“KPMG’s latest report, following the Board’s announcement last November that we do not expect an assessment in 2014, demonstrates the agency’s planning and management are prudent and that we are maintaining transparency as we work to complete the resolution of the corporate credit union crisis.”
(Chairman Matz comment in press release for the 2013 audit of the Temporary Corporate Credit Union Stabilization Fund.
NCUA has issued the annual audit of the TCCUSF with no discussion of the underlying events and assumptions that would enable credit unions to evaluate the status of their interests in the corporate takeovers and liquidations. The above-mentioned “transparency” provides no details of the change in securities’ values, how the $1.0 billion-plus in legal recoveries are being apportioned, nor the status of the five corporates’ individual asset management estates (AMEs), for which credit unions were given receivers certificates.
So the underlying questions, and doubts, persist: How real was the actual crisis? How much of the events were due to NCUA’s own actions – specifically, its overestimates of losses in future decades, which it required be expensed immediately?
Why An Independent Review is Necessary
One might say NCUA managed the mortgage crisis by destroying organizations, purging leaders from the system and forcing remaining leaders into a corner where no one would speak up for fear of retribution. And to avoid an evaluation of the destruction of system capital and liquidity, one might say the Agency disregards its duty to respond to industry inquiries, disrespecting the cooperative spirit that is the foundation for all collaborative solutions. One might say that.
But in the end, what matters is this: History will only repeat itself over and over if we can’t provide an accurate record of this period and learn from it. The organizations and professionals that were washed away with estimated losses will never be heard from again; they have no voice. And in the future, this could be you or your organization if we don’t use our voices now.
It is simple to just turn away and give NCUA the benefit of the doubt – to believe the Agency was doing the best it could in a bad situation. But that is not the case. By now, NCUA could have learned from the past and become better allies with credit unions in the stewardship of the member-owners’ money the Agency was designed to protect.
Even now, it isn’t too late for NCUA to open up the corporates’/AME books, to initiate a full and impartial dialogue using current information with industry experts, and to identify the right lessons. It isn’t too late to rebate premiums that were improperly assessed under the TCCUSF legislation. It isn’t too late to correct the rules that neuter the corporate system and diminish member value. And it still isn’t too late to re-imagine a vital role for the CLF. But at some point, the gulf of distrust will become so wide that neither the regulator nor the credit union community will believe in the other’s future goodwill or intentions.
The analysis below shows why these and other questions continue to be raised, as well as the lessons that can be gleaned so far.
Two Ways of Looking at Legacy Asset Value
NCUA has posted on its website its semi-annual estimates of the market value of the legacy assets . The latest table (through December 2013) shows that the year-ending market value increased $4.0 billion in 2012 and $2.4 billion in 2013, or a total of $6.4 billion in two years.
The result is that the ratio of remaining NGN notes to be paid off versus the market value of the legacy assets has gone from 128 percent (2011), to 111 percent (2012) to 97 percent at yearend 2013. In dollar terms, the estimated market value of the legacy assets alone now exceeds the remaining payments due on the NGNs by more than $500 million!
This is very good news! This surplus includes no funds from the $4.8 billion in credit union premiums or recoveries from legal efforts.
The other way to assess the prospects for recovery is to look at the actual losses in each corporate versus the OTTI amount each expensed, and to compare how accurate these projected losses are proving to be.
The U.S. Central Example Through December 2013
U.S. Central contributed 43 percent of the legacy assets used to collateralize the NGN note issues. At June 2010, U.S. Central reported positive capital of $310 million after recording total OTTI projected expense due to possible losses of $3.544 billion. Of this “reserve” (technically, security write downs), actual losses of $396.8 million had been realized, leaving a balance of $3.15 billion when taken over by NCUA for liquidation.
As of March 31, 2014, actual losses on NCUA’s list of U.S. Central’s assets total $1.327 billion, which would leave a total reserve balance of $1.8 billion before any need to tap into the remaining capital of $310 million. At March 2014, $10.3 billion of U.S. Central-sourced securities remain, so further losses are probable, but unlikely to exceed the more than $2.0 billion remaining OTTI and capital at June 2010.
This surplus is confirmed by U.S. Central’s AME accounting summary, which the Agency is passing out privately but has not posted publically. This accounting based on the year-end market value of U.S. Central’s legacy assets shows a positive balance of $686 million at December 2013. This “surplus” is a $1.3 billion improvement from the negative balance of $625 million at yearend 2012.
Almost all of the receiver’s certificates for U.S. Central are held by other corporate members. Future recoveries will enhance each of these corporate credit union’s capital accounts; moreover it will enhance the prospects credit unions that hold receiver’s certificates as former members of Members’ United, Southwest and Constitution corporates. All three have significant OTTI reserves remaining at March 31, 2014, plus whatever will be distributed from U.S. Central.
The accounting for each individual estate is also useful for learning how the legal settlements are being apportioned. For example, U.S. Central’s estate received $488.5 million in 2013. But the statements also raise important questions about why NCUA would be charging its guarantee fee ($27 million for U.S. Central) to the AME account. Where are these funds going? The accounting also shows $180 million in “other liquidation expenses” charged to the U.S. Central AME accounts. What are these expenses, which equal almost 75 percent of NCUA’s annual budget, being used for?
