Why Credit Unions Must Secure Their $4-5 Billion Windfall From Corporate Liquidations

Cooperatives are different by design. All of the value created is paid forward to benefit future members in the form of retained earnings and operating capabilities. As tragic and unavoidable as the corporate credit union problems were, the NCUA still has the chance to demonstrate its support for the uniqueness of the member-owner model.

The agency can show that support by ensuring credit unions and their members receive their funds from the legacy assets remaining from the corporate credit union takeovers in 2010. That’s in addition to the nearly $2.5 billion in settlements with Wall Street investment banks, the latest a $225 million payout announced this month with Morgan Stanley.

While there’s blame aplenty to go around for the erroneous calculations and forecasts in the oversight of America’s corporate credit unions, those errors are behind us. The challenge now is to make sure members get their money back.

The NCUA’s latest balance sheet updates for the Temporary Corporate Credit Union Stabilization Fund (TCCUSF) and the Asset Management Estates (AMEs) of the failed corporates show a potential surplus of $4 billion to $5 billion from the so called legacy assets alone. That’s not even including the legal recoveries.

With billions at stake, the crucial question is how will the credit union community ensure these funds are returned to their members and not appropriated by NCUA?

This update of the NCUA’s liquidation of five corporates consists of two separate articles:

• This article on why it’s vital for credit unions to become engaged and assert their interests in the distribution of the growing surplus. One of the unique responsibilities of a co-op leader is to ensure the member-owners’ interests are always protected.
• The second article is a review of the data that documents the surplus and how it has arisen from what were supposedly insolvent institutions. While some, myself included, have been critical of the NCUA’s transparency, if credit unions don’t respond to the limited information the regulator does release, then the co-op system’s checks and balances could fail once again.

Without the details, there is reason to be concerned as to how these recoveries will be returned to credit union member-owners.

What’s Happening To The Settlement Money?

An immediate and significant example of why credit unions should be involved is the allocation of the legal recoveries. NCUA has repeatedly publicized its ongoing efforts to sue numerous banks and others which were involved in the issuance of the distressed securities. The regulator’s public information office published a new listing of all recoveries on Dec. 10, 2015, showing it had collected a total of $2,485,350,000.

An NCUA spokesman confirmed this week that funds from any settlements or judgments will be going solely to the AMEs after payment of expenses and fees. The agency has again declined, however, to explain how much the lawyers got and how the remaining money is allocated among the five AMEs, the estates left from the failed corporate credit unions.

If as reported, the lawyers get 25% of the settlements, how has the balance of $1.9 billion been distributed among the five AMEs? This decision affects every credit union with a capital account in these corporates. In the September AME financial statements for example, Members United reports $83.6 million in settlements and Southwest, $46.0 million in settlements as income. How were these amounts determined? Which legal recovery were they from?

Without the details, there is reason to be concerned as to how these funds will be returned to credit union member-owners.

The Current Context For These Issues

Whether one assumes the low end of $3 billion in net recoveries or the $5 billion suggested by the latest NCUA Guaranteed Notes program updates as outlined in the second article plus legal recoveries these payouts would dwarf the current corporate network’s total capital.

There are 12 remaining corporates today. As of Sept. 30, their total assets were $18.6 billion and the total of all capital accounts $1.6 billion. Of this current capital total, $303 million is in retained earnings, $220 million in non-perpetual capital accounts (most raised pre-crisis), and $1.1 billion in perpetual capital accounts. The positive AME balances when distributed will exceed by two or three times the amount of all capital in today’s corporate system.

Two examples of the current situation are: Alloya Corporate (successor to Members United) with total capital of $299 million, of which $44 million is retained earnings from the past four years; and Catalyst Corporate (successor to Southwest Corporate), $205 million, of which $43 million is retained earnings from the same time period. The total projected balances from these two credit unions’ preceding corporates’ AMEs exceed the total net worth today of these re-established firms.

Moreover, these forecasted recoveries are coming from only the most problematic assets, the so-called distressed securities. The total assets of the five corporates when put into liquidation were $31.7 billion for the four retail corporates, plus $30.2 billion for U.S. Central. This total of more than $60 billion is three times greater than the total assets of the today’s corporate network. The recoveries forecasted above are after the best assets, the ones providing solid returns and sound market value, were sold off to pay out the credit union shareholders during liquidation.

U.S. Central also had a special role prior to its liquidation. It provided the funding for the Central Liquidity Facility (CLF) so that all credit unions could collectively manage their own liquidity needs from within the system in the event of a crisis. This also enabled credit unions to draw upon as much as $40 billion in outside funding from the U.S. Treasury.

The NCUA dismantled that capability when it liquidated U.S. Central. The regulator repeatedly stated it would have a plan for the CLF when it took over U.S. Central. It had none. The NCUA is now asking Congress to pass a law to restore a cooperative liquidity capability that the NCUA’s own actions took away.

