ALEXANDRIA, Va. – Slow NCUA action to in identifying and addressing examination problems at Constitution Corporate FCU were among the chief reasons for the failure of the one-time $1.7 billion corporate credit union last year–one of five corporate failures to plague the credit union industry–according to a new study released this afternoon 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.
By December 31, 2007, 61%, or $870 million worth, of Constitution Corporate's investments were private label MBS, the IG reported.
“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 concluded.
“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, that includes $50 million in lost member capital and $145 million of losses recorded by NCUA's corporate stabilization fund so far.
The report shows how as financials at the doomed corporate continued to deteriorate that 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.
The corporate's tenuous financial situation was exacerbated by the fact that 50% of its deposits were from a single Connecticut credit union whose CEO sat on its board, posing the threat of a calamitous withdrawal at any time.