Latest Data Shows Preliminary Lessons from NCUA’s Corporate Plan
The latest TCCUSF audit and the U.S. Central AME accounting suggest important tactical and system-wide lessons for credit unions concerning NCUA’s resolution plan. These include:
The inaccuracy, if not folly, of relying on sophisticated models and experts to predict the future. NCUA’s own table shows the projected “losses on legacy assets” from July 2010 were at least $6 Billion overstated as of December 2013. In just the last two years, the legacy assets have gained more than $6.4 billion in market value even as actual losses are subtracted. Future predictions armed with regulatory authority and no appeal is a toxic combination for successful workouts for cooperatives.
The reserves for OTTI losses expensed by the five corporates were more than adequate to cover investment losses. The $5.0 billion remaining in corporates’ OTTI that is still available more than four years after these credit unions were all liquidated, shows the fallacy of counting only potential losses without considering the earnings accruing from an ongoing entity. NCUA’s plan locked unknown losses in place and provided no opportunity for income to reduce these potential shortfalls. This liquidation action was taken even though three of the five corporates reported positive net worth at the time of liquidation.
Example:The initial value of the securities bought by U.S. Central was more than $40 billion. These securities had paid down at the time of liquidation to $19.4 billion. Losses to date are approximately $1.327 billion for a loss rate of 4.42 percent on reduction in total principal so far. Over the 10-year period of this portfolio (of which $10.3 billion is still performing), this computes to an average loss rate of 44 basis points per year. This rate of loss is certainly much less dire, and financially more manageable, than NCUA’s loss projections when it conserved the corporates.
Managing actual events is far superior to attempting to project all possible losses 10 years or more into the future and expensing that estimate today. In the middle of a crisis, it is hard to foresee recovery prospects because of fear and uncertainty. For example, NCUA’s reserving expense for the NCUSIF was 7 times (700 per cent) greater than actual experience. This error resulted in unneeded premiums just as credit unions were pulling out of the economic downturn.(put in link to NCUSIF article)
The NGN structure, which used Wall Street advisors under a banking, not cooperative, approach was much more expensive and rigid than other options . This rigid structure has locked up until 2021 billions of credit union cash assessments that are not now needed – and never were.
NCUA’s confusion in raising cash for TCCUSF liquidity needs versus cash for actual losses cost the industry in billions in excess premiums. Instead paying a nominal amount in interest expense for liquidity borrowings at a rate of .15 percent would have sufficed. The $700 million TCCUSF premium expense in July 2013 was not supported by losses or write downs on the legacy assets; moreover it immediately reduced resources for members because it locked up funds that credit unions would have used multiple times for loans to members.
Reporting on the TCCUSF plan has been late, infrequent and so general that it is meaningless for understanding what is happening. After almost four years, NCUA has neglected to inform holders of receiver’s certificates about the status of their recovery potential. Millions in AME expenses are unexplained, raising doubts about how these funds are overseen and accounted for within the Agency.
Why The NCUA's TCCUSF Track Record Matters
Understanding the status of the corporate workout is about more than millions of wasted or misused funds and unintelligible reporting. It is an example of the Agency using its most severe authority, conservatorship, without recognizing the need to present itself as a thoughtful and learning organization that is responsible to the credit union community.
Currently, NCUA is proposing comprehensive rules to give it even greater authority over the cooperative industry. The Agency wants to shut down 74 long-operating, home-based credit unions because they don’t operate like a “modern institution.” It intends to require specific capital reserves for every asset held on credit union’s books using a single, national formula; and when the formula is still not enough in examiners’ eyes, NCUA would give examiners authority to require more than the rule or federal statute mandate.
Throughout the unfolding TCCUSF workout, NCUA has continued to operate on auto pilot. There doesn’t appear to be any updated thinking or adjustment in actions based on new information. By failing to release data on the status of the five separate AME accounts, the regulator undermines its reputation for oversight and its relationship with the industry it should be serving.
NCUA’s unilateral actions and antipathy to the corporate model have resulted in dissolving credit unions’ unique, cooperative liquidity safety net available to all. It has reduced the CLF’s role to insignificance, wiping out 40 years of system success in creating a convenient, cooperative source for liquidity and investment option.
Instead of playing up the potential of the credit union charter and its unique capabilities, the Agency has mimicked banking regulations and FDIC workout approaches relying on “experts” from Wall Street. This practice continues to jeopardize member-owners’ trust in a regulator that does not understand cooperative design.
NCUA must focus on building consensus and showing they are capable of evolving and creating solutions that fit the current times, along with a promise of flexibility to fit the future. Their goal should be to ensure that past practices evolve and lead to better solutions going forward.
The power of the cooperative model will not be found in better rules. Rather, the cooperative design places the member-owners and their vision of mutual self-help at the center of everything the industry does. What an achievement it would be if the regulator would believe in and act on the same principles that inspire every credit union!