CLF: The One Thing Necessary

As of December 2019, approximately 1,468 credit unions with total assets of $1.4 trillion reported membership in the Federal Home Loan Bank (FHLB) system. These totals represent 27% of credit unions by number, and 88% of total assets.

By comparison, there were 278 credit unions that were Central Liquidity Facility (CLF) members holding $115 billion or about 7.2% of assets.

While numbers for Federal Reserve membership are not readily available, since NCUA requires by rule that all credit unions over $250 million be members of either the CLF or Federal Reserve, one can presume the overwhelming majority have opted for Fed membership.

Why this choice? If the Fed and CLF are both “lenders of last resort” why is the CLF deemed so unappealing? How is the FHLB system so much more relevant for credit unions then their own liquidity backstop?

NCUA’s Appeal for Credit Unions to Join the CLF

In its April 2020 meeting, the NCUA board approved final rules to make the CLF more attractive to join. Some changes were the result of the CARES legislation. They included opening membership to Corporates directly while changing their agent roles, expanding lending purpose, and increasing the borrowing multiple based on contributed capital from 12 to 16 times.

Regulatory rule changes eliminated the six-month waiting period after joining to borrow, the ability to withdraw membership upon demand versus the current 6-24 months delay, easing collateral requirements, and allowing corporates to borrow for their balance sheet. Staff also outlined improved loan processing capabilities.

The three Board members made individual appeals urging credit unions to join up now. They explained that the CLF, as is, could be inadequate to the crisis even at a multiple of 32 times capital shares; or, NCUA needs the liquidity for use by the NCUSIF; and borrowing from the Federal Financing Bank is a unique source of funding in a crisis.

The One Missing Element

The CLF is a “mixed-ownership government corporation” managed by the NCUA. The credit unions supply all the capital upon which the borrowing capacity is determined. Funding is direct from the government’s financing bank, unlike the FHLB system which raises its borrowings in the open market. If the CLF is to be relevant in the future, the “mix” of the credit union and NCUA roles needs to be assessed.

After the historical agreement in 1983 between the CLF and the corporate system to fully fund the capital requirements for all credit unions, the CLF never moved forward to become an integral partner with its credit union members. The FHLB system is credit union’s preferred lender because they are member-centric in their operations. Members buy capital stock to borrow in good times and bad; they elect the board, and individual banks proactively develop products and services to serve their various members’ needs.

The CLF has been used solely as a regulatory tool by NCUA. In the Great Recession, the primary borrower was the NCUSIF which forwarded $10 billion to the balance sheets of WesCorp and US Central. An effort designed by leading credit unions to create a “protracted adjustment credit” program to help credit unions refinance members’ mortgage loans became stillborn when NCUA staff took over the initiative.

Not Routine Borrowings

Credit unions seeking liquidity assistance will almost always be under some form of financial stress. This can be from assets mispriced due to market dislocations, share outflows, or other earnings pressures such as increased delinquency or absence of sound growth options.

By “normal” operating criteria, credit unions needing liquidity will be under financial strain and often under examiner constraints and directives. NCUA practice is not to assist workouts with problem credit unions via NCUSIF 208 and CLF assistance. Rather NCUA prefers to direct the credit union to downsize to fit its reduced capital position. This was not the model when the CLF was used to alleviate the stress from the non-earning receivers’ certificates issued by the FDIC after the Penn Square failure in 1982.

NCUA has not sought credit union input for changes that would enable it to readily fulfill its legislative purpose to ”encourage savings, support consumer and mortgage lending, and provide basic financial resources to all segments of the economy.” If credit unions are going to be asked to fund the CLF more fully, they must be part of the conversation about the CLF’s future.

Reversing an Historical Catastrophe

At year-end 2011 and until October 25, 2012, the CLF was fully funded and covered all credit unions for membership. At the 2011 annual CLF audit, it had an estimated draw of $49.8 billion from the Federal Financing Bank. Total credit union assets at that time were $974 billion.

Here is how NCUA reported what happened in the following audit in 2012: “Neither USC bridge nor NCUA were able to secure the transition of USC’s products and services to a successor entity, thereby leading the Board’s decision to wind-down and liquidate USC Bridge’s operations as of October 29, 2012.

Accordingly, USC Bridge discontinued its role as the agent group representative for CLF and CLF redeemed USC Bridge’s capital stock on October 25, 2012. The result of the liquidation of the agent group representative is that as of December 31, 2012, CLF membership comprised solely regular members and no agent membership is in place.”

NCUA controlled both USC Bridge and the CLF. NCUA unilaterally shut down the CLF’s thirty-year history of covering every credit union in the cooperative system.  

Today US Central’s asset management estate (AME) reports a positive balance of $1.7 billion, a significant portion of the over $3.0 billion surplus in four of the five liquidated corporate estates.

The Challenge of This Time

Two of the three current board members were involved in these prior events. Rodney Hood was on the NCUA board that conserved US Central in April 2009, even though it was solvent and fully reserved for losses. From February 2011 Todd Harper was NCUA’s Director of Public Affairs and senior policy advisor to Chairman Matz when the CLF was effectively closed in October 2012.

If the Board can learn from these previous events and seek out a true partnership with credit unions about the design, structure, and role of the CLF, they will be able to rectify one of the most unfortunate actions ever taken by NCUA.

Credit unions’ strength is their ability to collaborate, work for shared purpose and exercise patience when resolving problems. If the Board reaches out and truly listens, real change can be made in the next covid congressional package that will be coming down the pike. Such a re-design could make the CLF central to the future of the cooperative system and enhance the role laid out for it by Congress. That would be a tremendous opportunity from this crisis that could reverse past shortcomings. Is the Board up to the challenge of this time?

A Culture of Impunity

A February 10, 2020 Inspector General Report describes personal indiscretions by Michael McKenna, NCUA General Counsel (July 2011 to November 2019) and his Deputy General Counsel Lara Daly-Sims.

The report details strip club visits and drinking while on the job from February 2017 through the beginning of the investigation in November 2019. Several members of the General Counsel legal staff and the Executive Director were also interviewed about the conduct of the two.

While the report is about personal peccadillos, that is not what is significant about this event.

McKenna was Deputy General Counsel in 2004 and became General Counsel in 2011 upon the retirement of Robert Fenner.

As shown in the blog below from Jim Blaine (reprinted with permission) the professional judgment of NCUA’s General Counsel has been a public topic for over five years.

GC Is Not an Independent Position

The General Counsel is a staff position providing interpretations and support for decisions taken by the line staff and the NCUA Board. Jim’s blog below is one example of the Board’s skepticism of McKenna’s counsel. But McKenna did not originate the RBC rule. Senior examination staff and the Board did.

Throughout his career his role was to defend Agency decisions that seemed contrary to common sense and the explicit language of the FCU Act. Actions included rejecting appeals from credit unions and individual members for merger misconduct, denying FOIA appeals, approving Board actions opposed by 95% of credit union commentators and providing legal cover for whatever supervisory actions the agency wanted to take.

