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April 2009 Newsletter 

Finance Expert Jane Bryant Quinn Reminds Consumers that Credit Unions are a Safe Place to Keep Money.  Watch the Video


 

                  How is the Economy Affecting CUs?

 

 

The recession will continue through 2009 before there’s light at the end of the economic tunnel, according to CUNA Senior Economist Steve Rick.

   Negative economic growth began in the third quarter of 2008 as consumer
   spending declined for the first time in 17 years, he explains. Credit-
   dependent sectors will see the largest declines as both the demand for and
   supply of funds dry up.

“The duration of this recession will be longer than the last two due to greater economic imbalances in both the housing and debt sectors,” Rick notes.

The silver lining for credit unions this year: a steep yield curve and rising deposit growth. He predicts credit union saving growth will rise to 12% in 2009 as consumers place their funds in insured accounts in the face of the recession, volatile equity prices, and falling home prices.

Also, credit unions are in better shape than other financial services providers, Rick says, with healthy capital (11.4%), ample liquidity, low credit risk exposure, and the ability to fund loans.

Economic Forecast

Rick makes the following economic forecast:

* Core inflation will decline to 0.5% in 2009. Falling energy prices and a slowing economy will reduce headline inflation to 0.5% in 2009. Core inflation (excluding food and energy prices) also will fall to 0.5% as subpar economic growth reduce wage and price pressures.

* The unemployment rate could climb to 9.5% by year-end 2009. The consumer-induced recession will lead to the weakest labor market since 1982. Payroll employment will decline by more than 300,000 jobs per month in 2009. Falling employment will reduce wage and inflation pressures.

* The federal funds rate will average 0.13% for 2009. The Federal Reserve will coordinate its actions with other central banks around the world to inject liquidity into the banking system in an effort to thaw the frozen credit markets. Any interest-rate increases will come late in 2010 and will be gradual as this economic recovery will be slower than usual.

* The 10-year Treasury interest rate will increase modestly in 2009. The recent flight to quality pushed the 10-year Treasury interest rate close to 2%. As confidence returns to the credit markets, capital will flow back into the corporate and banking credit sectors, pushing up the 10-year rate.

* The Treasury yield curve should remain fairly steep through 2009. Money market interest rates should hover below 0.5% in 2009, while longer-term capital market interest rates should rise to around 3.5%. This should boost the profitability of borrowing short-term and lending long-term.

CU Forecast

Rick predicts credit union loan growth will fall to 6% in 2009, although tighter bank mortgage underwriting standards will create an opportunity for greater real estate lending at credit unions, offsetting weak new auto lending.

“Credit card lending will slow from its recent double-digit growth rate as consumers hunker down and reign in discretionary spending,” he says.

Other predictions:

* Credit quality will deteriorate in 2009. Falling home prices and the continuing mortgage credit crisis will spill over into the auto, credit card, student, and business lending sectors.

* Overall loan delinquency rates will rise to 1.78% in 2009, up from 1.37% in 2008. The largest increase will be concentrated in areas with the biggest housing price corrections. Moreover, loan seasoning and a weaker economy will increase net loan charge-offs and provisions for loan loss.

* Credit union return on assets will increase marginally to 0.40% in 2009. Deteriorating credit quality will put downward pressure on earnings in 2009. This will be offset, however, by the steeper yield curve causing net interest margins to widen.

* Capital-to-asset ratios will decline to 9.9% in 2009. Capital contributions won’t keep pace with asset growth, lowering net-worth ratios.

10 Economic Trends

1. Two fears hang over the U.S. economy: wrenching recession and possible deflation.

2. The de-leveraging and reckoning process has begun.

3. The labor market has fallen off a cliff, with the unemployment rate expected to rise to 10%.

4. The government will implement a massive ($787 billion) fiscal stimulus package.

5. The Federal Reserve has implemented a near-zero interest rate policy and created new unconventional facilities to liquefy the banking system, stabilize financial markets, and monetize the recession.

6. Government intervention into the economy has proven less than effective and may have many unintended consequences.

7. Falling home prices will continue through 2009.

8. The housing market is in a severe meltdown.

9. Falling wealth, jobs, income, and confidence will restrain household spending and increase the savings rate.

10. The steep yield curve and rising deposit growth will be a silver lining for depository institutions in 2009.

 

 

More Accounting Guidance Sent to NCUA Examiners


National Credit Union Administration (NCUA) examiners received additional clarification regarding credit unions' flexibility in booking the National Credit Union Share Insurance Fund (NCUSIF) deposit impairment, according to NCUA.

