(Note: This is an updated post to reflect an error in my initial post where Vice Chair Hauptman’s name was mistakenly used instead of Chairman Harper’s)
On May 11, 2024 four former NCUA chairs sent a cosigned letter to the majority and minority leaders of the House Financial Services Committee.
In this unique, unprecedented and “bipartisan” communication they urged that NCUA be given new power and expanded authority to examine/supervise “third parties” who do business with credit unions.
The four signers with their dates as chair were Mike Fryzel (2008-2009), Debbie Matz (2009-2016), Rick Metzger (2016-2017) and Mark McWatters (2017-2019).
These former chairs presided over situations involving the largest projected losses ever recorded by the NCUA in its oversight of credit unions. Their joint prophecy of future catastrophe if the federal credit union act is not changed, would therefore appear to merit some consideration.
Their Records at Predictions as Chairs
The first of the two largest losses ever recorded by the credit unions was the forced liquidation of five corporates in 2010 with combined projected write offs and additional premiums of up $16.2 billion all paid by credit unions.
The second largest was the loss of approximately $750 million recorded in the sale of taxi medallion loan portfolios to a New York City “vulture fund” Marblegate Asset Management LLC in 2020.
In both cases these future loss estimates proved highly inaccurate. Instead of collective writedowns and assessments in the billions, credit unions and the NCUSIF have recorded recoveries and payouts to corporate shareholders in the billions of dollars.
In the taxi medallion resolution, the fund that purchased the medallions has seen a four-to-five-fold increase in guaranteed value to $250,000 for New York medallions. NCUA refused multiple FOIA requests about sale details, but public estimates were these medallion-secured loans were sold by NCUA for under $50,000 in this liquidation. Credit unions took the entire loss and a third party got the windfall.
Moreover, in their traditional oversight of natural person credit unions in the 2009-2010 financial crisis, the NCUSIF expensed estimated loss provisions of $1.362 billion. Actual net cash losses in the same two years were only $373 million or 27% of the amount projected.
Two observations from the tenures of these four former NCUA chairpersons when estimating future losses from their time on the job are:
- The estimates they provided for both natural person losses (or projected recoveries) and corporates 2009-2020 were wildly inaccurate. In the case of the taxi medallions the cash liquidation sale provided all the upside recovery to a third party, not to the credit unions’ borrowers or the NCUSIF.
- In none of the problem cases were third party vendor difficulties ever cited as a factor in these largest cases of potential or realized losses.
New Oracles about the Future
So what is the basis for these four former oracles now calling for greater NCUA regulatory powers given their track records. They refer to none of their prior events as Chair as a basis for their position. They cite no reference to any studies, factual analysis or actual examples from any regulatory experience. There is no insight from their post chairman responsibilities or even reference to recent bank failures.
Without actual evidence, their plea presents a dystopian prediction about how future bad actors could harm the credit union system.
“Many credit unions have large concentrations of members that could be of high value to our nation’s foreign adversaries. These fields of membership are tied to military installations, the state department, agencies of the United States Intelligence Community, Congressional staff and others.
“A cyber incident could create devastating consequences for these very sensitive populations.
“It is not hyperbolic to say that the safety and soundness of the credit union system is at risk due to the potential for operational failures, cybersecurity breaches and compliance violations by third party vendors.
“Credit unions in many cases unknowingly expose themselves to financial losses, reputational damage and regulatory enforcement actions because of vendors who fail to meet regulatory requirements or adequately manage risks.
It is all hyperbole however, a verbal waving of the bloody flag to create fear and uncertainty absent any factual evidence. And in the ultimate logical flip flop to support this open-ended expansion of authority, they claim it will actually be a form of regulatory relief:
“Additionally, this statutory authority would translate to significant regulatory relief for many small and mid-size credit unions who, in many cases, do not have the requisite experience, or resources to conduct due diligence on vendors who are vital to their survival.”
The Four Horseman of the Apocalypse
The content of this letter is an embarrassment to credit unions and the signers’ reputations as knowledgeable about cooperative financial services and the credit union system.
Their own track records is one of misleading catastrophic future predictions of losses around the core business they should be most expert. The NCUA had examiners on site full time at WesCorp and US Central before their conservatorships on March 20, 2009. Every month’s financial results and investment actions were sent to NCUA’s head office for review.
Similarly, the taxi medallion problems had been in NCUA’s crosshairs for decades. The agency actually stopped credit unions from issuing new loans years before the conservatorship of $1.3 billion Melrose in February 2017.
Despite these records of oversight failures, the four authors proclaim that “Without proper (NCUA) oversight of these service providers, credit unions may be exposed to greater chances of operational disruptions, financial losses, etc,etc”
The core problem from past failures is not NCUA authority, but the Agency’s effectiveness in problem resolution. Individual downturns and occasional failure are inevitable in a market economy. Rules and regs do not prevent bad decisions by credit unions just as good policy does not guarantee NCUA performance.
Credit unions survive and thrive not because they are better at conquering fear and danger, but rather because they embrace the human spirit of hope and betterment. That spirit has sustained them for over 100 years as the country and cooperative institutions have gone through periods of change and challenge.
What caused these chairs to sign on to this political act, obliviously designed by NCUA’s current chair Harper (correction to original post which mistakenly used Vice Chair Hauptman’s name), is unknown. They create a caricature of informed and experienced regulatory wisdom. Their desperate reasoning makes them appear like the four horsemen of the apocalypse, the biblical figures in the Book of Revelation that represent the end of times. Instead of the challenges of conquest, war, famine, and death their prophecy is about the end of the cooperative system.
Their collective letter reminds one of the first rule of leadership by Richard Feynman: “The first principle is that you must not fool yourself — and you are the easiest person to fool.”
Let’s not let these four prophets of doom fool credit unions or Congress.
