Category: NCUA

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Do Credit Unions have Enough Capital to Weather Loan Losses from the Current Crisis?

That was the first question the reporter asked. Others followed. Will some fail? Would secondary capital options help?

My Answer and the Data

Yes, the system has adequate capital. Credit unions have total reserves of almost $193 billion and an average net worth ratio over 11%.

In 2019 the industry’s annualized loan losses were .63%. At March 31, 2020, 85% of all loans were secured and first mortgages backed 43% of the portfolio. Unsecured loans were under 10%. The allowance account was 150% of all delinquent loans.

In the Great Recession of 2009, the net loan charge off rate was 1.21%; and in 2010, 1.13%. The market value of homes securing mortgages was a major concern. That is not the case today.

In 2019, the industry’s net loan losses were $6.1 billion. However. credit unions added $6.5 billion to the allowance account and still reported $14.5 billion in net income. Credit unions could see their historical loss rate of .50-.60% grow by three of four times (double the 2009/10 experience) and still be very sound.

Two Capital Sources

Averages provide a macro context, but problems are micro, in individual credit unions. Might individual credit unions have higher than average losses?

A fact of the covid economic shutdown is that the impact on individual households is disparate. According to a Bipartisan Institute Survey, 42 % of households report negative effects on income from the dual crises. For Hispanic households, the result was 60% and for black homes, 54%. Over 59% of single parent households, regardless of race, saw income reduced or were forced to seek unemployment.

Individual credit unions will have differing proportions of members financially impaired. But that is why the cooperative system has two capital sources.

The primary reserves are each firm’s retained earnings. The second is the collective capital in the NCUSIF approaching $17 billion.

Cooperatives’ Collective Capital

Unlike the FDIC fund, the cooperative system’s insurance fund was redesigned in 1984 to be a ready source of capital assistance. This assistance is authorized by Section 208 of the Federal Credit Union Act.

When the FDIC is given a troubled charter by separate supervisory authority, its role is to close the institution by liquidation or sale. Providing FDIC assistance is considered inappropriate because of public policy concerns about the use of “public money” to restore private wealth.

Credit unions create common wealth. Their reserves are the collective savings of all the members. Members in turn send 1 cent of every share in a credit union to the NCUSIF to comply with the 1% deposit requirement.

These collective reserves, updated semi-annually, are always fully available to assist individual credit unions. In the premium model, funds must come from expenses charged to the insured banks.

NCUSIF assistance in the form of cash, subordinated debt or guarantees has been used since the fund’s founding in 1971. These actions not only minimize losses, but most importantly enable familiar service to members who may be caught in the same economic circumstances as their credit union.

Capital Is Not the Issue

The dollars of capital or the level of net worth is not the primary issue for the coop system. Important yes; but more critical is how the reserves are used by credit unions and NCUA. Is it just to expense away troubled credit unions, or to invest to restore sustainable operations?

Cooperative reserves, like all capital, can be underused or misused. In a competitive market system however, capital’s objective is to gain long term returns and create competitive advantage. Liquidation is always the costliest option, both in terms of immediate expense and the elimination of all future income.

Today credit unions are working with millions of members whose financial situation has been disrupted through no fault of their own. Standing alongside members’ transitions can result in years of fervent loyalty. Similarly, the welfare of the whole system is enhanced when credit unions suffering loses, can work to again be sound.

The National Effort to Save Jobs, Assist Consumers , and Support Businesses

Every covid emergency program passed by Congress including the CARES Act with its $600 unemployment weekly increase, $1,200 one-time payments to families earning less than $75,000, the PPP loan program with loan forgiveness, the Federal Reserve purchase of EFT’s with high risk bonds, and its Main Street loans to business are public expenditures intended to prevent corporate and individual financial failure. The goal is to restore the economy and consumers to full activity as quickly as possible.