His role as General Counsel was to endorse the agency’s conduct regardless of the fact situation. His personal conduct is not acceptable. But the real issue is his professional shortcomings which contributed to a series of agency outcomes that have hurt the credit union system’s reputation, severely damaged its institutional capability, and has cost members billions in misused funds.

McKenna’s personal failings are merely a symptom of an agency unaccountable to any outside authority. One that always places its institutional self-interest ahead of credit union members’ welfare.

McKenna is an example, not the cause, of NCUA’s culture of impunity from top to bottom. If the agency had been a credit union with the public missteps from the last three years or longer, they would have been conserved a long time ago.

Jim Blaine on Credit Unions

Sunday, January 25, 2015

“And What Am I – A Potted Plant !?!”

Chief Legal Eagle

Mr. Michael McKenna is the General Counsel of the NCUA; has been with the Agency for over 25 years; and has held the top legal position for the last few. He is one of the highest paid lawyers in all of Federal government.

Don’t know Mr. McKenna on a personal basis; but would assume from his resume, background, experience, and current position, that he is probably the # 1 U.S. expert on the Federal Credit Union Act (FCUA) and the rules and regulations controlling federal credit union supervision – or should be! 

After all, he has spent a lifetime focused specifically on credit union statutes and rules; has helped draft and craft many of those laws; and is intimately familiar with the logical subtleties and historical compromises underlying their promulgation.

“RBC”(Ringling Bros. Circus)

As you may have noted, there is “a slight disagreement” on the legality of NCUA’s rule-making in the area of risk-based capital (RBC). Who is right concerning the legality of RBC is open to debate, but few will dispute that NCUA, over the last two years, has played the clown on the RBC rule repeatedly – and convincingly!

Three questions come to mind when listening to the legal arguments:

1.) What is Mr. McKenna’s , the #1 U.S. FCUA expert, opinion on the legality of RBC?

2.) Why would Chair Matz feel compelled to pay an outside law firm $150,000 “to do my own due diligence”, when she had Mr. McKenna sitting down the hall?

3.) Given that extraordinary $150,000 outside legal expense, can you determine which of the following. . .

. . .is an expensive, exotic potted plant?

 A) The one on the left.
 B) The one on the right.
 C) Either.
 D) Both.
 F) All of the above.


Anonymous said…

She sought out 11 outside firms! Speaks volumes! McWatters is certainly paying attention and understands the legal and ethical issues.

Jan 25, 2015, 7:57:00 AM

Anonymous said…

Who provided the list to her? The Democratic National Committee?

Jan 25, 2015, 10:15:00 AM

Anonymous said…

Isn’t it rich? Isn’t is queer?
Losing my timing this late in my career
But where are the clowns? Send in the clowns
Well, maybe next year

Jan 25, 2015, 10:20:00 AM

Jim Blaine said…

…should note that you missed the penultimate verse of the Sondheim song;

“But where are the clowns?
Quick, send in the clowns.
Don’t bother, they’re here.”

Jan 25, 2015, 10:31:00 AM

Anonymous said…

Matz has stayed far beyond her shelf life date, expect the stench to continue to grow.

Jan 25, 2015, 10:50:00 AM

Anonymous said…

There is something happening here.
What it is ain’t exactly clear may ass! Ms. Matz is spending credit union member’s money to politically connected law firms! Probably connected to Mr. Matz. Time we demanded real accountability from the head of NCUA. NCUA is uniquely paid for by credit union members. She has a fiduciary responsibility to the credit union membership.

Jan 25, 2015, 11:32:00 AM

Anonymous said…

Does Ms. Matz really believe that wasting a lot of money on a bogus legal opinion makes the incredible credible?

No matter how you slice it, bologna is still bologna!

Jan 25, 2015, 12:30:00 PM

Anonymous said…

McKenna is the General Counsel of NCUA. Generally, speaking it is not within the authority of the NCUA Board to change the FCUA. This is the specific authority of Congress.

If you want a different opinion, you have to pay a lot of someone else’s money to a Specific Counsel for an opinion to specify that the NCUA Board has authority for what they generally do not have under the FCUA.

Jan 25, 2015, 12:48:00 PM

Anonymous said…

So who are the clowns? Is it the NCUA Board? Is it the outside law firm? Is it the credit union industry for condoning this fraudulent waste of money?

Jan 25, 2015, 12:53:00 PM

Jim Blaine said…

Je Suis Les Clowns.

Jan 25, 2015, 1:26:00 PM

Anonymous said…

If the credit union industry allows Ms. Matz, her Lapdog and her Potted Plant to get away with the purloining of Federal Credit Union Act authority, than:

Nous Sommes Les Clowns!

Jan 25, 2015, 2:06:00 PM

Jim Blaine said…

Much better grammar…

Jan 25, 2015, 2:18:00 PM

Geoff Bacino said…

Jim states that he doesn’t know Mike McKenna on a personal basis…but I do. Mike served as my Senior Policy Advisor during my time on the NCUA Board. There are few that have a better understanding of the Federal Credit Union Act than does Mike. Apparently, Chairman Matz chose to seek outside counsel as a way to insulate the agency from appearing to be “too close to the situation.” That this outside counsel did not feel that the agency’s case is ironclad should not reflect on Mike but rather the interpretation of the firm and what might happen if this rule was legally challenged.

Jan 26, 2015, 12:25:00 PM

Shakespeare on NCUA’s Sale of Members’ Taxi Medallion Loans

In the play Timon of Athens, the central character lives lavishly beyond his means. It shows a society that thinks having money and spending it is proof of one’s moral goodness.

Several observations about human nature appear relevant to NCUA’s action to sell 4,500 members’ future fortunes to the investment fund Marblegate.

From William Shakespeare’s Timon of Athens:

‘Tis not enough to help the feeble up,
But to support him after. . .

Men must learn now with pity to dispense;
For policy sits above conscience. . .

I wonder men dare trust themselves with men. . .

When the Regulator and Credit Unions Worked for Common Purpose

In 1984 Ed Callahan delivered the customary NCUA Chairman’s speech to CUNA’s Governmental Affairs Conference.

His title this February was “Finish the Job.”

In the talk Ed outlined the incredible success of deregulation, credit union’s “fantastic” performance, and how the movement was fulfilling the founders’ visions for serving America.

He directly challenged critics who accused NCUA‘s policy initiatives as “competition in laxity.”

The Final Action Required

But there was one further institutional reform needed to ensure the industry’s future in the new market driven environment.

That change was to redesign the NCUSIF from an annual expense premium to a self-funding model based on 1% of insured deposits as the core.

Speaking with Logic and from the Heart

As you hear Ed’s voice, note the former football coach’s style:

  • He talks about the team’s success;
  • He gives them facts about their situation;
  • He speaks from the heart with an exhortation to finish the job.

