IG'S REPORT CRITICAL OF
AGENCY'S PERFORMANCE
ALEXANDRIA, Va.-Slow NCUA actionin identifying and addressing examination problems at Constitution Corporate FCU were among ne-time $1.7-billion corporate credit union last year-one of five corporate failures to plague the credit union industr,according to a new study released last week by NCUA's Office of the Inspector General.
Like the other corporate failures-U.S. Central FCU, WesCorp FCU, Members United Corporate FCU and Southwest Corporate FCU-the Connecticut corporate loaded up on private label mortgage-backed securities in an effort to chase every higher yields, the Inspector General found. In doing so, managers at Constitution Corporate continued to rely on Wall Street ratings and the approval of NCUA examiners, even as the mortgage market began to tank and threatened the values of MBSs, the report said.
"We determined NCUA did not timely communicate key risks related to Constitution's investment portfolio even though they had identified credit and concentration risks in the 2004, 2006, and 2007 exam workpapers," said the IG's report. "Specifically, NCUA failed to require corrective action on the credit risk in Constitution's investment portfolio related to the concentration of mortgage-backed securities until August 2008.
"By that time, severe market dislocation had occurred and Constitution's significant holdings of mortgage-backed securities experienced rapid declines in value and were increasingly illiquid," the IG stated.
"We believe stronger and timelier supervisory action regarding Constitution's concentration in mortgage-backed securities could have resulted in a reduced loss to the [corporate stabilization fund]," said the report. "NCUA regulations did not provide corporates with specific limits for concentrations of credit risk.
The IG notes how NCUA's Office of Corporate CUs awarded Constitution so-called Part I Expanded Authority as early as 2004, allowing the corporate to invest in lower-rated MBS in order to chase higher yields.
Constitution was taken over by NCUA a year ago along with Members United and Southwest and is projected to cost as much as $200 million in losses.
The report shows how as financials at the doomed corporate continued to deteriorate, its sources of liquidity dried up, with Bank of America, Wachovia Bank and Pacific Coast Bankers all shutting off lines of credit, then the Federal Reserve Bank of Boston denying it access to the Fed's discount window without special approval by NCUA.
DEMS, GOP CONTINUE TO
SQUABBLE OVER NEW AGENCY
WASHINGTON-Democratic Senators last week labeled as "gamesmanship" and "hijacking the legislative process" Republican vows to block any nomination to head the new Consumer Financial Protection Bureau until they get reforms to the fledgling agency's structure.
"A vocal minority is playing games with the process and holding [this] nomination hostage," Senate Banking Committee Chairman Timothy Johnson of South Dakota, said during last week's hearing over former Ohio Attorney General Richard Cordray's nomination to head the consumer bureau.
But Sen. Richard Shelby, the top Republican on the panel, insisted he and 43 other Senate Republicans will continue to block any nomination to head the new agency until President Obama and Senate Democrats agree to restructure the agency so it is lead instead by a five-member board and its power is watered-down. "No one person, I believe, should have such unfettered powers over the financial choices of the American people," said the Alabama Republican.
Shelby is among 44 Republicans who signed a letter to President Obama in May insisting they will not vote to confirm a director to the new agency until their demands are met. The 44 votes would be enough to block any nomination under Senate rules that require 60 votes to overcome a filibuster and Senate confirmation is required for the director of the new agency.
But several Democrats criticized the GOP's stance. New York Sen. Charles Schumer accused the Republican of trying to "hijack the legislative process."
"This notion of 'let's wait until we get it perfect' would have delayed the election of George Washington for decades," said Jack Reed of Rhode Island.
Republican Bob Corker of Tennessee called the Democrats' charges "half-truths, mis-truths and un-truths." "I am stunned at the un-truths that have been related today," said Corker, who insisted he was disappointed at the "rancor" expressed by Democrats.
Meantime, Cordray, the president's default nomination after Elizabeth Warren backed out, insisted if confirmed he will do everything he can to ensure that the new agency does not add to the regulatory burden for credit unions and community banks. "We will not impose additional costs on community banks and credit unions," said Cordray, who was accompanied by the chief lobbyist for the Ohio CU League and the Ohio Community Bankers Association at the hearing.