However, some at NCUA may not have bought into this bipartisan, government-wide effort. Bound by a literal PCA mindset, the NCUSIF’s CFO announced a $60 million addition to loss reserves in the May Board meeting, even though every financial trend presented was in a positive direction.

In April the Inspector General in his semi-annual report to congress confidently predicted: “Given the economic impact of the COVID-19 pandemic, we anticipate an increase in required MLRs in the coming year.” A Material Loss Review is required in every circumstance where the cost of a problem resolution exceeds $25 million.

Chairman Hood has issued policies to give credit unions greater flexibility and time to work through financial downturns. The question is whether these policies will be just press releases or will they change staff behavior

For that to happen, the Chair will need to ensure operational performance. That oversight accountability, not the amount of capital, is the real test for the Agency’s leaders.

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Crossing Red Lines

“We crossed a lot of red lines.” That is how Federal Reserve Chairman Jerome Powell described the host of actions by the central bank responding to the COVID economic shutdown.

Actions included lowering interest rates to near zero, conducting unlimited bond purchases, implementing emergency lending programs to business, state and large city governments.

There are more steps planned, novel in scope and speed. These include the main street credit program to make at-risk loans to medium-sized businesses, buying corporate bonds and the debt of states and large cities.

The purchase of non-investment grade debt held by Exchange Traded funds was perhaps the most controversial. Included in the initial $1.3 billion purchases were bonds issued by Hertz, J.C. Penny, Neiman Marcus and Whiting Petroleum all of which have filed for bankruptcy. The US Treasury has been allocated up to $75 billion to cover potential losses on these non-bank, lending initiatives.

The Opportunity of a Crisis

But THE red line crossed that preceded all of these central bank actions was changing the internal mind set of the Federal bureaucracy. “We don’t do this. Where is the authority? We’ve never done this before. How will it work? What if we fail?”

With over one in four workers laid off, unemployment is expected to exceed 20% for May. Powell justified his innovative approach partly by the fact that the burdens of job loss are falling on those least able to afford it. They are lower paid service workers whose ranks are disproportionately women and minorities.

But changing long standing, institutional economic realities is hard. All governmental leaders find bureaucracies reluctant to move in innovative ways or at the pace of events. The easiest thing is keep doing what you have always done. The result, no real change occurs. The status quo remains.

The opportunities for transformational change can be fleeting. Public moods move quickly. Political and vested interests rise up. New approaches can be lost if not seized “in the moment” as Chairman Powell did.

He courageously decided to “cross all the institutional red lines.” Without taking that risk, the whole recovery momentum would be much more difficult.

NCUA’s Withdrawal from the Cooperative System

This crisis is an opportunity for NCUA to reverse the past decade’s pattern of unilateral, isolated and often self-serving regulatory responses in its relationships with credit unions.

Among all financial institutions, the cooperative model uniquely depends on collaboration. It is not just the basis for initial chartering, but also a singular operational advantage.

All elements of the system have a mutual responsibility for safety and soundness. Since the NCUA’s 2009 takeover of the corporate network followed by liquidation of four of the five largest corporates, it has failed to seek solutions cooperatively with credit unions and in members’ best interests.

The disruptions to financial performance by the crisis should be a turning point in this relationship. No regulatory rule or waiver, or congressional legislation, can “de-risk” the consequences of the financial toxicity caused by the pandemic and national economic shutdown.

The regulatory impulse to get rid of problems through mergers and selling member-owners to someone else when the going gets tough is a slow-moving death spiral for the industry.

Cooperative workouts are not presumed to be fast, especially when relying on retained earnings. They take time – sometimes years. They are messy. Each is unique, personal in the details. They require sweat equity and occasionally, 208/NCUSIF assistance.

The purpose of the 1% NCUSIF redesign was to keep credit unions and the system whole. Since the 2009 crisis NCUA has used the resources of this unique cooperative fund to broker problems away and avoid leadership accountability.