Ed never used a script. But his logic was so clear you could transcribe his words verbatim. While the circumstances Ed addressed have changed, his authenticity marked by  directness, transparency and passion are needed all the more today.

Listen for the rouser at the end. It was his signature moment!

The Betrayal

NCUA’s sale of 4,500 credit union members’ loans secured by taxi medallions to a private equity firm is a betrayal of everything the credit union cooperative system represents. Credit unions were founded to protect consumers from being exploited by loan sharks preying on those who have the least or know the least about financial services. NCUA’s sale just put these members and their families at the mercies of Marblegate Asset Management LLC, a firm that exemplifies capitalism’s limitless profit ambition.

These 4,500 borrowers have invested years, some decades, establishing an equity stake with the sweat of their brow, in an earning asset to help them realize the American dream of financial well-being. They joined credit unions and trusted their interests would be treated fairly. Instead the agency regulating the industry sold them out to add additional pieces of silver to a fund bulging with more than $16 billion in liquid assets.

This action irredeemably harms these members whose interests are exactly opposite Marblegate’s. NCUA’s fundamental responsibility is to protect credit union members. This sale places a stain on the entire credit union system. It contradicts Board members’ individually stated policy priorities to treat members fairly, to support financial inclusion, or follow the rule of law.

This deliberate action is an agency wide effort. There was no emergency dictating the disposal of these loans. Rather, NCUA planned for over a year to shed responsibility for the safety and well-being of the very persons credit unions were intended to serve: the member-borrower.

The agency says it worked on this effort for 18 months. When confronted earlier this year with widespread requests by New York City, Congressional and credit union leaders to work collaboratively with the 4,500 members affected, the agency claimed it had to act now or lose its credibility for future asset sales.

It put the buyer’s and its own self interests ahead of the members. Seldom has the well-being of the powerless few been so completely trampled by those with money and authority.

A 2019 New York Times investigation found 950 licensed taxi drivers have declared bankruptcy since 2016. The crushing debt has led to driver suicides. NCUA has now transferred the fate of these credit union borrowers to an investment fund whose reported plan is to acquire the largest share of New York’s 13,500 medallions.

What is Known About the Sale

NCUA provided no facts about this sale. Rather, the media has reported the only public details of this regulatory tragedy.

On February 20, the Wall Street Journal reported the sale to “an investment firm known for buying up distressed assets, will now become the largest single owner of New York City Taxi medallion loans” with this purchase.

Sale price of 31 cents for each $1 of book value

The Journal reported the price of $350 million was for a portfolio of 3,000 New York medallions, 900 Chicago medallions, 500 Philadelphia medallions and 100 from other cities.

This is an average loan value of $77,800 each, all secured by medallions. The estimated par value of these loans is the purchase price of $350 million plus the loss NCUA says it has taken on the portfolio of $760 million. Combined, these two numbers add up to an average book value per loan of approximately $245 thousand.

This total par value of $1.11 billion also suggests that the average price per loan was approximately 31 cents on the dollar, or a discount of more than two thirds from the portfolio’s original book value.

We don’t know what proportion of these loans are receiving regular payments. But many are earning assets backed up with years of payment history. Some will have been rewritten. In every case the medallion security minimizes the possibility of any downside loss. For if the borrower defaults, the security has a cash price that can be monitored in each market.

For example, individuals are offering to buy New York medallions for prices from $125,000 to $135,000 on multiple websites today. The actual sales price for a Chicago medallion since January 1 has ranged from $24,000 to $40,000.

In Boston offers to buy on the web range from $27,000-$40,000.

The following news articles suggest that Marblegate is not interested in loan assets yielding 6% or, if bought at the estimated discount, a yield of 18-19%.

The Buyer: “Profiting from the Misfortunes of Others”

Marblegate Asset Management LLC formed in 2009, is an investment fund focused on buying distressed assets.

A Wall Street Journal article from April 11, 2011, describes Marblegate’s corporate strategy.

For ‘Vultures,’ Slim Pickings — Facing Default, Publisher Lee Enterprises Sells ‘Junk’ to Foil Distressed Investor

The following excerpts from the article describe how these funds try to make high returns, an effort foiled in this case by Lee Enterprises which had been the target of a takeover through purchase of the company’s debt by “vulture” funds. The tactic failed when Lee found alternate financing.

Newspaper chain Lee Enterprises Inc. is on the verge of saving itself from bankruptcy — and many of its debt holders are livid.

Lee, weighed down by about $1 billion of debt, has long been high on the list of potential bankruptcies. But thanks to the roaring market for debt of risky companies, Lee is preparing to sell junk bonds that would enable it to pay off its obligations and give it a new shot at survival.

But what is good news for the company has thwarted the plans of a flock of “vulture” investors — Monarch Alternative Capital, Alden Global Capital, Marblegate Asset Management and a unit of Goldman Sachs Group Inc. — which have been buying Lee’s loans. The group had been betting the company would default, and that they could turn their holdings into an ownership stake, giving them access to the company’s assets, which include St. Louis Post Dispatch and the Arizona Daily Star newspapers.

Instead, they will get repaid, but miss out on the chance to make even bigger profits as owners.

Lee isn’t alone in its sudden pullback from the brink of bankruptcy, thanks to the frothy state of the high-yield bond market. One by one, distressed companies have been able to sell debt as money floods into the debt markets.

That has left few money-making opportunities for distressed-debt investors, who engage in a type of financial schadenfreude: profiting from the misfortunes of others. Vulture investors typically buy debt at low prices, expecting to turn that debt into equity in the company, giving them ownership. Then they can sell off assets or run the company, making more money than they would by simply owning the debt. [emphasis added]

An October 15, 2018 Wall Street Journal article, “Hedge Fund Bets on the Taxi Business” reports Marblegate’s efforts to acquire a dominant share of the New York taxi medallion markets.

Vulture investors are circling the beleaguered New York City taxicab industry.

Hedge funds that specialize in distressed investing have been kicking the tires of the New York taxi market after prices for medallions plummeted amid competition from ride-hailing upstarts. Marblegate Asset Management LLC, a Greenwich, Conn., hedge-fund firm, decided to place a big bet, and over the past year or so has scooped up about 300 medallions for a total price of more than $50 million, according to people familiar with its strategy. (note this would be an average price of $167,000)

Owners of taxi medallions and their drivers in New York and other cities have been hobbled by the flood of app-based ride-hailing services such as those run by Uber Technologies Inc. and Lyft Inc. There are more than 80,000 vehicles used for ride-hailing services in New York City, more than triple the number in 2015, regulators say. They now dwarf the roughly 13,500 yellow cabs. The competition has led to declines in yellow-cab trips and fare revenue even as the number of passenger trips in for-hire vehicles has soared.