The agency wants to ensure that its field staff is consistent with advice to credit unions that they have some flexibility in deciding whether to book the impairment of the NCUSIF deposit on their March 31 statements.

The newest guidance addresses the recently released Accounting Bulletin (AB 09-02) and subsequent memo to field staff on accounting for the insurance costs associated with NCUA Corporate Stabilization Plan.

According to Mary Dunn, Credit Union National Association (CUNA) deputy general counsel, the newest communication clarifies that for any credit union using the accrual basis of accounting, examiners should not take exception with either of the following decisions:

• If the credit union records the deposit impairment and premium expense consistent with the guidance in AB 09-2; or

• If the credit union accounts for the deposit impairment and premium expense (including not recording them at all) in accordance with written guidance from a licensed practitioner that states the guidance is consistent with generally accepted accounting principles—or GAAP.

Even if a credit union delays booking the impairment of the NCUSIF deposit without guidance from a licensed practitioner, Dunn said Thursday, the NCUA has indicated that examiners are directed not to take harsh action.

They should instead note such action as an exception under "Informal Discussion Item" or at most an "Examiner's Finding" on the credit union's examination report.
 

CUs can offer better rates than banks on auto loans, savings

Credit unions can offer their members better rates on savings accounts and auto loans than commercial banks, according to a DFW news story in Dallas.

The NBC affiliate compared credit unions with banks to see which is a better deal for consumers. On average, credit unions offer 5.38% interest on four-year auto loans, compared with 6.68% with banks.

Credit unions also offer an average of 0.54% return on savings, compared with 0.36% at banks.

"The differences may seem small, but can add up," the news outlet said.

DFW advised consumers to get to know someone at their financial institutions so that they can have someone to turn to when they need help.  

 

Legislative


• Evidence of Treasury's success or failure to help solve the financial crisis is mixed, according to Elizabeth Warren, chair of the Congressional Oversight Panel. The panel has released its April Oversight Report, "Assessing Troubled Asset Relief Program (TARP) Strategy." The report comes out six months after TARP was created under the Emergency Economic Stabilization Act of 2008. Treasury has spent or committed $590.4 billion in TARP funds in the past six months, and has relied on the Federal Reserve's balance sheet--which has expanded by more than $1 trillion, the report said. The Treasury's outlook on the crisis focuses on banks' problems as temporary--and fails to acknowledge that the crisis may be deeper, Warren said. "Treasury's efforts to date could be enough, but we will continue to press them," she said ...

• The Obama administration is encouraging large investment companies to establish bailout funds--similar to war bonds, which were created during World War I to help soldiers (The New York Times April 9). The theory behind the bailout funds is that they would purchase troubled securities from banks, helping lenders make loans to stabilize the economy. The funds could eventually be sold to garner a profit. However, analysts say investors could lose money if banks' assets aren't worth as much as investors thought. The funds, which are currently under discussion, would not be created for several months if the plans are approved ...

• The banking industry is in better shape than some think, according to federal examiners who spent the last eight weeks stress-testing institutions to see how they would fare if the recession gets worse (The New York Times April 9). Though some banks are holding up in the tests--regulators say 19 of the banks being examined will pass--the nation's largest lenders may need a bailout. Citigroup, JPMorgan Chase and others are expected to report their first-quarter results soon. Though the results could indicate that the banks are bouncing back, the banks also could report large losses on real estate and corporate loans, and credit cards ...

• The Federal Deposit Insurance Corp. (FDIC) Thursday was scheduled to offer a second conference all for investors interested in participating in its Legacy Loans program (American Banker April 9). The first call attracted 2,700 participants. The Legacy Loans Program aims to attract private capital through an FDIC debt guarantee and Treasury equity co-investment ...

 
 

Unemployment rate likely to rise into 2010

Even if the recession ends later this year, the unemployment rate – a lagging indicator – will continue to rise well into 2010, with employers waiting on hiring until they are confident the economy is stable, a NAFCU economist said Friday.

