LENEXA, Kan. – U.S. Central FCU, which reported a whopping $4.9 billion loss for 2008, detailed new exposures to the ongoing credit crunch in its annual report issued Friday night.
The one-time $52 billion corporate credit union, taken over by NCUA on March 20, explained that its losses for last year quadrupled from the previously announced estimates of $1.2 billion for several reasons, including the continuing deterioration of the housing markets on which its vast portfolio of mortgage-backed securities are based, and problems at the main insurer for those MBSs.
As the corporate credit union for the nation’s corporate credit unions, U.S. Central sits on the top of the three-tiered credit union system. As a result, losses accrued by U.S. Central will eventually trickle down to all credit unions, first to its 27 member corporates on the second tier, then to the 8,000 natural person credit unions on the bottom tier.
Upon taking U.S. Central under conservatorship, NCUA dismissed the management and the board of directors, which included two representatives of CUNA.
The deterioration of the financial condition prompted an extraordinary apology from the management in the annual report.
"Speaking for the staff of U.S. Central, we are sorry this happened," wrote James Nance, appointed by NCUA as conservator of the troubled corporate. "We are embarrassed
that we allowed this to happen on our watch."
"We are haunted by self-doubt concerning our decisions. Those entrusted and vested with authority necessary to have avoided the problems are no longer affiliated with U.S. Central," he continued. "Even while we understand that responsibility rests among them, we – as an organization and as individuals – are hurt and scarred by the resulting losses absorbed by our members and by their members."
"Our failures, combined with those of the other elements of the risk-control environment
designed to protect this organization, left us more vulnerable to these extraordinary
market forces than, in hindsight, was appropriate," he wrote.
The report paints a bleak picture of potential future losses. For instance, it says the continuing deterioration of the underlying collateral for the MBSs has caused the downgrade of 165 securities with a par value of $6.7 billion below investment grade. Even with realized losses of more than $6 billion over the past 18 months, unrealized losses on the portfolio stood at $8 billion at year-end 2008 and $8.5 billion at mid-year 2009.
"Many of U.S. Central’s investment securities are in significant unrealized loss positions
as of December 31, 2008, particularly non-agency (residential mortgage-backed securities," explained the U.S. Central auditors, Deloite and Touche. "Management believes that the unrealized losses, and the severity thereof, are the result of 1) historically high defaults and delinquencies on mortgages underlying non-agency RMBS and 2) a severe imbalance in the current, illiquid market between supply and demand for these same securities."
In addition, U.S. Central owns a number of investment securities guaranteed by monoline insurers. One of the monoline insurers, Financial Guaranty Insurance Company, has experienced particularly severe declines in its credit ratings. Based on internal analysis and the aforementioned downgrades, U.S. Central management has determined that FGIC’s claims paying ability was not sufficient to cover its estimated losses.
The situation has worsened since the end of 2008, with the troubled corporate reporting another $470.5 million in losses for the second quarter of 2009 and a $1.1 billion loss for the first six months of this year.
The accumulated losses exceed all of U.S. Central’s retained earnings and capital, although NCUA said this weekend that it has yet to revise the loss figures beyond the 62.7% of member capital shares owned by U.S. Central’s 27 corporate members.
NCUA, which has pledged an unprecedented level of financial resources to rescue the U.S. Central, said Friday U.S. Central remains a viable credit union. "The NCUA has made it clear that U.S. Central is to continue offering its products and services for the foreseeable future," said the agency in releasing the 2008 financials. "U.S. Centrals goal is to minimize losses to the National CU Share Insurance Fund. Under current market conditions, the board and management generally believe that losses will be minimized by continuing to hold the impaired assets and collecting principal and interest payments."