Crossing Red Lines to Avoid Red Ink

Jerome Powell has acted fast to help troubled industries, individual business, states and cities work their way through catastrophic revenue shortfalls and unknowable future trends. To keep the cooperative system whole while transitioning this crisis, NCUA must do the same.

The Board should establish an expectation that no credit union charter should be lost because of the current pandemic. Credit unions who work with their member-owners in this transition should expect no less than 100% support from their regulator.

This is not a legal, but a commonsense judgment. Similar to the Fed, the full range of credit union resources should be available whether this be 208 waivers and/or direct NCUSIF capital contributions.

This is a moment for NCUA to highlight the cooperative model in all its member focused uniqueness. It will require NCUA staff to grasp the opportunity for innovation by working with credit union leaders in the trenches. If that bureaucratic “red line” or mindset can be crossed, then the outcome should be a lot less red ink when this is over.

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Regulators Report to Congress

I have read the prepared testimonies of the FDIC Chair Jelena McWilliams and NCUA Chair Rodney Hood presented to the Senate Banking Committee.

The FDIC’s response to the coronavirus pandemic was clear. McWilliams’ summary:

“As it became clear that the public health emergency caused by COVID-19 would lead to a significant economic disruption, the FDIC took swift, decisive actions to (1) encourage banks to work with affected customers and communities, (2) increase flexibility for banks to meet the needs of their customers, (3) foster small business lending, (4) protect consumers and increase financial options, and (5) actively monitor the financial system.”

A Missed Opportunity

Chairman Hoods’ remarks listed every action and program that NCUA has undertaken during his tenure. These included not just responses to the supervisory and legislative COVID-19 changes, but also cybersecurity programs, diversity initiatives, the sale of taxi medallion loans and legislative changes the Agency would like to see. Not included in this legislative wish list was a request for NCUA vendor oversight, perhaps a positive indication of regulatory self-restraint.

While the focus on NCUA’s numerous rule making and emergency supervisory accommodations is understandable, I was also looking for a shout out for what credit unions were doing for members. Stories that would illustrate the cooperative difference. Numbers that would demonstrate how credit unions use their tax free capital accumulation to help members. There were only brief mentions of two credit unions’ loan volumes under the PPP program which is on point, but not unique to credit unions.

Crises are a time of heightened attention for financial services because of the vital role credit plays for members, small businesses and communities. Credit is credit unions reason for being. Retelling that story when people are listening, asking for updates, is a special moment to once again explain why cooperatives exist.

The three regulatory functions under the NCUA board are means to enhance safety and soundness. The goal of these tools is to enable each credit union to make a difference in members’ lives. The industry is doing that daily. But it didn’t get reported.

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Three-In-One

Tuesday’s virtual oversight financial hearing before the Senate Banking Committee will be a dramatic way to demonstrate the credit union difference.  

For NCUA Chairman Rodney Hood represents all the cooperative system’s regulatory and supervisory roles as a single witness. It takes three bank representatives to cover the same responsibility for that industry.

These three are:

1. Randal Quarles Vice Chairman for Supervision at the Federal Reserve Board-Liquidity
2. Joseph Otting, Comptroller of the Currency-Chartering and Supervision
3. Jelena Williams, Chairman of the FDIC-Insurance

Cooperative Design’s Simplicity

The credit union system built its federal regulatory structure over five decades (1934-1984). As credit unions evolved, their supervisory system followed the same cooperative principles. The NCUSIF is a collaborative fund where each member contributes 1 cent of every share dollar as a capitalization pool. The CLF is a mixed ownership corporation whose credit union funding is the basis for liquidity borrowings from the federal financing bank.

The advantages of an integrated, collaborative based regulator which covers all three functions are obvious. Greater efficiency, coordination, and single point of policy and oversight at the federal level.

The Drawbacks

But the potential downside of one organization is that there is no check and balance from other expert agencies. The effectiveness of the single regulator’s role depends on one board with the Chairman as spokesperson.  