The Bureau of Labor Statistics reported that non-farm payrolls in March dropped by 663,000, bringing the total number of payroll jobs that have been shed since the beginning of the recession last December to 5.1 million. “Two-thirds, or 3.3 million, of those losses occurred over the past five months,” said Katrin O’Connor, NAFCU's staff economist.

Aside from the education and health services sector, payroll losses were felt across all sectors, with the largest being the 161,000 jobs lost in the manufacturing sector. Those losses were followed by the 133,000 payroll cuts in the professional and business services sector and 126,000 cuts in the construction sector. Other areas of large job losses included the retail sector (-48,000), the leisure and hospitality sector (-40,000) and the government sector (-5,000).

Average hourly earnings increased by 0.2 percent from $18.47 in February to $18.50 in March. Year over year, average hourly earnings were up 3.4 percent. O’Connor said the increases were not worth getting excited about. “Companies are in the process of reducing hours and cutting or freezing wages and salaries,” she said.

According to the Household Survey, the unemployment rate increased from February’s rate of 8.1 percent to 8.5 percent in March. “That is the highest rate on record since November 1983.”

O’Connor noted that payroll losses are expected to continue throughout this year, with the looming bankruptcy threat for General Motors being a particular problem for the manufacturing sector. “As long as employers fear that the economy is on unsafe ground, they won’t do much hiring or investing. Despite some recent hopeful signs of an easing in the economic contraction, there will be no quick rebound.”  nafcu

 

Card Rules Advance  

Despite industry efforts, two congressional panels last week advanced legislation to put additional restrictions on credit card issuers.

The Senate Banking Committee approved a measure 12-11 and the House Financial Services was set to vote on a similar measure.Both bills would ban interest rate hikes on existing balances, over-the-limit fees and double-cycle billing. The cardholders could avoid the higher rate by canceling the card before it takes effect.

CUNA, NAFCU and other associations representing financial services said the measure would harm the ability of their members to manage risk and thus decrease the availability of credit. Both also said they support the idea of expanding consumer rights but took issue with several parts of the measure, including a provision requiring a 45-day notice of rate changes and the provision mandating creditors set up a system so consumers can notify them if they want to opt out of credit authorization of over-the-limit transactions if fees are involved.

The Senate and House bills are similar to regulations approved by the NCUA and other regulators last year, which take effect next year. Lawmakers want to pass the measure so it takes effect sooner–90 days after the president signs it–in light of the recession.

Senate Banking Committee Chairman Christopher Dodd (D-Conn.), the main sponsor of the measure in that chamber, said that passage is necessary because “we cannot recover if we allow practices to continue that drive so many families into debt.”

Because of the closeness of the vote, Dodd promised to work with committee members to make changes before he brings it to the full Senate. During a hearing on the bill last Wednesday, Rep. Carolyn Maloney (D-N.Y.), the measure’s main sponsor in the House, said, it “levels the playing field between card companies and cardholders.”
cmarx@cutimes.com

 

NCUA Will Release PIMCO Summary Soon

NCUA will release a summary of its commissioned PIMCO report “in the near future”, said Chairman Michael Fryzel today. Comments from the agency’s leader were included in NCUA’s weekly Friday corporate update.

 

Fryzel addressed criticism that NCUA has lacked transparency in its action to place both U.S. Central FCU and Western Corporate FCU into conservatorship, acknowledging that “the incomplete or insufficient nature of available information has led some to question the necessity of the NCUA’s actions and level of expected credit losses being projected.”

 

The release doesn’t provide exact numbers that break down how much each corporate contributed to the $5.9 billion share insurance fund hit; however, NCUA did provide updated portfolio ratings, and loss estimates by ratings category.  Based on the most conservative assumptions, it appears WesCorp’s losses are about twice as large as U.S. Central’s. 

Fryzel also said NCUA will issue guidance next week to assist member credit unions as they account for write-downs on paid-in-capital and membership capital accounts at their corporates. He also acknowledged receiving nearly 500 ANPR comments, and said NCUA is “currently analyzing them for incorporation into a proposed rulemaking to reform the prudential regulatory regime corporate credit unions will operate under going forward.”

Want to Help Members? Take a ‘Clean Sheet’ Approach

The economic conditions credit unions are experiencing today are unprecedented. Unemployment is climbing. Interest rates are falling. Home values and construction starts are declining. Weak sales threaten every auto manufacturer in the world.

This being the case, why would you think the same old approach to managing your loan portfolio, from credit criteria to collection strategies, will work over the next few years?

