The most disastrous event in the 110-year credit union story, the corporate crisis of 2008/9, has created its own myths and interpretations. The good news is that most credit unions successfully navigated the burden of paying billions of unneeded premiums.
The downside is that there has been no change in NCUA’s unilateral ability to impose its internal resolutions on problems unchecked and lacking objective data.
Edwards Deming, the founder of the quality improvement movement, stated: “Without data you are just another person with an opinion.” Opinions of the corporate events have always been plentiful and often predictable, from 2009 to today.
The latest March 2021 AME quarterly financials show NCUA’s 2010 loss forecasts and current outcomes differ by over $20 billion.
Common sense requires an independent factual commission analyze the entire event so this kind of catastrophic mistake never happens again. This is not an exercise in 20:20 hindsight. It is to prepare a full record from contemporary data, documents and participants to prevent future ruinous system outcomes.
Here’s the latest data and comparisons with NCUA’s forecasts.
AME Surpluses Grow to $3.125 BN
Total projected distributions to members of four of the five corporates now total $3.125 bn. This is an increase of $95 million from three months earlier.
Credit union shareholders in Members United and Southwest Corporate will receive 100% of their capital, plus liquidating dividends projected at $14 million and $307 million respectively, for a total of over $1.3bn. Both reported millions in regulatory capital in their August 2010 call reports before being taken over by NCUA.
WesCorp’s Deficit at $2.175 Bn
Only WesCorp shareholders will receive no distribution on their $1.114 bn of member capital. NCUA estimates the NCUSIF loss on WesCorp’s estate will be $2.2 bn. (AME: B4 Due to government)
NCUA’s Liquidation Expenses Exceed 10 Years of Operating Budgets
Section B 1 of the AME financials, “Liquidation Expenses,” reports total operating costs paid from each of the five estates of $4.786 bn. Subtracting expenses for legal recoveries (line 15) of $1.258 bn, NCUA has spent $3.528 bn administering the corporate resolution plan.
This net amount exceeds all of NCUA’s combined operating budgets from 2010 through 2020 in its oversight of 5,000-6,000 credit unions, the NCUSIF and the CLF.
Moreover, these “expenses” do not include realized losses charged to the AMEs of over $1.0 bn. NCUA incurred those additional losses by selling non-legacy, fully performing investments immediately after seizing the credit unions in 2010.
Total Surplus Approaches $6.0 Billion
NCUA boasts of the net legal recoveries of $3.8 bn. However, that amount would just pay for NCUA’s TCCUSF administrative expenses with only a $200-$300 million overage.
The growing combined surpluses of nearly $6.0 bn from the AME estates and the TCCUSF merger are from the “legacy” investment payments of interest and principal. Expected losses forecasted in 2009 years into the future, and expensed from capital, were billions in error. Instead of recognizing losses as incurred, they were written off all at once based on faulty modeling assumptions of future cash flows over the securities’ remaining lives.
TCCUSF Forecasts Billions In Error
When the TCCUSF was merged on October 1, 2017, its entire surplus of $2.562 million was transferred into the NCUSIF. However, when the liquidations commenced in 2010, NCUA projected a loss of $8.3 to $10.5 bn in the TCCUSF. This one aspect of the resolution plan’s outcome was in error by $10.6 to $13 bn.
NCUA estimated the range of total resolution costs after seizing the five corporates at $13.9-$16.1 bn. Projected recoveries were $0. The $5.6 bn extinguished credit union capital was gone forever. Additional TCCUSF assessments from credit unions ranged from $7.0-$9.2 bn.
These total AME estimates were off by over $20 billion when adding the growing surplus to this loss forecast.
These Resolution Costs Detail estimates of July 2010 were disclosed only after the seizure and liquidations were undertaken. At the same time the KPMG audit of the TCCUSF (note 6) projected a total loss of $6.4 bn at December 2009 across the entire corporate network. This audited loss provision estimate was not released until December 27, 2011, or 15 months after the liquidations commenced.
In contrast, at June 30, 2010, just prior to the five seizures, the 27 corporate call reports showed the entire system reporting gains in reserves of $260 million and significant reductions in AOCI (all other comprehensive income) of over $8.8 bn versus June’s 2009 totals.
Every corporate reported improving financial results as financial securities recovered from the depths of the market dislocations in early 2009. Instead of recognizing these positive trends, NCUA imposed a second crisis on the system by liquidating the five corporates.
The Members United Example
Corporates and the entire economy were on a visible recovery trend when NCUA initiated its September 2010 liquidations. One example: Members United had expensed $600 million in estimated OTTI credit impairments, but had incurred actual losses of only $95 million according to its final call report on August 2010. Its reported changes in the monthly valuation of its investment dislocations (AOCI) had gone from a peak decline of $2.1 billion (March 2009) to $917 million in its final 2010 call report.
Seven years later at the merger of the TCCUSF with the NCUSIF, Member United’s legacy assets had incurred only $297 million losses versus the $600 million expensed. The latest AME March 2021 financials show Members United shareholders will receive $605 million from interest and principal pay downs on their corporate’s “legacy” investments.
Independent Review Critical to Learn Hard Truths
The organization ultimately responsible for the safety and soundness of the credit union system is NCUA. The agency had the resources and authority to lead a mutual least cost outcome. Instead, acting unilaterally, in secret with no communication with those closest to the events, the agency abruptly closed the four largest corporates plus the $1.2 bn Constitution Corporate. The agency justified these actions by publishing loss projections significantly greater than KPMG’s audited numbers.
The agency that was supposed to protect and keep the system safe turned into its prime executioner. Did no one object to the plan? Were no alternatives reviewed? What factual data was the basis for the actions when all the 5310 monthly reports showed recovery was underway?
The billions in unnecessary TCCUSF premiums, the denigration of corporate personnel and their network’s critical contributions, the effective dissolution of the CLF’s liquidity safety net, are all disastrous individual events.
But the ongoing harm is even greater. Credit unions’ trust in the agency and its willingness to work mutually with credit unions is still in doubt. The agency shut itself off from public dialogue, asserting its independence and provided no timely information or objective data—all characteristics part of its current culture.
Reform will only occur when this past event can be honestly presented. Facts should be the basis for truth; and the voices that were ignored or blamed, should be asked their points of view.
Without a transformation in NCUA and credit union interactions, the cooperative option will seem at best, disjointed; at worst, a system where the NCUA’s accountability for safety and soundness is still absent.
We will never know if wiser leadership might have avoided this regulator-induced catastrophe. The purpose of an independent, expert commission is not to change the past. Rather it is to inform future regulators, wanting to act unilaterally, from sending more credit unions over the cliff.