ALEXANDRIA, Va. – An internal report issued by NCUA this afternoon said the agency’s Office of Corporate CUs failed to identify the Texas corporate’s high concentration of investments, which led to the 2010 failure of the one-time $12 billion corporate.
The failure of Southwest Corporate, one of five corporate failures, is expected to cost $141 million to resolve, according to the report issued by the NCUA Office of the Inspector General. Southwest is in the process of re-emerging after a combination with Georgia Corporate FCU, and the new entity is now known as Catalyst Corporate FCU.
The report said NCUA’s corporate examiners failed to grasp the high concentration of Southwest Corporate’s investments in private label residential mortgage backed securities based in mortgages in a single state–California. In July 2007, Southwest had $1.9 billion, or 43% of its $4.4 billion RMBS exposure to mortgage collateral in California. The California concentration represented 319% of Southwest’s capital.
The corporate examiners also did not grasp the importance of the corporate’s concentration of its own deposits in a single entity–U.S. Central FCU, the one-time $52 billion corporate which also failed, in March 2009.
“We determined Office of Corporate Credit Unions staff would have likely been able to mitigate these conditions and the expected loss to the Stabilization Fund had appropriate regulatory support--in the form of more specific investment concentration limits--been available to allow the OCCU staff to take exception with and aggressively address Southwest’s investment strategy,” concluded the report.
“Because of this significant concentration of privately-issued securities linked to the residential mortgages without the backing of the federal government, Southwest management left its balance sheet highly vulnerable to economic conditions in the residential real estate market,”said the IG. “As a result, Southwest was exposed to significantly increased credit risk, market risk and liquidity risk.”
The report said between NCUA’s March 2004 examination of Southwest and the start of the credit market dislocation in July 2007, Southwest management increasingly made privately-issued RMBS a significant concentration of its investment portfolio. During this period, Southwest management increased its direct concentration of privately-issued RMBS by 263%, from $1.39 billion to $5.05 billion.
As a percentage of Southwest’s overall investment portfolio, Southwest management increased its exposure to the residential real estate market through privately-issued RMBS from 16% of Southwest’s $8.47 billion portfolio as of March 31, 2004 to nearly half of the corporate’s $10.54 billion investment portfolio as of July 31, 2007.
In addition, as of July 2007, 36%, or $3.8 billion, of Southwest’s $10.54 billion investment portfolio was deposited at U.S. Central. These deposits amounted to an additional 639% of Southwest’s capital, making Southwest’s total potential exposure to privately-issued RMBS nearly 1,500% of its capital. “Because of the risks within U.S. Central’s investment strategy, Southwest’s deposits at U.S. Central represented additional significant risk for Southwest,” wrote the IG.