Now is the time to start with the proverbial “clean-sheet” approach to your lending and collections department. During the past decade, I bet many of us have made hundred of changes to our lending policies for various reasons.

When the economy is booming, credit criteria is tossed aside and everyone gets a loan. When the economy is in a down cycle, even solid borrowers are denied.

An example of this comes from a conversation I had with a friend working as a loan officer in one of the country’s worst real estate markets. Historically a top performer, he’s now dealing with a decline in his own production by as much as 75%.

His credit union is suffering from losses in home equity loans and has responded by reducing its maximum loan-to-value (LTV) ratio to 70% from 100%. A wise move? Hardly.

If the credit union has qualified appraisers, there should be no reason not to lend with confidence up to 80% or perhaps 90% LTV. The trick is finding the right borrowers and circumstances.

Dig in the dirt

During the past decade, the right borrower, more often than not, has been determined by a decision engine and driven by the FICO score. Personally, I don’t think a successful lending strategy in this economy will be found in a decision engine.

Perhaps we all should spend more time looking at our losses to find what’s not there: Losses in stable neighborhoods, losses from members who’ve lived in their homes more than just 24 months; and losses from members with sound finances (i.e., manageable credit card debt).

I have a passion for golf, and I liked what the late Ben Hogan had to say about finding success in golf. “The secret is in the dirt.” Meaning he had to dig it out of the dirt. Hard work.

Hard work for lenders means we can’t take the easy way out when making credit decisions.

Collections: Take a new approach

The same clean-sheet approach also is in order from the collections side of our business. Here’s a question for you: What is your credit union really concerned with, loss of interest income or principal.

If a member is laid off and struggling with payments on a $30,000 vehicle loan at 7% (now secured by an SUV worth $12,000), why not lower the rate to 0% for 12 months and reduce the payment by half? You’ll still have a principal reduction on the loan, and you’ll avoid making the loss worse if the member can’t find a solution to his/her financial problems.

If a $100 million asset credit union allocated $1 million in temporary (six to 12 months) 0% loan modifications for members in need, and changed the payments to reflect the principal-only status, it would lose $70,000 in interest income at an average rate of 7%. The impact to return on assets would be seven basis points.

However, what are the chances a credit union could reduce its loan losses at least $70,000? How many members could it help with that $1 million?

There are lots of opportunities to take advantage of a clean-sheet approach. Don’t be afraid to develop new ideas, analyze the impact to your members and credit union, and implement these ideas to ensure we do more than our fair share during these tough economic times.

Bill Vogeney is senior vice president/chief lending officer for Ent Federal Credit Union, Colorado Springs, Colo., and secretary/treasurer for the CUNA Lending Council.

 

Lender Liability Lawsuits on the Rise

Have you recently repossessed or foreclosed on any collateral? Have your delinquencies increased during the past 12 to 18 months?

If so, these are signs your lender liability exposure has increased. Given today’s increasing foreclosures, repossessions and collections, lender liability lawsuits likely will continue to rise.

In its Nov. 12, 2007, Lender Liability Update, the prominent international law firm Bracewell & Giuliani stated, "either through desperation or in an attempt to profit from public fear over what the media calls the ‘mortgage crisis,’ we believe that defaulting and troubled borrowers will increasingly take aggressive postures by challenging foreclosures through affirmative consumer claims."

While lender liability laws vary some by state, typical case law allegations include negligence and breach of fiduciary duty. These allegations can arise out of actions like failing to fund a loan, lending too much or not enough, unfairly repossessing collateral—or simply acting unreasonably.

What’s Lender Liability?

Lender liability refers to the body of predominately case law and some statutory law that creates various obligations for any institution or person as a result of their dealings with loans or leases.

Current or potential borrowers commonly bring lender liability lawsuits as a reaction to repossession, foreclosure, collection, or even the anticipation of these actions.
 

 It’s important to remember a jury often will determine the extent to which a party
 was unreasonable.

 Other common lender liability allegations:
 * Negligent misrepresentation;
 * Negligent lending;
 * Unfair dealings;
 * Duress;
 * Failure to disclose; and
 * Breach of contract.

 In addition to case law, lender liability can stem from statutory law such as
 violations of the Fair Debt Collection Practices Act or federal and state unfair or
 deceptive practices acts. A common misunderstanding is that lender liability
 lawsuits relate only to business loans. This is not the case.