Selling Out To Wall Street

From the NCUA’s own published information, we know the predictions for both the distressed securities portfolio as well as the individual projections used in the conservatorships for the solvent institutions have proven to be in error by at least 50%, or $8 billion. Instead of a workout factoring in the reserves already set aside and rapidly improving market conditions, the NCUA sold out the cooperative system by providing a guarantee to Wall Street investors until 2021, to replace the full funding then in place from credit unions.

As the TCCUSF performance unfolds, the enormity of the NCUA’s miscalculations and fatal judgments continues to unfold. The same Wall Street modeling firm that made the initial projection errors is still being used. The fallacy of trying to project values far into the future is a lesson not yet learned.

The NCUA has understandably tried to portray its actions not as self-serving but reflecting the best Wall Street advice and their own staff’s resourcefulness. However their numbers, initially interpreted in erroneous forecasts for conservatorship orders, have become even more disconnected from actual results. With every data update and explanation, the NCUA contradicts its unchanging narrative about its judgments and actions for these five corporates.

Credit union members paid for these regulatory misjudgments. Remember, the $3 billion to 3.5 billion in TCCUSF cash assessments after 2010 which NCUA now projects will be recovered, came right off credit unions’ balance sheets. As an expense, it was deducted directly from net worth. In 2008-2009, the worst years of the Great Recession, credit unions had the two best lending years in their history stepping up when the rest of the nation’s financial services had to step back or close their doors.

The $3.5 billion in TCCUSF assessments were taken from credit unions and members just as the recovery was getting underway reducing both lending availability and capital to promote the recovery. Moreover even when returned, the loss of the use of these funds for more than 10 years adds hundreds of millions of dollars annually to the unnecessary assessments.

Cooperatives are different by design, but the design only matters if their leaders take responsibility on behalf of the owners. In this case, that means demanding accountability, transparency, and a return of capital to credit unions by the federal agency that has so blatantly mismanaged situations it was responsible to resolve.

Coercive Power And Lack of Accountability

In its conservatorship orders, NCUA includes the following sentence: Any business purportedly conducted on behalf the credit union’ following service of this order may subject members of the Board of Directors and management to civil and/or criminal liability.

In other words, NCUA threatens to go after the person’s livelihood if he or she dares to challenge the order. In all five situations the corporate directors, because of membership eligibility requirements, had full-time jobs in their own natural person credit unions or associations. Their careers were at stake, not just the future of the corporate.

When this kind of coercive threat is used along with the statement, it is ordered that the contents of the confidential statement shall not be disclosed or otherwise made public the opportunity to present logical and factual rebuttal to mischaracterizations, incomplete information, and dubious forecasts is effectively prevented.

Government agencies have the authority to do things that private firms and citizens cannot. But whether the government employee be from law enforcement, a regulatory agency, or even the IRS, there are public processes for accountability, transparency, and ultimately oversight via the executive branch, Congress in its funding, or from the electorate.

The NCUA has effectively avoided all of these traditional checks and balances and asserts its right to do so as an independent agency.

While autonomy is needed to function, it can take on a life of its own and do great harm if not set up in a just manner. The NCUA unilaterally destroyed these corporates and in the process dismantled the cooperative liquidity system which had been built in a unique partnership between the agency, credit unions, and the U.S. Treasury. It sullied the reputation and future potential for the corporate system. And not the least, it undermined the industry’s trust in the agency itself.

If credit unions that have a legal, verifiable financial interest in the billions of dollars from the destroyed corporates’ valuable assets don’t step forward now, when will they respond to future misuse of the agency’s authority?

Avoiding Lessons From Events

The NCUA has had numerous opportunities to show that it is open and willing to learn the lessons of prior misjudgments. Instead it doubles down defending the mistaken situation it created. Just as the NCUA ignored offers from credit unions to take responsibility for the funding and management of the corporate uncertainties, the regulator continues to shut the door to credit union involvement and oversight of its work.

Indeed, the NCUA’s continuing narrative that there are no more lessons to be learned about the corporate takeovers is contradicted by every update and explanation.

Credit unions have long put the corporate crisis behind them. That’s a realistic decision, but the circumstances that resulted in the destruction of the most critical pillar of safety and soundness in a crisis the CLF-cooperative liquidity option are still part of the agency’s mindset today.

If credit unions that have a legal, verifiable financial interest in the billions of dollars from the destroyed corporates’ valuable assets don’t step forward now, when will they respond to future misuse of the agency’s authority?

More than money is at stake. The cooperative system loses its critical uniqueness if its member-owners don’t step up to their responsibilities. The NCUA has published data and provided information albeit often incomplete and untimely. However, flawed the agency’s responses or transparency, the greater mistake occurs if credit unions don’t fulfill their legal and moral obligations to their members for accountability.

Cooperatives are different by design, but the design only matters if their leaders take responsibility on behalf of the owners. In this case, that means demanding accountability, transparency, and a return of capital to credit unions by the federal agency that has so blatantly mismanaged situations it was responsible to resolve.