Most Agree Blame For Corporate Failures Goes Far Beyond NCUA
BIRMINGHAM, Ala.-Blaming NCUA for the problems that befell the corporate system is easy to do, agree those within and outside the corporate network.
But industry analysts and leaders of corporate credit unions are split on whether-or how much-the regulator bears responsibility for the deep losses experienced by most corporates, and the conservatorship of the two largest, Wes-Corp and U.S. Central.
Dennis Dollar, former NCUA chairman who is now principal of Dollar Associates, agrees that NCUA shares in the blame, but not so much for its handling of the corporate problems once trouble hit; moreso for allowing some examiners to become part of the fabric of the corporates they watched over. The agency had examiners on site at both WesCorp and U.S. Central.
Dollar shared that he has had concerns that in-house examiners do not all rotate as effectively as they could among the corporates they examine. "There is the possibility that if you do not rotate out, in-house examiners almost become institutionalized and become part of the operations," Dollar told Credit Union Journal. "I think there is certainly a legitimate complaint that perhaps at some corporate credit unions that on-site examiners may have become too institutionalized."
Overall, Dollar, who was chairman of NCUA from 2001 to 2004 insisted NCUA was on top of the corporate problems. "Examiners were looking daily at investment portfolios full of AAA and AA securities. What do you expect the regulator to do-say you need to limit your exposure to AAA securities? Is that a reasonable supervisory action? I could see if we talked about double B or Bs to say you need to limit your exposure and bring in more A and AA. But the AAs were the problems."
Thomas Bonds, president of Corporate America CU, Birmingham, said he typically has no problem pointing the finger at NCUA. But not in this instance. While examiners should have made a bigger issue of concentration of credit risk, Bonds noted, adding that it is not their primary responsibility.
"Their primary responsibility is to ensure the institution is working well. Should NCUA have approached this as a safety and soundness issue based on the concentration of credit risk? I think even NCUA at this time would say 'yes.' But looking at the situation before the crisis, the corporates were compliant with regulations. So I don't blame NCUA for this crisis. Had they been more diligent in the front end perhaps they could have mitigated problems to a degree."
While emphasizing that many are responsible for the corporate troubles, Stacy Glidden, COO of FirstCorp CU in Phoenix, believes that at some point regulators "fell asleep at the switch. Where was the oversight?"
Regulators may have played an ancillary role in the corporate crisis, argues, Pete Duffy, managing director at Sandler O'Neill & Partners in New York, but he steers clear of blaming a lack of oversight. Instead, Duffy contended that opening up corporates to a national field of membership was one of many contributing factors that led to the institutions loading up on bonds with "questionable underlying credit." With more competition, he pointed out, corporates were forced to cut prices on services even while the cost of funds and doing business rose. That squeeze pressured corporates to rely more and more heavily on investment yield.
"It was from every corner of this business; the lawmaker, the regulator, the rating agency, the consumer who was demanding more, and in the middle is the community bank and credit union stuck trying to compete with Lehman, Chase, BoA and Wells Fargo," Duffy observed.
Whatever NCUA's role may have been, state regulators are hopeful that they will be able to contribute in the future and help ensure that such a crisis never arises again.
"In the future we hope there will be some type of joint effort on the part of NCUA and state regulators in overseeing the corporate credit union system," said Tom Candon, Deputy Commissioner of Banking and Securities for the State of Vermont.
"I think there is a precedent for working together and having a broader regulatory perspective and that's quite healthy," said Roger Little, Michigan Deputy Commissioner, Credit Union Division, noting that the state's examiners previously participating in examinations at U.S. Central while the giant was still a Kansas state-charted institution. "Our general approach is that the best antidote to systemic risk is diversity either in the institutions themselves or from a regulatory perspective."