'At The End of the Day,' No One Really Knew

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PHOENIX-There was no way to avoid being caught up in the mess, is how FirstCorp CU EVP and CIO Greg Harden summed up plight of most corporate credit unions.

"There really was no free lunch out there," insisted Harden. "If you were a huge market participant you definitely had your exposures on some of these securities. If you were not a market participant then you had a pretty hefty capital contribution at U.S. Central that you ultimately lost. You were going to lose one way or another."

Harden acknowledged that FirstCorp did not see the problems coming, but was able to limit its exposure to some of the riskiest investments because "we did not like some of the things that were going on with some of the asset-backed securities we were looking at. We did not know why we did not like them, but they did not seem as good."

With spreads tightening and FirstCorp reviewing investment prospectuses a few years ago, Harden said it began to notice lower than usual FICO scores. "Things were going both directions that you did not like. At the end of the day we just did not know if we were being compensated for some of the risk that was out there. Because of that we ratcheted up our participation in some of the U.S. Central floating rate instruments that we needed in order to carry on our business here."

Harden emphasized that he is not saying the corporate system gets a free pass. He believes many of the decisions made and strategies pursued should have been different. The biggest change, Harden pointed out, should have been around concentration limits. "The system should have been more diligent in the concentration in some of these assets. But that being said, if the corporate network was so diligent about this but the rest of the world wasn't, we still had a pretty massive problem on our hands, because all the financial sectors took a beating."

Even if prices for the corporates' impaired investments were raised from 20 cents on the dollar to 80 cents, Harden believes there still would be significant liquidity and consumer confidence issues to warrant NCUA's actions, and that a share guarantee would have been necessary. "I don't think that anyone can think that this was going to turn out without some major intervention by NCUA. If the world was headed down this path of credit, I think it's naive to think that we would have made it out without some of the tremendous issues we are facing now."

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