart a course, not to defend or debate the past but to ensure confidence in future NCUA decisions about the five AMEs and the TCCUSF.

Keeping credit unions in the dark about the sources and uses of funds has the opposite effect.

Transparency should ensure that timely and full disclosure is made at least quarterly of:

  1. The sources and uses of funds for each AME and the TCCUSF;
  2. The methodology and supporting details for asset valuation;
  3. The persons responsible for overseeing these billions of dollars of credit union funds, and make them available for public question and answer.

The ideal solution would be to add credit union capital shareholder representatives to the oversight group to ensure that credit union interests are always kept paramount. Such representation is not only consistent with cooperative principles, but it would also bring expertise that could enhance recovery options and decisions.

The need for greater clarity is urgent; the opportunity for gaining industry respect is significant. 

With literally billions of credit union dollars at stake, this topic is far more consequential to credit union financials than the NCUA’s annual budget decisions. The need for greater clarity is urgent; the opportunity for gaining industry respect is significant.

 
 

Sept. 1, 2016


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