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WALL STREET-NCUA sold $3.8 billion of bonds last week from the detritus of U.S. Central FCU, the first offering of what is expected to be as much as $35 billion of corporate bonds sold.

The bonds were sold in two tranches, or groupings. A tranche of $3.28 billion of floating-rate bonds carried an interest rate of 45 to 50 basis points over the one-month LIBOR rate. A tranche of $566.5 million of fixed-rate bonds carried a rate of 105 to 110 bps over what is known as the interpolated swaps rate.

It was the agency's second offering following the sale of $9.5 billion of bonds backed by U.S. Central and WesCorp FCU assets earlier this month, as NCUA begins to liquidate the failed corporate credit unions.

In constructing the bonds from the scraps of the failed U.S. Central, NCUA collected fixed-rate securities owned by the one-time $52 billion corporate and pooled the cash flows into new securities-also known as collateralized debt obligations-that will have a fixed-rate, according to people familiar with the deal. Then the same was done by pooling the cash flows on floating-rate securities in U.S. Central's portfolio and creating floating-rate bonds. Though the new bonds, all carrying ten-year maturities, were created from cash flows on troubled bonds, they were enhanced by the ultimate guarantee, that of the federal government, which attracted a Triple A rating for them. The government backing makes the bonds permissible investments for federally insured CUs.

NCUA modeled the bonds after similar instruments created by the FDIC based on the cash flows from securities owned by failed banks the regulator has taken over.

NCUA hopes to sell as much as $35 billion worth of the bonds by liquidating the assets of the four other failed corporates, WesCorp FCU, Members United Corporate FCU, Southwest Corporate FCU and Constitution Corporate FCU. NCUA is only expected to recover pennies on the dollar for the failed investments of the corporates, leaving natural person CUs with a bill of as much as $16 billion.

The initial offering was underwritten by Barclays Capital and co-managed by JP Morgan Chase and Wells Fargo Securities. The selling syndicate also includes ISI, a brokerage owned by U.S. Central, as well as CastleOak, Loop and Williams.



ALEXANDRIA, Va.-NCUA is investigating whether to bring charges against dozens of directors of the three recent corporate credit union failures-including CEOs of some of the nation's biggest credit unions-just as it did in the failure of WesCorp FCU.

The charges could be as serious as civil fraud or negligence, just like NCUA has charged directors of WesCorp, according to one source familiar with the NCUA practice. Or they could be less serious, such as a slap on the wrist accompanying so-called Letters of Reprimand, which was done once before, in the 1995 failure of Capital Corporate FCU.

NCUA is expected to wait to bring any charges against directors of Members United Corporate FCU, Southwest Corporate FCU or Constitution Corporate FCU until after the agency's Office of the Inspector General has completed a formal Material Loss Review on each of the recent failures.

An NCUA spokesman said beside the charges brought against the WesCorp directors in a civil suit, NCUA has also served notice of an intent to file a bond claim against directors of U.S. Central FCU. NCUA is expected to file similar claims against the director of Wes-Corp. But no decisions have been made about the other three corporates. "In the case of the other three conservatorships, it is premature to say what we might do," said John McKechnie, chief spokesman for NCUA. "Nothing will be done until we review all of the facts."

In the WesCorp case NCUA is claiming breaches of fiduciary duty and gross negligence on the part of five top WesCorp executives and 11 directors, most of them managers of large California credit unions caused the failure of the one-time $34 billion corporate. NCUA typically follows up civil suits like this with some kind of civil administrative actions, such as a prohibition order which bars an executive from working for a federally insured credit union. However, in the CapCorp case directors who consented to Letters of Reprimand were allowed to continue their CU careers. Some of them continue to operate Washington-area CUs to this day.

Whether NCUA decides to pursue action against directors of the failed corporates will depend on several factors, according to one former attorney with NCUA's office of general counsel. One factor will be a determination of the cause of each failure. Another will be the size of the monetary loss involved. Another still will be the level of expertise expected from the volunteer directors. For example, NCUA generally views expectations from directors of small CUs, many of them having little financial expertise, differently than expectations from corporate directors who are financial professionals, many of them managing their own billion-dollar credit unions, the former NCUA staffer said.

The corporate failures, said the one-time NCUA insider, raises questions as to what the boards knew about the dire conditions of each corporate and the accuracy of the disclosures to both members and regulators. All of the failed corporates, for instance, were issuing optimistic reports about their prospects down to the final days, in order to prevent member withdrawals.

NCUA is already moving to answer some of the questions raised by the failure of the five corporates with respect to board governance. Over the next few weeks NCUA is expected to propose amendments to its new corporate rule that will, among other things, require all new internal and board reporting like in the Sarbanes-Oxley Act for all corporates.

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