The following article, part of CU Journal's July 13 Bonus Content, is an extended version of the way it appeared in print.
ALEXANDRIA, Va. — Newly released minutes of NCUA closed Board meetings earlier this year show the credit union regulator vastly under-estimating losses at U.S. Central FCU, even as it had a full-time examiner housed at the one-time $50 billion central bank for credit unions.
The minutes of the closed meeting held on Jan. 28, when the Board agreed to pump an emergency loan of $1 billion to keep U.S. Central afloat show that NCUA officials were taken aback a few days before when U.S. Central CEO Francis Lee and Joseph Herbst, the chairman of its board, visited the agency and told them the estimate losses had exploded to $1.2 billion. Up until then the losses at U.S. Central had only been "rumored" to be about $300 million, Hunt told the NCUA Board members.
"I will say, for the record, it is still preliminary," Scott Hunt, acting director of the Office of Corporate CUs, told the three NCUA Board members. "They have not finalized that number with their auditors. But nonetheless, it was an estimate that now deems (sic) the action we are here before you with a sense of the significance."
Those losses are expected to be dwarfed still when U.S. Central finally releases it audited financials for 2008, scheduled for Friday. Estimates are the losses will exceed $2.5 billion.
Hunt, the chief corporate examiner, tried to d ownplay the losses to the Board, explaining that if the mortgage-backed securities owned by U.S. Central were held to maturity the eventual losses could be as low as $400 million to $700 million.
The wide discrepancy in loss estimates prompted the NCUA Board to hire an outside expert, PIMCO, to review all of the bonds not only held by U.S. Central, but also WesCorp FCU. That review led to the takeover of the two corporate giants by NCUA just weeks later, on March 20.
The documents, obtained under the Freedom of Information Act, show real worry among NCUA officials and Board members at the extent of the losses in the corporate system, with unrealized losses of almost $19 billion far exceeding the $8.7 billion of capital held by all corporates.
NCUA was extremely worried that the corporates would be forced to sell their underwater securities at a steep discount and realize some of those losses. As of last November, when NCUA froze the capital ratios for all corporates-in effect agreeing to ignore billions of dollars of depleted capital-at least six corporates: U.S. Central, WesCorp, Members United Corporate FCU (headed by Herbst), Southwest Corporate FCU, Corporate One FCU and Constitution Corporate FCU all had unrealized losses exceeding all of their capital according to NCUA.
At a closed Board meeting March 26 where the PIMCO report was review, Rick Mayfield, a corporate examiner on-site at WesCorp, said "Selling bonds does not make sens to us...If we sell bonds now the losses will be greater than if we just hold onto them. And so I know that we have got folks on the outside suggesting PIMCO is positioning itself to buy our bonds but their advice is to hold them. Do not sell."
NCUA's approval of the $1-billion U.S. Central bailout and subsequent takeover of the failed corporate has had a broad ripple effect on not only those corporates, but also all corporates and their natural person credit union members; as the depletion of capital in U.S. Central has further depleted the corporates' capital, which in turn has depleted the capital held by their credit union members.
The agency calculated that the cost of the corporate bailout would add another 112 credit unions with a total of $52 billion in assets to the undercapitalized list. Additional capital infusions into U.S. Central could add another 89 credit unions with $9 billion in assets to the undercapitalized list.
The documents include minutes from a closed NCUA Board meeting on October 16, 2008; the closed Board meeting of Jan. 27; the closed Board meeting of Jan. 28 when the Board approved the $1 billion emergency loan to U.S. Central; the closed meeting March 19, when the Board voted to take U.S. Central and WesCorp under conservatorship; and the closed meeting March 26.