New York City this summer instituted a one-year freeze on licensing new for-hire vehicles while it examines ways to raise driver wages. (note: tis freeze has been extended)

Marblegate, which began buying up medallions last fall at prices between $175,000 and $200,000, isn’t trying to call a bottom, according to people familiar with its strategy. Instead, it plans to operate its own fleet of taxicabs and believes it can run a better business than existing operators — in part by improving working conditions and benefits for its drivers.

At current rates, owners can lease out a medallion to a fleet operator for $15,000 a year, people in the industry said. The operator takes care of cars, drivers and vehicle dispatching, meaning that a buyer of a $175,000 medallion can expect an annual return of 8% to 9%. The price of the medallion is also tax deductible over 15 years.

By operating its own fleet, Marblegate’s returns could be significantly higher. [emphasis added] Aleksey Medvedovskiy, chief executive of NYC Taxi Group, a fleet operator based in Brooklyn, said that some of the better owner-operators today earn about $30,000 annually per medallion, or a 17% return on a $175,000 investment.

Distressed investors buy assets in industries in which disruption has caused prices to decline, wagering they have fallen too far. Investors see New York as the city where traditional taxis — which have the exclusive right to pick up street hails in Manhattan — have the greatest chance of survival. One million passengers hop in a cab, a town car or an Uber each weekday across the city, according to regulators.

“As long as there’s a hail system and a central business district, there will always be business for them,” said Matthew Daus, a lawyer at Windels Marx Lane & Mittendorf LLP who specializes in the medallion industry.

Marblegate’s Strategy: “Furthest Along”

In a July 18, 2019 Crain’s New York Business article, “Mystery Buyer Snaps up taxi medallions as prices fall further“, the state of the taxi medal market is described:

Taxi medallions might be worth less than ever. But in some ways, there has never been more interest in the troubled asset.

Private-equity firms have been circling for the past two years as prices have continued to fall. Marblegate Asset Management of Greenwich, Conn., is the furthest along, having acquired a little more than 300 medallions, starting with purchases at an auction in September 2017.

The firms have different strategies for how to profit from the medallions, according to insiders, but agree that taxis have a future as a key part of New York’s transportation infrastructure. Some see their interest as a bet on the industry’s eventual recovery.

“There are multiple players now—it’s not just Marblegate,” said Matthew Daus, a former Taxi and Limousine Commission member, who is a partner at Windels Marx, a law firm that represents taxi interests. “This is a positive sign.”

The article’s final observation about medallion sales values is also relevant to NCUA’s action: “Bulk sales typically fetch lower prices per placard than individual sales.”

Credit Union Borrowers’ Interests Conflict with Marblegate’s

Even at the discounted prices of the loans which would result in double digit yields, Marblegate’s strategy is to dominate the market for New York taxi medallions to enhance their profitability. Owning medallions is the firm’s operating goal, not administering borrowers’ loans. Refinancing to help individual borrowers pay down loans would just prolong the time before Marblegate might foreclose on a medallion due to driver’s payment defaults.

NCUA has turned these credit union members’ financial fate over to a fund whose sole goal is to maximize return on invested funds.

The New York Post directly addressed this issue. The story was published February 20,2020, the date of NCUA’s board meeting, titled Cabbies Worry as Hedge Fund Snaps Up Taxi Medallions:

Some industry sources said they were skeptical whether Marblegate would be interested in taking a haircut on the loans to help out taxi drivers. “Marblegate is happy owning these assets because they want to own a superfleet and build economies of scale,” according to one industry insider. “The idea is to keep buying the loans, keep foreclosing on them and keep gobbling up medallions until you control the market.”

How could any individual borrower ever hope to renegotiate loan terms with Marblegate? They want the medallion, not a loan, that if paid off would take away their prospect of owning the medallion via foreclosure.

A Credit Union Times story the same day quoted the Bhairav Desai, executive director of New York Taxi Workers Alliance that they hoped to restructure the loans at uniform value of $150,000 each. Instead NCUA sold the loans for $77,000 each. The borrowers received no benefit from this sale and are still burdened with debts incurred in very different market circumstances.

Marblegate acquires the debt at a very steep discount. The members are shut out from any upside potential from the sale.

NCUA’s Moral Blindness and Administrative Stonewalling

NCUA has turned its back on common sense and its fiduciary obligations to the cooperative system.

NCUA has charged the cost of the resolution of liquidations to the credit union system but then given all the potential upside profits to the private sector to reap. Co-ops pay for all losses. For profit firms reap the gains.

There are no facts provided in the NCUA press release, the FAQs or board oral statements defending the sale. The rhetorical explanations are entirely unsubstantiated. There have been no criteria for the solicitation process, no details about the financial advisor’s purpose or recommendation, no comparison of different options, no data on administrative costs, and no information on portfolio performance provided to explain this decision.

Somehow the general press (Wall Street Journal, MSN and New York Post) were able to find these details. This fact vacuum suggests NCUA either does not have data to support the sale process or is afraid the data would not justify their action. Vague assertions and generalizations replace evidence.

NCUA’s Illogical Explanations

The hollowness of NCUA’s arguments is staggering. McWatters is quoted: “We are fiduciaries for the insurance fund. We needed to take this offer.” Without a single fact to back up why a $16 billion fund needs more cash liquidity.

The most absurd statement in NCUA’s press release is “Private entities have specialized skills and greater resources and flexibility to work with borrowers in ways the NCUA cannot.” I will not argue with NCUA’s confessed lack of competence. But are they also ignorant of the billion-dollar credit unions and CUSO’s that manage taxi medallion loans as an everyday part of their business with specialists that know how to work with members?

NCUA has dissed the expertise, capabilities and experience of the credit unions they oversee in turning the future of these members to a “vulture” fund over which they have no control. They have sold out not just 4,500 members, but the entire cooperative system’s reputation and replaced it with a private, profit maximizing fund’s financial ambitions.

Compounding this demeaning assessment of credit union’s expertise, this bulk disposition of distressed assets will only harm credit unions with loans secured by the same collateral. The public fire sale which writes off two thirds of the book value of loans, can only harm the valuation of loans now held by credit unions in the same asset class.

As for NCUA’s claim that this was “the least long-term cost” every known fact about this case suggests just the opposite conclusion. The agency took the highest and greatest loss possible forgoing all future revenue from these loans. The upside opportunity is not tied to medallion values, but rather to the borrowers’ abilities to make affordable payments on their debts as they strive to achieve full medallion ownership.

At a fire sale average price of $77,000 (or the higher $150,000 amount proposed by the Workers’ Alliance), it is inconceivable that these experienced borrowers and taxi drivers could not meet rewritten payment terms and create a win-win for them and the NCUSIF.

Invoking Congress and “Mission”

The statement that “failure to achieve an orderly liquidation at the lowest long-term cost would violate the NCUA’s Congressionally mandated mission of protecting the insurance fund” is nonsensical. It is supported with no facts and in essence suggests that Marblegate doesn’t know what it is doing due to these so-called long-term costs. I suspect that this investment fund knows exactly what it is doing and has calculated that the long-term revenue returns that will enable it to dominate the taxi medallion business in New York and other cities. The statement merely confirms the agency’s analytical myopia.

