Billions More Reasons For The NCUA To End The Deepening Secrecy

More than $8 billion of credit union money is tied up in and around the regulator’s bailout of the corporates, but little else is really known.

The NCUA’s continued secrecy over how it’s handling billions of dollars in credit union assets has gotten deeper.

By one accounting, there’s more than $8.6 billion of unaccounted revenue and expenses at the agency stemming from the bailout of the corporate credit union system during the Great Recession.

This very substantial sum is from three different sources, and the lack of transparency leads to some troubling questions: while the credit union movement waits to get its money back, is the NCUA failing to mitigate losses in the corporates? The regulatoralso appears to be trying to obscure the fact that it significantly underestimated how much the corporates’ remaining assets are worth.

This may well not be the case. But because of the NCUA’s years-long refusal to explain how it’s managing these funds, it’s hard for the rightful owners of those funds the credit unions that funded those corporates toknow what’s going on.

This argument is based on the most recent information available, including agency reports about the Asset Managed Estates (AMEs) that were created from the transferred assets of five shuttered corporates and the NCUA Guaranteed Notes (NGNs) those estateshold.

The three sources of funds involved here, meanwhile, are the $3.46 billion in legacy assets over the actual balance of the NGN notes; the $3.1 billion in net legal recoveries from the settlements with the sellers of the toxic securities that led to thissituation in the first place, and $2.1 billion in liquidation expenses.

Let’s follow the bouncing ball until it runs into a wall of regulator secrecy.

The $3.46 Billion

The NCUA issued $28.3 billion in notes the NGNs after it created the Corporate System Resolution Program in September 2010. These notes provide long-term funding for the distressed investment securities, which the NCUA labels legacy assets,left over from the five seized corporate credit unions then liquidated via individual Asset Management Estates (the AMEs).

The NCUA on its websitesays those legacy assets are more than 2,000 investment securities secured by about 1.6 millionhome mortgages, commercial mortgages, and other securitized assets.

The NCUA’s latest Performance Metrics Report, posted in June, compares the remaining balances of the NGNs with the net realizable valueon these legacy assets. From that, we can see a surplus of $3.46 billion in legacy assets.

The specific numbers are: NGN balances due of $8.976 billion versus an Ending Net Realizable Value of $12.436 billion from the legacy assets. (Also of concern is that it’s unclear whether this realizable number includes $765 million in cash heldby the trustee.)

Five years ago, in the same metrics report from December 2011, the NCUA projected no surplus at all. In other words, the assets’ Net Realizable Value of $24 billion would just equal the outstanding NGN balances at that time.

The NCUA has stated that these surplus funds will be returned to the AMEs based on how the collateral was provided by the individual AMEs. That surplus, again, is the money due the credit union shareholders of those now-extinct corporates.

So how are these surplus funds accounted for in the June 2016 AME values? Are the corporates whose assets were used receiving full credit back for these performing assets? How did this valuation miss-estimate occur? Has the NCUA changed its modeling andvaluation process in light of this ever-growing 15% error?

These points need underscored: the $3.46 billion is the difference between what’s owed on the notes and what they’re worth. In other words, the estimates of future losses were grossly off the mark. The regulators have routinely underestimatedwhat the assets are worth how, if at all, has that gain in value been recorded for each of the AMEs?

In theory, those assets belong to the AMEs, but because the agency is not revealing how the funds are being allocated, we really don’t know.

The $3.1 Billion

The $3.1 billion is how much in net recoveries the NCUA has reported receiving from the long series of lawsuits it has settled with the big investment houses that sold the failed mortgage-backed securities to the corporate credit unions.

The gross amount is over $4 billion but just more than a billion dollars of thatwent to the attorneys whotook the cases on contingency.

The details of the $3.1 billion is not showing up on any of the spread sheets or other reports on AME assets that the regulator has released so far. These are the funds that the NCUA board boasted in press release after press releaseit was securing from the big banks as it took credit for saving the industry itself.

Where is that money? Shouldn’t it have been returned to the AMEs, to the entities on whose behalf the regulators filed suit in the first place? Perhaps it has. We don’t know.

The $2.1 Billion

The $2.1 billion is how much in liquidation expenses the NCUA now says it has racked up through this process of saving the legacy assets of the corporate system the regulators themselves shut down.

Here are the expenditure totals the NCUA listed in its June 2016 AME Payment Priority Schedules for each of the five corporate AMEs:

Credit Union Total Expenditure
WesCorp $820.668 million
US Central $841.825 million
Southwest $174.580 million
Members United $222.002 million
Constitution $35.795 million
TOTAL EXPENSES $2,094.870 million (or $2.1 billion)

This total is up $194.5 million in the first six months of 2016. These expenses are incurred and paid off the top ? before corporate shareholders or credit unions receive any distribution. So, the management of these expenses directly impacts the bottomline of every credit union holding a Receiver’s Certificate which is every credit union shareholder-owner of the five corporates.