If the board’s leadership  is not familiar with cooperative design and credit union differences, there will be the temptation to look to their bigger regulatory kin, who have a longer, different history and a lot more resources. When that approach is used to justify an action, NCUA can get off track.

What to Watch for in the Hearing

Because the hearing is virtual, the side by side visual of one versus three may not be as dramatic were the hearing in person.

I’m listening to see if Chairman Hood presents the credit union role from a cooperative point of view. Are there reports of the unique initiatives credit unions have taken to assist members? Or will the ever-present temptation of “bank envy” characterize his comments?  

Credit unions were not meant to be banks. Level playing field arguments or changes because the banks can do it, are not the reason the cooperative option exists.  

Hopefully the Chairman will show the difference not just in the 1 vs 3 setting,  but also by presenting the member focused accomplishments the industry has achieved in this crisis.

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A Stunning Confession of an Agency’s Leadership Shortcomings

What does it say about a federal government agency whose leadership collectively confesses to the inability to tell right from wrong, legal from illegal, good behavior from disreputable? Especially in the middle of a national crisis.

That was the stunning admission revealed by the NCUA last week as it announced a new personnel decision made at its March 19 closed board meeting.

Appointing a Chief Ethics Counsel

On April 22, NCUA announced the Board’s decision to hire a “chief ethics counsel.” Supervised by the chairman, the press release stated: “The Office of Ethics Counsel will certify the agency’s compliance with relevant federal ethics laws and regulations, promote accountability and ethical conduct, and help ensure the success of the NCUA’s ethics programs.” This had been a role of the General Counsel.

Senior federal executive appointments are traditionally selected based on candidates’ experience, convictions and proven character. Ethical obligations and moral behavior are presumed. This Presidentially appointed, Senate-confirmed NCUA board trio has now conceded the Agency is failing in this basic discernment ability.

So, in addition to three board members, their personal policy advisors, senior staff including an executive director and deputy, a general counsel and deputy, and the full organizational capabilities of human resources department, the agency is unable to make ethical decisions.

It makes the story of the Greek philosopher and cynic Diogenes’ quest for an honest and truthful person more than prophetic.

A Partial Record of Agency Leadership Failings

The litany of disastrous and self-serving actions by senior agency personnel in just the past three years is lengthy.

  1. A March 2020 IG report: Misuse of Official Time, Illegal Drug Use, Time and Attendance Fraud) It described how NCUA General Counsel Michael McKenna (appointed 2011) and his deputy, Lara Daly-Sims, had visited strip clubs, consumed alcohol and possibly marijuana, while on government time.
  2. The betrayal of 4,500 credit union borrowers’ whose loans were sold to a hedge fund in February 2020 in a secret bidding process.
  3. The January 2019 release of a 25-page investigation by NCUA’s OIG of then Chairman McWatters and Chief of Staff Sarah Vega’s excessive travel expenditures.
  4. The May 11, 2018 Washington Post report of Chairman McWatters overseeing the NCUA from his home in Dallas: “almost unheard of for an agency leader, to routinely work from home.”
  5. The seizure of $3.0 billions of TCCUSF surplus due credit unions via merger with the NCUSIF.
  6. The lack of transparency in the management and expenditures of billions in liquidations of the five corporates.
  7. The operating loss reported in the December 2017 NCUSIF audit, the first since the fund was created in 1971.

Compounding Error with Folly: A Self Promotion Campaign Paused

As if this admission of collective moral bankruptcy was not itself damning, the agency on April 24 further proved its leadership vacuum.

On that day the credit union press reported NCUA’s contracts with three public relation firms’ for more than $500,000 to assess, compare and then rebrand the agency signage and logo. Deliverables also included responding to agency media requests and preparing testimony.

When the December 2019 contracts became public on April 24 through FOIA requests, the agency immediately said it would postpone, not cancel, the contracts.

