Corporate Recovery Litigation Has Cost More Than $1B: NCUA

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The National Credit Union Administration has spent more than $1 billion on lawsuits against the banks and securities firms that sold the faulty mortgage-backed securities that led to the corporate credit union meltdown, according to new data released by the regulator.

That data comes courtesy of a new website launched by NCUA that provides detailed information about recoveries arising from the agency's lawsuits against banks and securities firms that sold faulty securities to the five failed corporate credit unions.

The page includes a summary of the litigation and information about recoveries – including payments from the likes of RBS, Goldman Sachs and more – as well as legal fees and expenses, and other data and explanations.

According to the site, about half of the $1 billion in legal expenses went to the Washington-based legal firm of Kellogg, Huber, Hansen, Todd, Evans & Figel, PLLC, while the remaining $501 million was paid to Korein Tillery LLC of St. Louis.

Taking into account attorneys' fees and other expenses, NCUA generated an aggregate net recovery of about $3.1 billion. Legal expenses constitute about 23% of the overall amount recovered. The agency said it had not previously disclosed its attorney fee arrangements out of a desire to generate the maximum return from pending litigation.

NCUA indicated that its outside attorneys took the cases under "contingency fee arrangements," thereby insulating credit unions from most costs if the cases were unsuccessful.

"Without this fee arrangement, which shifted most of the risk of these legal actions to outside counsel, there would have been no legal investigation of potential claims, no litigation, and no legal recoveries," NCUA Chairman Rick Metsger said in a statement.

Metsger also defended the high cost of legal representation.

"We were the first federal financial institutions regulator to sue these firms, and we were going up against some of the world's most powerful institutions," said Metsger. "The outcome was far from certain, but we engaged expert outside counsel and our team has been very successful."

Dissolve the Stabilization Fund

The National Association of Federal Credit Unions (NAFCU) praised NCUA for releasing its legal fees and other information on corporate resolution, however NAFCU President and CEO Dan Berger called on NCUA in a statement to take further steps to put the matter behind it.

"After the debt to the U.S. Treasury has been fully repaid, it is imperative that the agency develop a concrete plan for the years leading up to the dissolution of the Stabilization Fund," said Berger, adding "NAFCU and our members recommend the agency pursue a course of action focused on increased transparency and public input, with the goal being an expeditious refund to credit unions."

Bill Hampel, chief economist and chief policy officer at the Credit Union National Association, observed that NCUA's strategy for going after the bad actors may not have been cheap, but there weren't a whole lot of other options available.

"There’s no doubt it’s a lot of money," Hampel said in a statement. "Given the complexity and uncertainties involved in litigation of this kind, it's hard to say whether the NCUA’s approach to obtaining recoveries in these cases was the most cost effective. However, if they had not pursued these cases, they would never have recovered the substantial sums that they did, and pursuing them without a contingency arrangement would have been very difficult."

As of Oct. 11, 2016, the regulator has obtained $4.3 billion in recoveries, "significantly reducing potential assessments" for credit unions. Metsger added that "net recoveries" have repaid some of the claims on the estates of the five failed corporates, including those of the Temporary Corporate Credit Union Stabilization Fund. But the agency has also warned CUs that even with the end of assessments and the recent news that the agency will soon complete payback on its loan from the U.S. Treasury, refunds of paid assessments aren't likely to come anytime soon.

All told, NCUA's board, acting as liquidating agent for the five aforementioned corporate credit unions, has filed 26 complaints against 32 defendants in federal courts in California, Kansas, and New York. The five corporate credit unions and the credit union system as a whole suffered billions of dollars in losses from the purchase of the faulty residential mortgage-backed securities.

The new webpage and the data on NCUA's legal fees can be accessed here: https://www.ncua.gov/regulation-supervision/Pages/corporate-system-resolution/legal-recoveries.aspx

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