 In a recent example, the Nevada Supreme Court ordered Countrywide to pay
 $1.3 million for foreclosing on the wrong condo. Further, even if the defendant can avoid an award or settlement, the defense of these claims can be significant. CUNA Mutual Group commonly incurs six-figure defense costs alone.

“The average cost of defending lawsuits which cannot be resolved at the outset of the litigation is $27,500, and defense costs can reach $100,000 even before trial,” according to Eric Schneider of Los Angeles-based Anderson McPharlin & Conners, which frequently defends lender liability lawsuits.

With foreclosures, repossessions, and other collections on the rise, it’s important to understand how lender liability losses can create additional losses for your credit union.

John Wallace is the product manager for CUNA Mutual Group’s Bond and Special Insurance Package.

FTC Warns Consumers About Economic
Stimulus Scams

The FTC is warning consumers that they could get stung by an economic stimulus scam.  The scams come in different forms. 

Right now, on the Web and in e-mail, scammers are telling consumers they can help them qualify for a payment from President Obama's economic stimulus package.  All they have to do is provide a little information or a small payment.

E-mail messages may ask for bank account information so that the operators can deposit consumers' share of the stimulus directly into their bank account.  Instead, the scammers drain consumers' accounts of money and disappear.  Or bogus e-mail may appear to be from government agencies and ask for information to "verify" that you qualify for a payment.  The scammers use that information to commit identity theft.  Some e-mail scams don't ask for information, but provide links to find out how to qualify for funds.  By clicking on the links, consumers have downloaded malicious software or spyware that can be used to make them a victim of identity theft.  

"Web sites may advertise that they can help you get money from the stimulus fund.  Many use deceptive names or images of  President Obama and Vice President Biden to suggest they are legitimate.  They're not," says Eileen Harrington, Acting Director of the FTC's Bureau of Consumer Protection.  "Don't fall for it.  If you do, you'll get scammed."

Some sites suggest that for a small sum of money - as little as $1.99 in some cases - consumers can get a list of economic stimulus grants they can apply for.  But two things can happen: the number of the credit card the consumer uses to pay the fee can fall into the hands of scam artists, or the $1.99 can be the down payment on a "negative option" agreement that may cost hundreds or thousands of dollars if the consumer does not cancel.  

"Consumers who may already have fallen for these scams should carefully check their credit card bills for unauthorized charges and report the scam to the FTC," Harrington said. 

The Federal Trade Commission works for consumers to prevent fraudulent, deceptive, and unfair business practices and to provide information to help spot, stop, and avoid them. To file a complaint in English or Spanish, visit the FTC’s online Complaint Assistant or call 1-877-FTC-HELP (1-877-382-4357). The FTC enters complaints into Consumer Sentinel, a secure, online database available to more than 1,500 civil and criminal law enforcement agencies in the U.S. and abroad. The FTC’s Web site provides free information on a variety of consumer topics.

 

NCUA begins reporting on U.S. Central, WesCorp

Implementing periodic reporting that was urged by NAFCU to restore some confidence in how corporate credit union stabilization is being executed, NCUA on Friday released a status report covering the agency’s activities in the first week following the conservatorships of U.S. Central FCU and Western Corporate FCU.

Friday’s report, issued in the form of a media release, says the requirement that member credit unions replenish membership capital share accounts has been suspended at both of the conserved institutions. In addition, the agency said that:

bulletnormal operations and transactions continue and liquidity remains stable;
bulletthe two corporates’ boards of directors, chief executive officers and one senior staff member have been released;
bulletCEO and senior management contracts have been repudiated;
bulletall senior management bonus plans have been suspended (and executive perks canceled).

NCUA says that associated Federal Home Loan Banks and Federal Reserve Banks have been contacted and that provisions to maintain lines of credit are being explored. Cross-analysis of held securities continues, and specific comparisons are expected to be released shortly, NCUA said.

The leadership of the conserved institutions plan to continue periodic teleconferences and town hall meetings to inform member credit unions, solicit stakeholders’ input and remain apprised of member service needs.

NCUA Chairman Michael Fryzel, in a lengthy statement included with this report, reiterated that the conservatorships of U.S. Central and WesCorp were necessary to protect the interests of federally insured credit unions.