The agency’s operational hold of this four-month effort was explained by the need “to spend more time addressing the coronavirus crisis.” This covering story fabrication is underscored by the fact that the President declared the coronavirus national emergency six weeks earlier on March 13.

Serving Members: We’re In This Alone

NCUA’s actions, putting its interests first, accumulating greater and greater credit union resources, and making unilateral decisions, erupted in the 2008-2009 financial crisis. And the tide never reversed.

In this crisis, the lesson for credit unions serving members tirelessly under the slogan “We’re in this together,” is that they are also in this alone.

The most important authority of any government leader is moral, not rules and regs. Without this “compass,” the regulatory instruments and collaborative resources at NCUA will not be directed to enhance credit unions’ fundamental values or purpose.

Instead, NCUA’s pattern of actions betray the basic values that make credit unions different. Cooperative success relies on self-help, mutuality, burden sharing and community well-being. These values, more than unique processes and services, make credit unions who they are.

The Challenge

Daily, credit unions are carrying out this cooperative philosophy and their “essential service” designation for millions of members—many laid off, most uncertain about their future, and everyone anxious for their personal safety.

The good news is that we have been here before, and the collective changes undertaken in 1980-1984 for example, served a whole generation that followed. How will this generation of credit union leaders fulfill its destiny?

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Revealing Character

Many have observed, “crises do not create character; they reveal it.”

Recently a CEO asked if I had heard about PPF funding for credit union entities such as CUSO’s or foundations. Credit unions are not eligible. He heard reports that several entities had applied. That worried him. The concern was that such efforts compromised the claim that we take care of our own, the self-help basis of cooperative design.

I replied that if the economy continues to falter requiring hundreds of billions more of government grants, a much bigger challenge will confront the country and credit unions. Specifically, how will the government pay for all this additional spending and debt issuance. The answer is obvious: new taxes.

Therefore, credit unions must demonstrate and document our self-reliance, self-funding mutuality with members during this time. Did we use our tax-free net income and capital to benefit members, or did we just hoard it?

A Skeptical Take: Fake It Till the Fourth Quarter

Another view is that some will cry NCUA made them so dependent on “help from on high” that they could not stand alone with any integrity. Can this generation of credit union leaders rekindle the spirit of cooperative innovation and entrepreneurship? Or, will they be tempted to seek “paint by the numbers” handouts from bureaucrats who never met a payroll or face-to-face with members?

Is it possible to at least fake it until the fourth quarter and the clock runs out?

The Cooperative Way Forward

Credit unions’ purpose is to use each day as a day to do something better for members. It is reasonable to see the crisis as bigger than any one of us, as individual members or credit unions. But it is not bigger than all of us together.

That confidence arises from knowing we were created to do things that had not been done before. We do not shy away when that challenge comes again. That is why we are here.

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NCUA’s Leadership In a Crisis

NCUA’s actions in a crisis matter–for good or ill. So far, its efforts have ranged between two poles. On the one hand there are moves to lessen regulatory and compliance restraints to enable credit unions to respond to member needs with innovative, non-traditional practices.

This instinct is excellent. For it recognizes two realities:

  1. Effective responses for members’ problems occur locally. The discrete, granular circumstances of each member are resolved best, on site, credit union by credit union. No national policy can substitute for the speed and wisdom of local responders.
  2. Nothing of consequence in a crisis can be accomplished alone. When NCUA has taken over credit unions through conservatorship or examiner dictates, this principle of collaboration is nullified. Cooperation and patience are uniquely credit union strengths.

One credit union veteran described effectiveness this way: “Government is too far away and too late to help one’s neighbor. Right now, it is our neighbor to neighbor approaches that auditors, regulators, and bureaucrats need to template. This is what makes future government responses relevant, or even come close to working. We, the citizens and community actors, must be the template for the approaches we hope to have and live with from government .”

The Second Response, Also Instinctive

The other extreme of “we’re all in this together” is the inevitable bureaucratic reach for more power and money. This has resulted in two legislative suggestions by board members at opposite ends of the ideological spectrum: Harper and McWatters.

