This month the NCUA is sending $736 million to credit unions as a partial refund for the billions that credit unions paid to bail out the corporate credit union system during the financial crisis of a decade ago.
This shiny coin should not blind credit unions to the fact that the corporate resolution program has been the most disastrous and costly regulatory failure by NCUA.
When cashing this check, bear in mind that the regulator’s estimate of actual losses used to justify holding on to the monetary remnants of the Temporary Corporate Credit Union Stability Fund has now been documented to be in error by over $21.7 billion.
Here are some other numbers to be aware of when reading the self-congratulatory messages issued by the agency:
- The entire losses on legacy assets had been fully reserved by each of the five corporates. All had external audits. At June 30, 2010, there was $10.5 billion in written-down assets for which no loss had occurred.
- At September 2017 when the TCCUSF was closed, total losses on legacy assets were $3.1 billion less than this written-down total. No corporate’s legacy assets had incurred losses near the amounts which had been expensed by June 2010.
- NCUA’s July 2010 loss estimate of total corporate resolution costs (released in 2011) was $13.9 billion to $16.1 billion. This included the $5.6 billion in capital write downs of the five conserved corporates. This unverifiable estimate exaggerated by over 100% the actual losses the corporates had already fully reserved, but not used.
- As of December 2017, the combined surplus from the TCCUSF program was $5.6 billion; $3.1 billion transferred to the NCUSIF and estimated $2.5 billion surplus in four of the five AMEs, the asset managed estates.
- NCUA’s loss estimate error as of December 2017 was $21.7 billion. Of that, $16.1 billion was the initial loss projection. The rest is the $5.6 billion initial actual surplus available as of December 2017.
- Expenses of the TCCUSF program to date, paid from legacy revenues, include $1.258 billion to lawyers and $1.7 billion for liquidation and NGN expenses. These total operational expenses of $2.958 billion are 215% higher than the entire operating expenses of the NCUSIF ($1.372 billion) for the same 2010-2017 time frame the TCCUSF was in place. NCUA has redirected almost $3.0 billion of income from the corporate assets to its own use.
- At the time of the September 2010 seizure, three of the corporates reported positive regulatory capital even after recording a total of $11.6 billion in lifetime OTTI losses which had been expensed against their existing capital and retained earnings. Only WesCorp reported a significant negative capital position of $4.9 billion.
- As of December 2017, the capital shareholders of the four AMEs that were solvent or had only a minor impairment, were estimated to receive payments as follows: US Central: $1.329 billion; Members United: $493 million (100% member capital); Southwest: $616 million (150% of member capital); Constitution Corporate: $24 million. WesCorp members get nothing.
- How The NCUA Cheated 100 Million Members Out Of $3.1 Billion
- An $800 Million Surprise Raises Tough Questions
- NCUA Audit Reports Shows Something’s Wrong
- What Could Credit Unions Do With $2.5 Billion
The NCUA’s corporate resolution program is a catastrophic failure of its core mission. It exaggerated the potential losses by more than 100% above the amount the CPA firms and corporates had reported. This loss estimation error, now at $21 billion, was used to justify the Wall Street-designed NCUA Guaranteed Notes program that funded the AMEs. The $2.9 billion operating expenses to run the program became a gravy train for vendors, Wall Street bankers, and even the NCUA’s own budgets with no external oversight.
The seizure of US Central, which reported $321 million of regulatory capital, led to the dismantlement of the Central Liquidity Fund and the cooperative system’s backup liquidity line from the Treasury’s financing bank of over $44 billion.
The capstone event of merging the TCCUSF into the NCUSIF gave the agency control of the current $5.6 billion TCCUSF surplus, which directly contradicted the congressional intent in the fund’s enabling language:
These provisions are intended to ensure that activities of the fund are restricted to resolving problems in the corporate system, and not used for other purposes such as for dealing with natural person credit union problems.
The NCUA board knowingly rejected this congressional direction. It continued the corporate example of using exaggerated and unverifiable future loss projections to expand and retain $2.4 billion of the initial $3.1 billion surplus in the TCCUSF. To do this, the NCUA board recorded the first ever operating loss ($229 million) in the history of the NCUSIF during a time of nine years of continuous economic expansion.
The NCUA board openly discussed its circumvention of the requirements to raise the normal operating level (NOL) of NCUSIF via a premium to facilitate the retention of the TCCUSF surplus.
The NCUA’s disastrous, costly oversight of the corporate system resolution ironically shows the underlying financial resilience of the cooperative model. However, no system can be sustained if its leaders ignore real facts, refuse to back-check assumptions and performance, and fail to carry out the explicit requirements of the law.
The corporate resolution was not primarily a financial challenge; the leaders of the corporates had done everything that could be reasonably estimated to fully account for the loss potential and lay a foundation for successful workouts. What instead happened is that the corporates exposed NCUA’s inability to work constructively to resolve problem situations.
Yesterday it was the corporate uncertainty; today it is the disruption in the taxi industry; tomorrow will bring a new challenge for credit unions. As credit unions deposit the 6 basis points tip from NCUA, ask how much longer the cooperative model can bail out regulatory failures.
A new system of accountability for the NCUA is long overdue. If in doubt about the urgency of this change, one should note that the two candidates being floated for the current NCUA board vacancies both had leading roles in the corporate events detailed above.