Last week the NCUA, reversing five years of FOIA denials, detailed its payments of more than $1 billion to the attorneys who secured $4.3 billion in settlements from a lineup of Wall Street and international big banks that sold the corporate credit union system the kind of sometimes questionable securities that helped spark the housing crisis and Great Recession.
At the same time, the regulator now says its own board has no role in allocating the rest of the proceeds, including how, when, and if any of the money will be returned to the credit unions who are its rightful owners.
Natural person credit unions funded the corporate credit unions the NCUA seized and shut down in September 2010, and those same credit unions then funded the recovery through fees imposed by the regulator’s Temporary Corporate Credit Union Stabilization Fund.
The NCUA replaced those five shuttered corporates with five Asset Managed Estates funded through the NCUA Guaranteed Notes program. The recent spread sheet detail of attorneys’ fees and other reports show the NCUA has paid the more than $23 billion from the cash flows of the AMEs as follows:
The lawyers filing suit: $1,003,029,479.
The holders of the NGN notes: $16,952,000,000.
Borrowings from the U.S. Treasury: $5,100,000,009 (from peak outstanding at June 25, 2010.)
Reimbursement of NCUA expenses: $112,347,785, plus tens of millions in other expenses paid directly from AME accounts.
The NCUA said the attorneys worked on a contingency arrangement of 25% of recoveries. In this case, that’s roughly the equivalent of 250 attorneys each being paid $400 an hour for 2,000 hours a year for the past five years.
Board chair Rick Metsger said outside attorneys were needed for such a complicated, lengthy process. But the real question remains, what has been done with the balance of $3.1 billion that is due to the five AMEs?
After launching what initially promised to be a new era in NCUA board leadership, chair Rick Metsger and member Mark McWatters could have made dramatic statements showing their responsiveness to the credit union system.
Rebuffed Requests For Transparency
The NCUA has repeatedly refused to disclose how it allocated the $3.1 billion in remaining legal recoveries to the AMEs, whose beneficiaries are the capital shareholders of the liquidated corporates.
The latest refusal came on Oct. 21, in response to a Freedom of Information Act request about the latest $533 million allocation to WesCorp’s estate. The FOIA request specifically asked for “documents that would show who made the decision and the reasoning on which it is based.”
When the agency sets no measurable goals, it's hard for credit unions to hold is accountable. Read more in, "Lessons Learned From The NCUA Budget."
The shareholders of the five liquidated credit union corporates wrote off approximately $5.6 billion in member capital shares and retained earnings. They and all other credit unions paid another $4.8 billion in TCCUSF premiums.
The June 2016 estimates from the NCUA show credit unions should receive a minimum of $2.4 billion and up to as much as $4 billion. These estimates continue to increase every six months as the updated “resolution spread sheet summary” is published.
One would hope the NCUA would be eager to show AME shareholders just how well their recoveries are proceeding. Just as important, one would hope the NCUA board is overseeing the recovery process that now is more than 10 times the amount on NCUA’s most recently proposed annual budget of $300 million.
The NCUA budget process has become more transparent, with public hearings and draft expenditures out for comment. This is not the case with the multi-billion TCCUSF fund decisions.
The NCUA board has apparently delegated all responsibility — and accountability — for the largest recoveries ever in credit union history to an office in its agency that primarily liquidates or forces the merger of tiny credit unions.
Who’s Making The Call?
According to the NCUA’s director of public affairs, John Fairbanks, the board does not even have a role in these decisions. Following the Oct. 20 public announcement of the legal recoveries and fees paid, Callahan & Associates submitted two questions about that press release to the NCUA:
When did board members first learn of the distribution among the four AMEs of the most recent cash settlements?
What role, if any, did the board have in the allocation of this most recent settlement among the AMEs?
The following is Fairbanks’s reply:
“I talked with staff and found the board has no role in the allocation of legal recoveries. (Emphasis added.) The AMAC was delegated that authority years ago ‘to exercise any and all powers of a liquidating agent of an FCU conferred upon the board by the Federal Credit Union Act.’ The Office of General Counsel does follow a distribution protocol with respect to legal recoveries; however, the details of that are not public information.” (Emphasis added.)
AMAC is the NCUA’s Asset Management and Assistance Center. Based in Austin, TX, it’s responsible for handling credit union liquidations and asset recovery and management.
So, apparently, the board has delegated all responsibility — and accountability — for the largest recoveries ever in credit union history to an office in its agency that primarily liquidates or forces the merger of tiny credit unions. This from the same agency that deemed it necessary to pay more than $1 billion for outside legal help to get the money in the first place.
And, perhaps even more egregiously, this federal regulator says the credit union system it was created to serve and protect has no right to know how the movement’s money — money that by right belongs to the more than 106 million members of the nation’s 6,000 federally insured credit unions — is being allocated.
Any board delegation of authority can be reversed. That’s happened numerous times in the agency’s history. But the board that readily did an about-face after five years of FOIA denials concerning attorneys’ fees now “has no role” in the much more consequential portion of funds due credit unions?
Why Allocations Matter
Three of the five corporates the NCUA liquidated were solvent at the time they were liquidated. For example, the June 2010 5310 report filed by Southwest Corporate showed capital of $86 million after setting aside more than $454 million in OTTI write-downs. Not only was the corporate solvent, but there also is still more than $200 million left in the OTTI “reserve,” according to the NCUA-issued legacy asset spread sheet at year-end 2015.
The NCUA now projects the Southwest Corporate shareholders will recover their full $404 million in capital shares. To put this in context, the bridge and successor corporate, Catalyst Corporate, had total capital of $217 million at July 31, 2016. In other words, the capital recoveries will be almost twice the current amount of Southwest’s successor firm.
So, what is the formula for allocating legal recoveries to solvent corporate credit unions versus to WesCorp, whose recorded losses are greater than all its reserves and capital accounts? For example, a recovery allocated to U.S. Central, which has a current projected payout of 24% ($408 million out of total capital shares of $1.7 billion) would be redistributed to the other four estates plus the successor corporates still operating today that had U.S. Central membership shares. However, any recoveries allocated to WesCorp’s estate increases the TCCUSF net balance but will unlikely ever be sufficient to benefit WesCorp shareholders.
The NCUA's continued secrecy not only perpetuates uncertainty and mistrust; it undermines confidence in the whole recovery process.
When Will The Board Step Up To Its Role?
At least the agency has stopped imposing fees on credit unions to fund the corporate bailout kitty, and the fund is supposed to wind down in 2021. Surely there’ll be some answers by then. Or at least refunds. But if there are no clear answers now, how much more confused will the circumstances be in five years?
The current estimated recoveries of $4 billion and rising should be an extraordinarily positive event for credit unions. Indeed, the agency ballyhooed the process all along, using press release after press release to praise itself and its former chair Debbie Matz for its unprecedented success in securing the settlements and indeed, saving the credit union system itself.
But now, the NCUA’s continued secrecy not only perpetuates uncertainty and mistrust; it undermines confidence in the whole recovery process.
Most importantly, secrecy and lack of accountability can easily lead to less-than-optimal outcomes, even to the wasting of assets. A government agency with responsibility for more than $4 billion of member funds needs to be open, above-board, and responsible in its oversight. What could there possibly be to hide?
After launching what initially promised to be a new era in open board leadership, Metsger and board member Mark McWatters could have made dramatic statements showing their accountability to the credit union system. Right now both are missing in action.