These two posed the greatest risk, he said. “Moreover, in the case of WesCorp, it is clear that management’s estimates of projected credit losses on residential mortgage-backed securities were dramatically lower than the estimates of both NCUA and WesCorp’s own external advisors,” he stated.

As for PIMCO, Fryzel said it selected the firm to analyze bonds at the two corporates because of its expertise and the fact that it had not sold the analyzed instruments. Any firm equipped to analyze the bonds was a potential purchaser, he said. “However, there is no conflict of interest given NCUA’s intention to hold these securities to maturity,” which Fryzel said was also recommended by PIMCO.

Timeless Wisdom in a Timely Moment:
We Don't Run Credit Unions

A nationally-recognized leader in the credit union industry, Chip Filson is an astute author and frequent speaker and consultant for the credit union movement. With more than a quarter century of in-depth experience in government, financial institutions, and business, Chip co-founded Callahan & Associates in 1985. Previously he held concurrent positions at the National Credit Union Administration (NCUA), as President of the Central Liquidity Facility (CLF) and Director of the Office of Examinations. He holds a magna cum laude undergraduate degree in government from Harvard. Awarded a Rhodes Scholarship, he earned a Masters in Politics, Philosophy and Economics from Oxford University, England. He also holds a Masters in Management from Northwestern University’s Kellogg School, Chicago.

When Ed Callahan went to NCUA in 1981, the Illinois Credit Union League presented him with a framed memento to hang in his DC Office. The sign read: "We don’t run credit unions."

At one reading, the sign merely summarized Ed's approach to deregulation: boards and managers were responsible for their institution's business decisions. In a different context, it also captures the fundamentally different skills required to be successful in the competitive market versus a government regulatory agency.

That difference was forgotten last Friday when NCUA put itself in charge of the two largest Corporates, with total assets of over $ 60 billion, through conservatorship. This action raises profound questions about the Agency's wisdom in taking this extraordinary step. All credit unions should be concerned.

The Context

Seven weeks ago the Agency stated that the uncertainty in investments in the Corporate network was a systemic problem. As described in a speech by Federal Reserve Chairman Bernanke on March 10: "The world is suffering through the worst financial crisis since the 1930's . . .Its fundamental causes remain in dispute."

This context and the accompanying logic of patient, longer-term cooperative solutions to avoid any forced sale was overturned when the Agency acted to conserve. There are at least three areas where the Agency’s actions are, at the least troubling, and at worst, creating a crisis where one did not exist.

 

How Did the NCUA Board Reach its Decision?

The logic presented by NCUA staff in its webinar on Monday, March 23rd, and in writing was that the system loss of $4.7 billion six weeks earlier had now been revised to $5.9 billion. This was due to a more comprehensive and thorough modeling of the investments, NCUA said with the PIMCO expertise frequently mentioned. Moreover, the "specific case" loss provision had gone from $1.0 billion to $5.0 billion, or 500% in this same period.

These dramatic changes over such a short time period should have been enough to cause the Board to question the data presented by staff. Even more fundamental, the determination of a "specific" number in establishing future credit losses in a dislocated market is impossible. The best minds on Wall Street, in Treasury and in think tanks and academia around the world are unable to do this. The outputs depend entirely on the future assumptions put into the model and the "scenarios" selected.

But in this case the Board, less than 6 weeks from having one set of “facts” presented to it and taking systemic action, now has another set of “facts” for securities losses extending out over ten years and, based on this “latest information,” decides unanimously to conserve two Corporates.

The impossibility of point estimates is acknowledged by NCUA in their $7 billion to $16 Billion range of loss projections presented in the webinar. However based on their selection of the "base case" outcome, they are asking credit unions to record losses on their income statements of almost $10 billion. None of these losses have yet occurred. However the Board is asking credit unions to write-off their entire 1% deposit in the NCUSIF and for shareholders in US Central and Wescorp to additionally write-off their entire MCS-PIC holdings. All this based on a change in a "point estimate" of at least 500% in six weeks for two of the Corporates.

Surely the Board must have seen that this kind of numerical accuracy is impossible and will change with the next set of input parameters, tomorrow, next month and next quarter. The staff said that they have contracted for three more PIMCO model runs. Secondly, this certain information was presented by the same staff who as recently as last July in public statements were assuring credit unions that they were in daily oversight of the Corporates and that the policy of holding through the dislocations was sound.