When has NCUA ever justified an action by invoking a “Congressional mandate? If that is the reasoning whatever happened to the “Congressionally mandated mission” to help cooperative borrowers?

The sudden action (Feb. 19) by NCUA after numerous inquiries and efforts by the New York City Council and other interested parties suggests NCUA wanted to lock in the loss on these liquidations. Before the liquidation of the two credit unions, the NCUA-appointed conservators had estimated the combined negative net worth of LOMPTO and Melrose at $150 million at June 2018. In the September 2018 liquidation, NCUA recorded a $760 million expense against the allowance account.

This was an estimate already recorded in the December 2017 NCUSIF audit, over two years before this February 2020 sale. Any resolution that would contradict this prescient estimate would be embarrassing for all involved. So best to lock in the loss projected with amazing foresight so there is no need to explain how a $150 million deficit balloons to $750 million three months later.

And the $350 million just happens to be the net recovery value NCUA estimated when they expensed the allowance account over two years earlier. It is indeed remarkable how accurate this loss forecast proved to be compared to the absence of any contemporary data to support the sale today.

Who Will Join the Members’ Voice?

Following the NCUA meeting on Feb. 20 in which the taxi drivers’ signs were taken away and many routed away from the board room, one taxi representative summarized the board’s actions: “They sold us out today.”

The day following the Board meeting the New York state attorney general ordered the city to pay $810 million to debt-hit taxi drivers. The demand stated that the city allowed brokers and top players to collude on prices. The demand claimed the Taxi Limousine Commission marketed the new medallions as a path to the American dream.

Some commentators question whether this demand has any merit, but it shows two things. The possibility of assistance for taxi borrowers from unexpected sources. More importantly for NCUA, it demonstrates a government entity willing to try to help the borrowers, not walk away as NCUA has done.

NCUA’s explanations of the sale are neither credible nor convincing. The entire process was done in secret. Those most affected were never consulted.

This event raises the prospect that NCUA has become the weakest link in the cooperative network. For if members cannot rely on NCUA to protect their interests in this relatively small, highly visible event, what confidence should the 100 million plus members have that their interests will be safeguarded in the future?

This event is not an individual failure in which an examiner or survivor made a mistake or showed poor judgment. Rather this is an institutional failing from top to bottom over an extended period.

And that is why this betrayal has significance for every person concerned for the future of the cooperative system. To be silent is to give consent. Leadership tales courage. Shouldn’t Congress ask how this sale of members’ future fulfills NCUA’s cooperative mission?

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Why the Past Matters Today

Recently I posted two blogs that lifted stories Jeff Farver, a former credit union CEO turnaround artist, wrote for his family and friends about his career.

In three multi-year workouts, two as CEO, he saved these credit unions from liquidation. He did so in partnership with the NCUA who recognized his talents and innovative approach to resolutions. For example, his Good CU and Bad CU distinction and his ability to fashion a long term plan.

Credit union difficulties in New York City are continuing front page news.

Regret Yet Contentment

At the end of his short history, Jeff added this paragraph:

One of my regrets in retirement is the loss of fellowship with my fellow Credit union CEO’s, but especially those who were problem solvers, risk takers and cooperative adventurers. As I reflect on my career, I must acknowledge how those past successes have led to my positive outlook on the future and self-esteem and contentment.

The Regret that Should Inform Us All

Today NCUA and state regulators struggle with how to resolve problem situations. The instinct is to want them to go away. Merge them so someone else with excess capital can figure out what to do. Or in harder cases, just spend money to make the problem disappear—the most expensive and destructive option of all. Moreover, members don’t vanish when a credit union is liquidated, as we see in the example of NCUA’s mishandled taxi medallion liquidations.

Jeff knew that turnarounds were not a math problem to achieve the right net worth result. Competent leadership was the key. Like life itself, effective management takes multiple paths for success and flexibility for changing circumstances.

Jeff was not the only workout road warrior for the cooperative system. Other names that come to mind then and today include: Jim Ray (now deceased), Gordon Dames (former NCUA examiner), Don McKinnon, Bill Connors, Andy Hunter, John Tippets and Steve Winninger.

And it was not just RD John Ruffin but a whole class of NCUA Regional Directors who became partners with credit union workout leaders. These senior NCUA managers encouraged turnarounds not simply ending charters. Dozens of CEOs also persevered often in the face of irrational NCUA demands to downsize. They resisted the demand to shrink until the remaining capital was sufficient to meet a net worth ratio goal, but maybe not sustainable for the long term.

The Key Success Factor in CU Turnarounds

The key success factor in resolving the inevitable problems credit unions will encounter is wise leadership. When this wisdom is lacking, replaced by panic or fear for one’s reputation, then responding effectively to problems is literally short-changed. Every NCUA  response becomes a nail to be hit with a hammer, until it disappears into the wood.

Jeff characterizes the qualities needed “problem solvers, risk takers and cooperative adventurers.” He laments their absence. He modeled these necessary capabilities. That is leaders informed by the lessons of the past and the ambition for resolving credit union challenges with sustainable solutions.

Thank you, Jeff, for your life of cooperative service. Hopefully your example will inspire others to emulate your venturing spirit.

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“A Time to Mourn…”

Today the NCUA announced the agency’s sale of over 4,500 credit union borrowers and their loans secured by taxi medallions. These loans, many from years of labor, represent the most important earning asset in these members’ lives. The purchaser was a financia hedge fund which specializes in buying distressed assets at fire sale prices.

There will be time to describe how morally corrupt this action is. This action by the agency supposed to protect members would seem right at place in a Dickens novel about debtors’ prisons. Or more apropos to the pre-credit union era when consumers’ primary source of credit was loan sharks.

But for the moment, a reflection from Proverbs 24:

If you faint in the day of adversity, your strength being small;
If you hold back from rescuing those taken away to death,
Those who go staggering to the slaughter;
If you say, “Look, we did not know this”—
Does not he who weighs the heart perceive it?
Does not he who keeps watch over your soul know it?
And will he not repay all according to their deeds?

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An Opportunity for the NCUA Board to Do the Right Thing

Over the past two months, the plight of the 3,500 borrowers secured by taxi medallions has been on many political leaders’ minds.

Members of Congress, the New York City Council, the union representing the taxi drivers, CUNA and three credit union leagues have all written or spoken up asking NCUA to do what is in the borrowers’ best interests. They have all sought a collaborative solution with the borrowers, not an outright sale of the portfolio.

In January, several dozen driver-borrowers showed up at the NCUA’s monthly board meeting to present their case firsthand. NCUA has met with the union’s representatives but has given no information about the portfolio’s size and composition, the options being considered and the agency’s criteria for seeking a change from the current outsourced collection effort.