Both endorsed new NCUA authority to examine third party vendors, a request rejected repeatedly over the past decade in Congress.

The second was to expand the cooperative system’s CLF liquidity options. Although unclear, the suggestion appears to be that liquidity should be on call, solely at NCUA’s behest. The current mixed ownership structure requires credit unions to subscribe capital shares to create the 16 times borrowing capacity at the Federal Financing Bank. Now, credit unions are the direct funders, agents and users of the system.

Contrary Crisis Response

The go-it-alone, we’re in charge approach, was disastrous in the Great Recession. NCUA’s unilateral actions destroyed the CLF’s three-decades long role as the cooperative system’s liquidity safety net. NCUA requested a special $6 billion borrowing line from Congress at same time the CLF had an unused $49 billion capacity.

In the 2009 crisis NCUA took over the daily management of $100 billion dollars in corporate assets without a plan or knowledgeable leadership. Today the $6 billion AME surplus from the liquidations of five corporates, shows the catastrophic misjudgment which NCUA estimated would cost credit unions $13-16 billion dollars.

The misjudgment was not just a dollar and cents forecasting error. Rather the fundamental mistake was that NCUA took over total control. They failed to work collaboratively and respect the expertise and experience in the corporate system. Instead NCUA bought plans from outsiders who failed to understand both cooperative strengths and the crisis itself.

Chairman Hood’s Silence

One reason for Chairman Hood’s silence may be he recalls his past tenure on the NCUA board. And he has reflected on the lessons from that time.

The beauty of the cooperative model is when consumers and leaders believe they can be owners of solutions and get to it. In any crisis we must use that spirit to be first to respond, solid in our belief we can overcome, and hopeful in the fact that things that work will be documented as historical markers for future actions.

Leadership in a crisis offers the chance to build a better system. This occurred in the 1980-1984 transition to deregulation. For that outcome to occur, the NCUA board must work collaboratively with those who man the front lines with members.

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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.

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 now capitalized, could be inadequate to the crisis even at a multiple of 32 times member shares. NCUA could need liquidity for the NCUSIF and the Federal Financing Bank is the most reliable source for 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 total 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 reassessed.

The historic agreement in 1983 for the corporate system to fully fund the CLF’s capital requirements for all credit unions  was ended by NCUA in 2012.  The NCUA failed to provide a design for the CLF to become an integral partner with its credit union members-owners.

In contrast today 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 for credit unions to refinance members’ mortgage loans became stillborn when NCUA staff took over the initiative.

Non Routine Borrowings to Resolve Problems

Credit unions seeking liquidity assistance will almost always be under some form of financial stress. This can be due to market dislocations making  assets difficult to value, unplanned share outflows, or earnings pressures from increased delinquency or  sound loan growth options.

By “normal” operating criteria, credit unions needing liquidity will be under financial strain and often under examiner constraints. Recent NCUA practice is not to provide 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 ratio.  For contrast, this was not the policy 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 to better fulfill CLF’s 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 to be asked to fund the CLF more fully, they must be included in the conversation about the CLF’s future.

Reversing an Historic 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.

NCUA described events following the audit in 2012 in the annual report: “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 the USC Bridge and the CLF. NCUA unilaterally shut down the CLF’s thirty-year record of covering every credit union in the cooperative system.  

US Central was never insolvent when liquidated by NCUA.  US Central’s asset management estate (AME) today reports a positive balance of over $1.7 billion.

The Challenge at 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 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’s comprehensive industry role was terminated in October 2012.

If the Board can learn from these previous events to again develop a partnership with credit unions about the role of the CLF, they will 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 listens, real change can be made in the next covid congressional package that will be coming down the congressional 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 in the current crisis to reverse a mistake from the prior one. Is the Board up to the challenge this time?

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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.

13 comments:

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

Posted on

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. . .