By Sancho Panza
As you might suspect, got a call from Don Quixote after that last opinion piece (“Tilting Windmills”). The Man from La Mancha, Illinois was, shall we say, wild-worded and a bit tilted. Quixote claimed I had definitely blown any chance of ever serving on the NCUA Board. I attempted to express my regret.
But aghast and inconsolable, Mr. Filson mounted up and charged off into a philippic on another of his favorite windmills, the NCUSIF (a topic about which he blogs incessantly and quite opaquely!).
The National Credit Union Share Insurance Fund is your 1% deposit plus accumulated earnings, which undergirds the federal insurance of member accounts. The NCUSIF (agency staff’s nickname is SIF) is cooperatively owned by credit unions and mismanaged by the NCUA.
The continued mismanagement of the Fund is surprising for two reasons – Rodney Hood and Kyle Hauptman. Both gentleman imply in their resumes to have substantial acumen and experience in finance – Mr. Hood with Bank of America and Mr. Hauptman with Jeffries, a sophisticated, international investment house.
And of course as Republicans, one would hope that both men champion the prudent, conservative investment of your funds while under their supervision. Neither Mr. Hood nor Mr. Hauptman, however, seems to be paying attention. For the Republican-majority NCUA Board members is this yet another RINO (“Responsible In Name Only”) example?
Robots and Ladders
Case in point, the NCUA’s “investment strategy” for the NCUSIF – your deposit, your investment, your Fund – is to invest the @$20 billion balance in U.S. Treasury securities with maturities “laddered out” over 10 years or less. “Laddering” simply means NCUA robotically spreads out that $20 billion evenly (approximately in this case) over seven or eight years.
NCUA’s investment gurus self-laud their approach, comparing it to “dollar cost averaging”; and pooh-pooh any suggestion of intelligent, strategic flexibility as “risky market timing”. ‘Course it’s true, you can’t be called indecisive, if you never make any decisions. In investment circles this type thinking is called “real A.I.” – or true artificial intelligence.
But, let’s not argue with the “strategy”, let’s talk about the consequences to you of its’ execution. Any strategy, which defies common sense and ignores major shifts in the national economy, will invariably cause significant losses to the investor – that means you, the cooperative owners of the NCUSIF. How so? Well, did you know that any excess earnings on NCUSIF investments (over and above the legally required “net operating level” (NOL) of the Fund) are required to be paid out to the owners of the NCUSIF – hey, that’s you, your credit union and all 135 million American credit union members. Want an estimate of how much NCUA’s “real A.I.” strategy is costing member credit unions?
The Critical Question
Okay, here goes. First, which way do you believe interest rates are moving – up or down? Right! How did you know? “Because I can read!” is an acceptable, sensible answer. But in addition, you might add 1) because Jerome Powell, Chairman of the Federal Reserve says so, 2) because 10,000 of the world’s finest economists at the Department of Labor say inflation in the U.S. exceeds 8%, 3) because the slope of the yield curve, and lastly 4) because Jerome Powell says so. Everyone in finance, except the folks at NCUA (including RINOs?), knows the axiom “Don’t Fight the Fed” – if you do, you’ll lose!
Second, so if Chairman Powell had been telling you all yearlong that the Fed was going to increase rates rapidly and significantly – a major national policy change – would you rush out to lock in some 7 and 8 year, long term – sure to be underwater losers – investment rates? No, me neither; nor anyone on the planet including Bank of America, Jeffries, and your 6 year old preschooler – that would truly be “real A.I.”
Yet, that is exactly what the pointy-headed, investment gnomes at NCUA are doing with your money in the NCUSIF – evidently with the full support of the NCUA Board, RINO’s [“Relevant In Name Only”) included! Reinvestment activity at the NCUSIF historically occurs around mid-month in February, May, August, and November. In February $650 million was invested for @ 7 years at a yield of 2.01%, in May $650 million for @ 7 years at a yield of @ 2.84%. The August investment results will be released today at the NCUA Board meeting. Surely the folks at the NCUSIF didn’t repeat their mistakes of February and May – right? (Wanna bet?)
The Cost of A.I.-Artificial Intelligence
Seven-year treasury securities as of 9-19-2022 are yielding 3.62%. Every one of the NCUSIF investments made in 2022 is substantially underwater. In fact the “unrealized loss” in the NCUSIF portfolio has increased by over $1 billion in 2022 alone, following a similar $1 billion+ decline in 2021 – with much more to follow according to the Fed!
The “real A.I.” investment gurus at NCUA self-importantly and incorrectly point out that “unrealized losses” don’t matter, because the NCUSIF “holds to maturity” all investments. In a sense that is true because “holding to maturity” does wash out all their investment missteps over a 7 or 8 year period – their mismanagement never shows up on “their” income statement, so no big deal – right? No, that’s wrong! NCUA’s “real A.I.” strategy, in the current economic environment, wastes any prospect of your credit union receiving a premium payout of greater NCUSIF earnings – you’re the loser, as are your credit union members..
So, here’s the “real Republican” estimate – well-reasoned, conservative – of what “real A. I.” is costing you and your members. To start, assume Jerome Powell is a man of his word – a real Republican. On August 15, 2022 (the last NCUSIF investment date) the 7-year treasury was yielding 2.86%, the 6-month treasury was yielding 3.13%!. What if that last $650 million had been invested for just 6 months, while we all waited to see where the yield curve settles out? An intelligent, no brainer? An irresponsible, missed opportunity? A RINO alert?
The Lost Opportunity
If one could improve the overall yield of the NCUSIF by just one-half of one percent, the “excess earnings” would exceed $750 million ($20 billion x .50% x 7 years = $750 million). Remember the 7-year yield is now at 3.62% (with Powell promising more to come!), but we’re stuck with the 2.01% February and 2.84% May investments for the next 7 years! Would credit unions have any use for $100 million or so in extra income this year? If not; don’t worry, be happy!
A couple of rhinos skiing downhill in winter is quite an amusing thought. A couple of RINO’s frolicking in “the Swamp”, while ignoring the yield curve in an election year, isn’t quite so funny and could become a slippery slope.