This is the NCUA Board’s Decision

The Federal Credit Union Act explicitly states that the “Administration (of NCUA) shall be under the management of the NCUA Board.” While the current three appointees may prefer to opine about broad policy issues from cyber security to consumer protection, their day job is to ensure the Agency is properly managed.

Most immediately this decision about the fate of the borrower members from Melrose/LOMTO’s liquidations is on their desks. The responsibility cannot be delegated to some staff or committee. The identification of reasonable options and then selecting what is in the members’ best interests for the future of this portfolio loans is in their hands.

A Solution in Everyone’s Interests-Available Now

The credit union press reports that NCUA has put the loans out for bid. It is no secret that hedge funds have been buying up New York medallions at auction for cash. These firms are risk taking vulture investors, bidding at liquidation prices, seeking an extraordinary return. They do this by squeezing borrowers further or by flipping the security to individuals who understand the medallions’ economic value when used to operate a taxi business.

There is good news however. An immediate and proven solution is readily available that if used, would be a win-win for everyone who has expressed an interest. It would give borrowers a chance to earn out the collateral’s economic value, provide significant upside recovery for NCUA, and most importantly, demonstrate the unique capabilities of the cooperative model.

This solution is a CUSO. The entity is 100% credit union owned, a 24 by 7 operation with call center, lending experts and decades long experience in the administration of taxi financing whether on balance sheet or participations. It has the resources and capacity to provide a solution that is visible, accountable and most importantly sustainable, whatever the time period required to work through the portfolios.

For the board not to be aware of or to have a proposal from this proven industry resource would be at best negligent, if not at worst, a total dereliction of duty.

Why This Solution Makes Sense

  1. It is in the borrowers’ interest to have these members’ loan administration overseen by an entity whose sole purpose is serving the credit union system. The unique coop values, capabilities and design are a part of a CUSO’s DNA. NCUA’s responsibility extends to all members not just those with savings. Selling members’ loans to profit maximizing firms violates the board’s fiduciary duties to these member-owners. After all the name of the financial cooperative is CREDIT UNION.
  2. The CUSO approach harvests the financial upside in the situation. Medallions are a license to run a small business. It is an income earning asset for borrowers, not a sterile security waiting for turns in market rates. The last call reports filed by NCUA’s conservators at Melrose and LOMTO showed a combined negative deficit of $150 million. When liquidated in the following quarter, NCUA recorded a $745 million NCUSIF expense against the allowance account. It is fair to suggest the maximum losses have been fully recognized. The potential for recoveries is highly probable if managed by an entity willing to stay the course to do so.
  3. The downside risk is minimal. The argument that the taxi business will exist no longer and instead be overtaking by various ride hailing services is being undermined with each passing quarter. Both Lyft and Uber lose money on every ride today. Neither has ever made a profit and both keep projecting years into the future when that might occur.

Every community in which these services operates now understands they are in the “public transportation business” and is moving to initiate or improve regulation. Licensing fees, taxes, congestion limits and even employment practices are a few of the changes imposed. These regulatory intrusions are eroding the entry pricing tactic of undercutting the regulated taxi pricing used by these market newcomers.

Instead of reducing traffic congestion, ride services are increasing it in city after city. (“Ride-Hail Utopia Got Stuck in Traffic” WSJ Feb 15, ’20, pg. B1) California has passed legislation effective this year that classifies drivers as employees with the accompanying benefits paid by the parent service.

City taxi regulators are modifying their practices on pricing, license fees and other regulations to give their local options a better competitive position. In one city the local drivers created a platform, ride hailing application that mimicked the convenience of the national startups.

The platform, ride share services have disrupted the traditional, locally regulated and metered-set-price approach of the taxi industry. City by city taxi regulators and operators are adjusting to remain viable.

What is not clear is whether the innovating, disruptive, nationally focused ride hailing options are sustainable. As the dominant players are now both public companies with investors wanting to see profitability, their future is uncertain. Could one or both end up becoming more “We Work” reorganization case studies?

The Three Board Members Policy Priorities

Each NCUA board member has stated a core policy/decision making focus in recent public comments.

For Harper it is consumer protection, making sure members are treated fairly.

For McWatters, it is being guided by what the law says. The purpose of the Act states, “credit union means a cooperative organization for promoting thrift and creating a source of credit for provident and productive purposes.”

For Hood it is diversity and financial inclusion. Has he witnessed a more diverse group seeking financial inclusion than the drivers sitting before him at the January board meeting?

The NCUA and credit unions need a positive example of the cooperative difference for the general public. Washington and many outside the city doubt the ability of their DC based leaders to develop collaborative solutions. This is an opportunity to demonstrate the unique capabilities of the cooperative system.

Every loan portfolio option will have pros and cons. It may seem easier for the NCUA board to wash their hands, selling out to the highest bidder, who may then ask for a guarantee to protect their downside. But it would seem illogical to convert these long-term, income producing loan assets into immediate cash for an insurance fund already bulging with over $16 billion in liquid investments. At best, these new cash assets might earn 1.5% per year.

All assets go through cycles of value. Some assets such as undeveloped land, or foreclosed business premises and equipment, have no economic upside until someone is willing to invest more time and resources to make them productive.

A loan to an operator/owner of a taxi medallion is an earning asset today. The value will fluctuate depending on many factors, but the income stream can be forecast and monitored monthly or even daily if needed. All that is required is a loan administrator willing to be responsive to changing circumstances so that all parties can contribute their best efforts. For the driver-borrower it is sweat equity.

A Precedent

The September 2019 AME financial statements (latest posted by NCUA) show that there will be a distribution of $3 billion or more to the member shareholders of four liquidated corporates. Only WesCorp members are without recovery so far. This amount is on top of the $3.1 billion surplus NCUSIF took in from the TCCUSF “merger” In September 2017. The NCUSIF also continues to collect the investment earnings on the TCCUSF merged assets as well as the NGN guarantee fees. This $6.1 billion and still increasing surplus is after NCUA has spent over $4 billion in out of pocket expense (not losses on investments) administering the legacy assets.

This $6.1 billion positive net income contrasts with NCUA’s loss projections for credit unions that would exceed $16 billion. A $22 billion forecasting error! Whether there should even have been liquidations of four corporates is a topic for another day. This example does prove the benefits of patient problem resolution versus the costs of cutting and running by disposing earning assets in a fire sale.

The Leadership Needed

The FCU Act says little about the role of the Chairman in managing the Administration (NCUA). It does say that the person “shall be the spokesperson”. . . “shall represent the board in its official relations with branches of government” . . .and “shall determine each Board member’s area of responsibility.”

As Chairman Hood considers his leadership on this issue, he may want to remind everyone of his words in November 2019 on financial inclusion:

When we talk about the need for diversity, equity and inclusion, I want these principles to be viewed as forces that bring us together. Diversity, equity, and inclusion should be sources of enrichment, strength and unity, not division.

Simply put, the commitment to diversity, inclusion, and equity must be part of this industry’s cherished value of “people helping people.”