Unfortunately the data was also being presented as "honest" in contrast to the numbers developed by the Corporates. If the NCUA was so sure of their superior knowledge, why did they not present the information to the Corporates, their auditors and boards and then let the consequences fall where they should if there was dishonest data? Surely the Board must have been aware that if the staff was saying the Corporates were presenting self-serving information by selecting favorable assumptions, then how did the staff validate their own assumptions?

The Second Issue:

There is a fundamental difference in the skills and mind set need to run a market-based institution trying to succeed in a competitive economy and the capabilities that lead to success in a governmental career. This is not about domain knowledge but about leading teams, reading customer reactions, and understanding competitors versus creating programs and policies with formal authority from a statute.

As the regulator now becomes the regulated, how will it manage the inevitable conflicts in those two roles? How will the board of NCUA career employees decide between pricing to gain market share versus building capital; between investing in customer service and reducing expenses; between evaluating risk as viewed by an examiner versus need from a member credit union that has just seen 10% of its net worth eliminated by an external event? How does the CEO build a business plan-what are the objectives? How does he communicate and get reliable input from a market that has just had to write off over $1.0 billion because of an estimate whose details are unavailable to members?

The questions will go on. One of the most disconcerting points in NCUA's webinar was the repeated request, or was it a threat?, that credit unions need to continue to support the Corporates because if there were a liquidity crisis that caused a sale, then the expense would just go higher. With NCUA now in control, can they still blame credit unions if it is their leadership that is in charge of the outcomes? Or does NCUA even intend to "run" the credit union or just liquidate the assets as quickly as possible?

The Final Concern:

The government, the Treasury and all financial regulatory agencies have one overriding responsibility: to maintain public confidence in the areas of the economy they oversee. If actions undermine this fundamental trust, then no matter what safety and soundness rationale is provided, the NCUA or any regulatory agency has failed its most basic function.

In the Corporates, all of the fundamental cash flows, external borrowings, earnings and member confidence were showing very positive signs. Preliminary audit results were provided to the Agency by outside auditing firms. Plans were in place to pay down the legacy assets and to set up separate settlement solutions. NCUA has identified nothing they wanted to accomplish that was not possible through the LUA process in place—and that includes, if deemed necessary, management and board changes. However, the only logic NCUA presented is they wanted to be "in control."

NCUA's actions have led to an immediate write-off of almost $6 billion in the NCUSIF deposit and another $3 billion in MCS and PIC shares. Not a single loss in the portfolios has occurred, rather this is all based on estimates by recent model runs that show potential losses going from 2-10 years in the future.

The cooperative model provides options that other industries do not have because there is not private ownership or taxpayer interest to parse losses between. The ability to recognize losses as incurred and match expenses was and still is feasible.

Now having created greater book losses, increased apprehension, and diminished the trust, confidence and support that every government agency relies upon, the Agency is saying it must go to Congress to ask for governmental assistance to be housed in the NCUSIF. Not one dime has been spent, even the billion dollars transferred to US Central is still on the books.

But this could be a very fortuitous event. Perhaps Congress could ask to see how the Agency arrived at numbers so accurate for credit unions to request a specific line of credit (to be used as capital), a challenge so far eluding Treasury, the Federal Reserve, other financial regulators and every market participant, except PIMCO. The whole country should have the benefit of NCUA's process and models, not just credit unions. I think Congress would welcome that insight for the whole country.

Ed Callahan said it best:

"A single regulator is sooner or later bound to become a lazy or arrogant regulator. The best ideas will not bubble up; the regulated will not flourish."
-- pg 47, The Coaches Playbook

Chip hosted a Live CUtv event on March 24th to discuss these issues. The recording of this event, NCUA's Corporate Conservatorship: What's at Stake for the Credit Union System? will be available online on March 25th.

The event covers:

bulletWhat prompted NCUA's actions? Were other options available? What did we learn and what did we not learn from their webinar?
bulletHow will this affect credit unions both individually and collectively? We will use December data to look at the impact.
bulletWhat issues does this raise for credit unions at this critical time?
bulletHow should credit unions respond, specifically to future NCUA actions that affect credit union expenses and their insurance fund?

Source: CreditUnions.com: http://www.CreditUnions.com © 2008 Callahan & Associates, Inc. Phone: 1-800-446-7453

 

 

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