WASHINGTON – NCUA worked behind closed doors with representatives of the Federal Reserve and the Treasury to ensure both corporates and natural person credit unions had adequate sources of liquidity available as the corporate system was showing signs of a meltdown last fall, NCUA Chairman Michael Fryzel told lawmakers yesterday during hearings on the corporate credit union bailout.
Starting last August, when growing numbers of corporates were reporting surging unrealized losses on their investments, NCUA secretly encouraged corporates with large losses on mortgage-backed securities to apply to the Federal Reserve for access to its emergency loan fund, known as the discount window, Fryzel testified during yesterday’s hearing before the House Financial Services Subcommittee on Financial Institutions.
In consultation with the Fed and Treasury, NCUA requested in September that Congress expand the borrowing capacity of the Central Liquidity Facility to $41 billion, which was swiftly approved.
In October, NCUA staff continued to meet with staff at the Fed, Treasury and the Treasury’s Federal Financing Bank to discuss contingency plans to handle payment system operations in the event of a meltdown of the corporate system
And in November, with the approval of the Fed and the Treasury, the NCUA Board created two programs to be run out of the CLF, the CU System Investment Program and CU Homeowners Affordability Relief Program to pump new liquidity into both corporate and natural person credit unions.
Fryzel predicted large losses, an estimated $5.9 billion from the corporate crisis."Both external and internal analyses have consistently shown that the projected MBS credit losses in the corporate system are real, highly likely, and relatively large," he testified. Even analyses using the most optimistic future scenarios produce large system wide credit losses, he added.
Fryzel also told lawmakers NCUA has attributed the meltdown of U.S. Central FCU and WesCorp FCU, which were taken under federal conservatorship on March 20, to increasing competition within the credit union movement for the funds of natural person credit unions.
"The advent of national fields of membership produced the competition that may, in turn, have helped generate" large concentrations of mortgage backed securities in the two failed corporates, he testified. "WesCorp was able to attract new (natural person credit union) members in part by offering dividend rates higher that other corporates. Consequently, it maintained an aggressive earnings strategy that was achieved by acquiring higher yielding MBS with greater amounts of risk."
"In direct response to WesCorp’s market share success, other corporates likely pressured their wholesale corporate U.S. Central to pay higher more competitive dividends which they could pass along to their members. As a result, USC changed its portfolio strategy and also invested heavily in higher yielding MBS," Fryzel testified.
The result was that the corporate system became increasingly invested in MBS, which went from 23% of its portfolio in 2003 to 37% in 2007, and is greater still today. WesCorp had a whopping 79% of its investments tied up in the troubled MBS market, while U.S. Central had 34% of its portfolio in MBS, the highest concentrations of MBS of any corporates, when they were taken over by NCUA.