Peter Drucker believed, and I quote, that “Unless commitment is made, there are only promises and hopes — but no plans.” He said, “Plans are only good intentions unless they degenerate into hard work.”

The next step forward is to affirm that commitment by creating the plans that will bring those promises and hopes to fruition — and then start the hard work of making these aspirations a reality.

Chairman Hood, are you ready to start the hard work of making these aspirations a reality for these member borrowers whose future inclusion comes from driving taxis?

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An Example of Regulatory Leadership in the 1977 MCU Conservatorship

In a recent blog reviewing the latest events in the May 2019 NCUA conservatorship of MCU, I suggested that the real problem was the failure of regulators, especially NCUA, to publicly explain their actions and intentions. The lack of transparency means that no one is taking responsibility for decisions made. Contrast this approach with the 1977 New York Times report on this earlier Municipal conservatorship.

Although insured by NCUA, Muriel Siebert, the banking regulator publicly stepped up and took charge of the situation.

In the excerpt from the New York Time’s article below, note her directness and actions with the credit union including:

  • Her transparency discussing the situation, including citing delinquency and board “struggles”
  • Her statement of full cooperation from the NCUA, including funding, if necessary
  • Her assurance of continuity of operations including paying a 6.5% share dividend
  • Her on site visit to the credit union’s main office and statement that the Department did not intend to retain possession
  • Her assurance there would be no wholesale layoffs of staff
  • The statement by New York’s mayor Beame extending his appreciation to the Regulator for protecting members interests

This is what leadership looks like: collaborative, goal specific and backed by personal commitment. The turnaround succeeded!

New York State Is Taking Over Municipal Credit Union in the City

(November 3, 1977)

Superintendent Siebert asserted that the credit union “is not insolvent and it has sufficient liquidity for us to be able to run it.”

She said that the union would be open for business as usual at 9 A.M. today and that “we will accept deposits, permit withdrawals and make loans to members as in the past.”

The Banking Superintendent said that the National Credit Union has assured her of full cooperation and that the national group would provide additional funds to run the Municipal Credit Union “should ;hat become necessary.”

She said also that the deposit insurance of up to $40,000 per account would continue “in full force and effect.”

The 60‐year‐old Municipal Credit Union has deposits of more than $120 million and has been paying its members quarterly dividends of 6½ percent. Miss Siebert said it was her intention “to correct the institution’s operating problems” and to continue to pay the usual dividend for the quarter ending Dec. 31.

In explaining the events that led to the takeover, Superintendent Siebert said that Ian examination of the credit union by her department early this year “disclosed an increased rate of loan delinquencies” and that “little was being done by the M.C.U. to collect these delinquent loans.”

Fights for Control Cited

Miss Siebert said the credit unions operations were also jeopardized because a struggle had been waged since 1972 for control of its board of directors. She pointed out that lawsuits had been brought by dissident members of the board and that all this had created problems involving the “effectiveness of management, personnel and various financial controls.”

Late yesterday, she visited the credit union in the Municipal Building at 156 William Street and told the staff there that her department “does not intend to retain possession of this credit union indefinitely.”

“We do not plan any wholesale layoffs of employes,” she said, although we do plan to make some reductions in staff which have already been recommended by our auditors.”

Mayor Beame issued a statement last night, which in part said: “I wish to extend my appreciation to the State Bank ing Department for moving promptly in this matter to protect the interests of the city employees who are members of the credit union.”

The Municipal Credit Union was chartered by the state in 1916 with 19 members.

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Municipal Credit Union (NYC) Reports $30 Million Net Income Gain in 4th Quarter

In a dramatic turnaround Municipal Credit Union (MCU) reported a $30 million reduction in its 2019 final year to date loss compared with its reported September 30 financial position.

$40 Million Improvement in Six Months

In the September 5300 call report, MCU’s bottom line was a $113.1 million loss. As of December, there was an improvement with a reported loss of only $82.7 million. This was on top of a $10 million-dollar gain from the June 2019 year to date loss of $123.3 million.

How is this dramatic $40 million turnaround in just six months possible? Is it too good to be true?

The short answer is Yes. It is neither true nor good.

Some Background

A brief summary of MCU’s situation from a November 2018 news article outlines the CEO’s embezzlement starting in 2013 to pay for addictions, his total compensation of $5.8 million in 2016, the removal of the Supervisory Committee and Board in 2018, followed by the appointment by New York’s Department of Financial Services of a former bank President and CFO Mark Ricca as CEO in October 2018.

At year-end 2018 MCU, led by the new CEO, reported a positive bottom line of $11.4 million, a net worth of 8% and a stable balance sheet with delinquency of 0.85% more than covered by an allowance account exceeding 228% of past due loans.

NCUA Conservatorship in May 2019

Then on May 17, 2019, NCUA took over the credit union and appointed Kay Woods as the CEO. Forty-five days later the credit union announced a year to date loss of $123 million versus the first quarter’s net income of a positive $2.9 million under the prior CEO.

There was no public discussion by the credit union or NCUA explaining this catastrophic loss. The lack of any reasons raises the question whether this was a hasty judgment or a predetermined action by NCUA. The result reduced the credit union’s 2019 mid-year net worth ratio to critically undercapitalized at 3.4% from well capitalized over 7%, 90 days earlier.

Even without any explanation, it did not take a forensic analyst to determine that NCUA’s new conservator had ended MCU’s defined benefit retirement plan and fully expensed the potential accounting deficit shown on the balance sheet as a negative $114 million at March 2019. This entry shown as other comprehensive income/loss has been reported on MCU’s balance sheet for over a decade.

The labor union representing 450 of the credit union’s employees confirmed this benefit cancellation had occurred and been replaced by a 401K defined contribution program in Local 153’s 2019 winter newsletter. The union’s contract had expired in January 2019. There has been no announcement of a new one.

How to Stage a $40 Million or More Turnaround

One way of capping a defined benefit plan’s future liability is to close it. This action will cause all employees covered under the plan to be 100% vested regardless of their vested status at the time of the closing.

The actuarial estimates of a plan’s future funding requirements do not require cash outlays until employees begin to draw benefits, which may be years or decades into the future. Closing the plan however, makes all covered employees fully vested in all earned benefits, regardless of years of service. This vested amount can be paid out if they leave employment instead of drawing the plan’s benefits for years after retiring.

Since the plan’s termination, employment has declined from 688 FTE equivalents to 523. In addition, the credit union announced in December that it was closing six more branches reducing total locations from 23 to 16 as of January 31, 2020.

As more employees will be asked to leave, each will be eligible to receive 100% of vested benefits in cash for rollover into another retirement program or an IRA. Individual lump sum payments will depend on length of service and level of compensation. However, the year-end average salary and benefit of $310,481 per employee (where the payout expense is recorded) suggests the average vested amounts are in excess of several hundred thousand per departure.