These may well be legitimate expenses, but it’s hard to say. The NCUA’s consistent refusal to say how these expense decisions have been made, and at times, even who’s making them, makes it hard to understand or justify much of what hashappened and continues to occur. For example, how much was paid directly and indirectly (through commissions) for Barclay’s role in the NGN program.

These may well be legitimate expenses, but it’s hard to say. The NCUA’s consistent refusal to say how these decisions have been made, and at times, even who’s making them, makes it hard to understand or justify much of what has happenedand continues to occur.

One could assume from NCUA announcementsthat $1.011 billion of these liquidation expenses are lawyers’ contingencyfees paid out of legal recoveries. Unfortunately, the full details of these payments were only provided over four years after the first significant recoveries were announced in 2012.

This belated revelation prevented any public discussion of the appropriateness of this process and comparison with the legal strategies other government agencies were following. For example, the Federal Housing Authority paid out approximately 5% in legalrecovery expenses. The NCUA? Make that 26%, including 23.2% to the two lead law firms.

Even if legal fees are part of total liquidation expenses, that still leaves more than $1.0 billion undocumented. Surely the shareholders of the AMEs, not to mention the entire credit union system, deserves a full accounting of this $1.0 billion in exactlythe same detail as the legal payments.

This detail should answer questions such as: How has the NCUA used these funds? Why were specific estates charged the amounts listed above? How are these expenditures reported to the NCUA board? Did the board approve any of these expenditures, and ifso when and how?

Adding Up Real Money

The bottom line here is that these three pools of money equal $8.6 billion in unaccounted revenue and expenses.

As the old saying attributed perhaps apocryphally to the late Sen. Everett Dirksen goes: A billion here, a billion there and pretty soon you’re talking about real money.

The regulator clearly laid out how the legal expenses were paid, and now it should be as transparent about the rest.

Why This Matters To Every Credit Union: 40 Basis Points

Consider this: the more than $4 billion in surplus funds the NCUA now estimates would be available from all the legacy assets recoveries and other revenue, if distributed pro rata, would add about 40 basis points to the net worth of every federally insuredcredit union in the country.

That’s their money. Instead, it sits in NCUA coffers. As far as we know.

This is why it’s critical that the decisions about expenditures, allocations, and asset management being made now are publicly disclosed and discussed at the board level. Without contemporary transparency, poor decisions can get covered up, or worse,better options for recoveries go unexplored.

Passing The Bucks

The agency did recently say that the board itself doesn’t make many of these decisions, which instead are relegated to a Texas-based office that mostly handles liquidating tiny credit unions. Little else was disclosed. Repeated Freedom of Information requestsand inquiries to the agency’s public affairs office also have failed to produce answers.

Without a full public accounting of these off-budget expenses there is no way to determine if the NCUA has truly mitigated losses or just treated the AME recoveries as agency slush funds. For example, why did the NCUA reimburse itself $112million from the legal recoveries? Were these for budgeted staff expenses or off-budget personnel costs?

At its 2017 budget hearing, the board took credit for reducing the next year’s budget by $1.0 million over the previous year’s estimate. Meanwhile the agency has spent 1,000 times that savings in AME liquidation expenses.

Not publicly disclosing details of $4.3 billion in legal recoveries until October 2016, five years after the first settlements were announced, prohibits any kind of contemporary accountability or oversight. It’s a public relations exercise clearlyintended to defuse criticism of excessive contracts and to prevent any discussion of alternatives that could have mitigated losses to the AME shareholders.

Transparency After The Fact Is PR, Not Transparency

The NCUA’s budget hearings in November recognized the importance of listening to the industry by soliciting opinions, ideas, and options prior to making final decisions. In contrast, not publicly disclosing details of $4.3 billion in legal recoveriesuntil October 2016, five years after the first settlements were announced, prohibits any kind of contemporary accountability or oversight.

The belated legal fee disclosures became merely a public relations exercise clearly intended to defuse criticism of excessive contracts and to prevent any discussion of alternatives that could have mitigated losses to the AME shareholders if theyhad been disclosed earlier.

What Else Haven’t We Been Told?

In October 2012, NAFCU President Fred Becker criticized the NCUA’s mischaracterizations of its initial legal recoveries. He said in part, The agency indicated that they had recovered $170 million, from which I think the natural conclusionwas that the money got returned to the coffers of the corporate system.

Obviously, this is not the case. (because of legal fees) The news calls into question the NCUA’s transparency regarding its handling of the entire corporate crisis. … People continue to question the corporate recoveries andhow bonds are really performing and this brings all that back to the forefront. What else haven’t we been told?

Four years later, the problem still exists. Only what we haven’t been told about these credit union funds that have now reached $8 billion, not a mere $170 million.

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December 1, 2016

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