NCUA Examiners Asleep At The Switch In U.S. Central Failure

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ALEXANDRIA, Va. – A new report on the failure of U.S. Central FCU concludes that NCUA examiners failed to adequately monitor the financials of the one-time $52 billion corporate credit union as it piled up increasing concentrations of risky private-label subprime mortgage-backed securities and so-called Alt-A paper.

It wasn’t until after U.S. Central, which was finally liquidated on Oct. 1, piled up almost $16 billion worth of subprime MBS and Alt-A bonds in 2007 that examiners started to sound the alarm, a new Material loss review conducted by NCUA’s Office of the Inspector General concludes. “At the time, this represented nearly 34% of total investments and approximately 45% of U.S. Central’s private issued mortgage related issues and asset backed securities,” wrote the Inspector General.

The growing concentration of subprime and Alt-A securities was fed by a rapid growth in U.S. Central assets, which fed by a growing need to pay higher dividends to its 27 corporate members, the report concluded. “In hindsight, management and the Board were more focused on asset growth than on achieving their defined capital goals and investment concentrations and credit risk management,” said the IG.

The report also faulted management and directors of the failed corporate for allowing U.,S. Central to concentrate so much of its assets in risky investments.

Twice in 2006, U.S. Central management recommended to the (asset liability committee) increasing the limit in the amount of non-agency mortgage-backed securities that could be held in the investment portfolio. The minutes from the ALM committee indicated that management increased this limit without regard to the increased exposure to credit risk related to the underlying collateral of the securities, much of which was subprime mortgage loans.

All the while, projected losses for the central bank for credit unions continued to spiral, from $151 million in December 2007, to $1.5 billion in July 2008, and finally to as much as $7 billion. In an effort to limit the losses, NCUA began liquidating the portfolio of U.S. Central on Oct. 1 and selling it off.

And all this time, NCUA had at least one examiner on site at U.S. Central five days a week.

“We believe stronger and timelier supervisory action regarding U.S. Central’s concentration in mortgage-backed securities could have resulted in a reduced loss to the NCUSIF,” wrote the Inspector General. “Although NCUA does not provide specific guidance regarding sector concentration limits, we believe (Office of Corporate CUs) examiners (and) staff should have recognized the risk exposure that U.S. Central’s significant concentration in mortgage-backed securities represented earlier than 2007 and 2008.”

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