Every time an employee leaves, the payment reduces the actuarially projected shortfall of $114 million shown at March 31, 2019. That total assumed the plan’s on-going nature with liabilities projected from current employee staffing, their accumulated tenure and plan vesting schedules.

The $114 million write-down in the June quarter was an accrual estimate, presented as a loss using plan assumptions that were no longer valid since the plan had been terminated.

By presenting what is at best a misleading, and possibly false financial narrative, the credit union created a source to pay laid off and departing employees a “severance” (their 100% vested amount), a rationale for pushing back union contract demands, a reason for closing branches, and an urgency to dismantle the credit union’s operating capabilities, plank by plank.

Six months after the $123 “loss” was reported, the reversal of the accrued liability, appears to be $40 million and rising as layoffs continue. In fact, the $30 million 4th quarter improvement is due almost entirely to a correction of the earlier significant incorrect presentation of a future liability.

Downsizing Goes On

Currently MCU lists over 25 vacancies on its web job site. Branch closings continue. One has caused a landlord to initiate legal action against early termination. Korn Ferry has been hired to recruit a new Chief Human Resource Officer with “10-15 years’ experience” and one who is “willing to roll up their sleeves as needed.” The union’s latest newsletter said negotiations are still ongoing with no contract.

Lending to members has slowed by 40% from $773 million in total 2018 loan originations, to $465 million in 2019. Loan quality remains strong and delinquencies are still covered by more than 200% in an allowance account reserve. However, this lending slowdown could impair revenue for years to come.

What is the Real Problem?

If the $123 million “loss” was not really a loss, then what is the reason for the accounting manipulation?

Financial reports from prior years portray a credit union that on the surface was doing OK. The credit union avoided both the taxi medallion problems (2017-2019) and mortgage backed security crisis (2008/09). It had a balanced, growing loan portfolio and was serving many blue collar, middle income, civic and nonprofit employees in the New York City area. Chartered in 1916, it is New York’s oldest credit union and had previously survived a previous conservatorship in 1977.

However, news accounts stated that the CEO been supporting addiction habits via embezzlement since 2013. A supervisory committee member, board member and prior human resource executive, have been accused of helping with the wrongdoing.

In early 2018, the MCU board took the lead role for terminating MCU’s CFO, CHRO, and CEO based on investigations following receipt of DOJ subpoenas that alerted the directors to problems. After the board acted, and the investigations completed, they were then removed by the regulator.

The allegedly underfunded defined benefit plan was never an issue in these 2018 events. It had been openly shown in call reports for over a decade. MCU’s executive salaries and benefits, including the $6 million paid in 2016 to the CEO were disclosed in the required IRS 990 filings year after year. Both of these accounts should have been thoroughly reviewed by examiners.

The news reports and 5300 call reports suggest that the core issues, whether in 2018 or 2019 were in plain sight all along. Every year NCUA and DFS conduct joint exams with dozens of trained personnel on premises over many weeks. The credit union’s board and supervisory committee records are read, CEO compensation and any loans to executives/board members examined, MCU’s internal audits and the external CPA audit (including the future funding projections for the defined benefit) are all part of the exam process.

External Audit Issued During the Board’s CEO Investigation

The external audit as of December 2017, dated April 11, 2018 from Eisner Amper LLP provided the normal “clean” opinion of MCU’s financial position:

“In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Municipal Credit Union as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2017 in accordance with accounting principles generally accepted in the United States of America.”

Annual regulator exams cover all aspects of financial reporting, loan analysis, reserve adequacy, compliance and IT security, just to name some of the areas in a normal on-site review. As a $3 billion credit union, MCU should have been assigned NCUA’s most experienced examiners.

Either NCUA had not identified the CEO’s five-year scheme or was unable to resolve it. The MCU board’s removal occurred only after they terminated the three suspected “bad actors” in 2018. And it was one full year later that NCUA’s current conservator reported the “surprise” loss from the benefit plan termination.

Was the exaggerated loss, currently $40 million, NCUA’s way of creating a “financial emergency” to force their changes on the credit union? Was this an after the fact effort to divert attention from years of regulatory oversights enabling the CEO’s defalcations to go unnoticed?

Silence Creates Uncertainty, Erodes Confidence

What compounds the impression of accounting manipulation, is the continuing vacuum about NCUA and the conservator’s plans. Both have declined to talk to the press. Without transparency, anything goes. There is no accountability, no need to justify actions, no explanations of alternatives. Everything is done by force majeure, justified by an inflated expense recorded a full year after the board is removed with the regulator 100% in charge.

NCUA’s nineteen-month silence during these two separate events, and failure to provide a public spokesperson willing to take responsibility for the conservator’s actions and purpose, suggests that it is avoiding any discussion of its supervisory responsibilities. Instead it wants to point to a $123 million shiny object and reprise a two-year-old act of a confessed CEO embezzlement scheme. An embezzlement loss that should be fully recoverable from bond claims and restitution.

What’s Next?

The easy part is over. Anyone can knock a barn down. It takes a carpenter to build one. Restoring employee and member trust and morale is not achieved by merely showing an improving net worth or high ROA. A wrecking crew approach may remove obstacles to change, but it will also lead to unforeseen consequences when seeking persons to build a resilient future for MCU.

MCU’s financial progress is inevitable, for the credit union was showing ROA and reasonable growth before using the defined benefit plan cancellation as a hammer to justify downsizing and layoffs. Financial results matter, but the critical processes that will show if the situation is on the right track include:

  1. Restore meaningful input from the membership, both employee groups and individuals;
  2. Find long term senior managers/leaders who understand the requirements to build a sustainable organization with what is left of operations;
  3. A frequent and open reporting to all public stakeholders, with timely updates from both those running the credit union and NCUA/DFS who outsourced their oversight to those now operating in secret.

Why Transparency Matters the Most

This final step is in fact the most critical. NCUA has aided and abetted a false narrative of the credit union’s financial situation begun with its purported loss in June 2019.

Cooperatives are very different from for-profit financial firms. Ownership is held in commonwealth, not by individual stockholders. When regulators act without presenting their goals for public understanding, there is no accountability for those exposable for the situation.

When problems occur from external events or internal failings, all cooperative parties have an equal responsibility for resolving them: the credit union leadership and board, the regulators and third parties such as auditors and bonding companies all share oversight responsibility. Effective solutions require collaboration and respect for everyone’s role.

When one party operates unilaterally in secret, or attempts to put blame on another, then collaboration and positive resolution is replaced with scapegoating. Vital information and capabilities are lost. Options are unexamined. And the situation can quickly descend into a failing spiral that no person or team can reverse.

For what employee would want to trust their career prospects to a firm without a leader, with no governance process in place, no stated plan or goals, continuing uncertainty and loss of market confidence? But this is becoming the situation today. Instead of preserving value, NCUA’s actions are destroying the prospects for recovery. It needs to make its case otherwise in public as soon as possible, if it has one.

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