Members of Congress want to investigate National Credit Union Administration’s legal fees? Good luck with that.
Such was the message from two former members of the NCUA board involved with setting up the arrangement that has brought in more than $5 billion in recoveries by suing banks that sold faulty mortgage-backed securities that led to the collapse of several corporate credit unions, though at a cost of more than $1 billion.
News broke earlier this week that two members of Congress – Republicans Ann Wagner of Missouri and Jeb Hensarling of Texas –
Regardless of whether the issue moves forward, the consensus among experts is that while Congress may investigate matters as part of its oversight function, there isn’t much the legislative body can do at this point.
Former NCUA Chairman Debbie Matz, who helmed the organization at the time the legal agreements were made, declined to speculate on what actions Congress might take, but suggested that whatever steps efforts legislators make, it may not amount to much.
“The money’s been paid – the funds have been received from the institutions that were sued,” she told Credit Union Journal. “I’m not quite sure even if they wanted to how they would get the money back… It’s just not clear what the path would be toward recovery.”
Similarly, Michael Fryzel, who was also on the board with Matz at the time, noted that “Congress can look into anything it wants to,” but reminded that it’s important to remember the context in which those fees were agreed upon.
“Back in 2008-2009 when all of this was going down and the credit unions were being assessed and we were borrowing billions of dollars form the Treasury in order to keep the system working, everbody would have been concerned if NCUA had said we need to hire a team of attorneys to file suit against these guys and we need to pay them $1,500 an hour,” he said. “The credit union industry would’ve been very upset. So you do the next best thing: You take a gamble and say ‘How do you guys work for us? The more money that you get that goes back to the credit unions, as that money goes back to them now, you will earn such-and-such a percentage.” And as a result they did very well; they got billions in recovery and as a result they had a very big fee.”
“Paying contingencies in this type of legal situation is the norm; it’s not unusual,” added Matz. “We did not have the resources to take on these lawsuits ourselves. NCUA certainly didn’t have the staff nor the financial resources to take this on. If we were going to do it, it was incumbent upon us to engage with law firms that were willing to take the risk that they would be laying out a huge amount of resources and perhaps getting nothing. As it turns out, they were very successful. The credit unions benefitted tremendously, and that was the price of getting that $5 billion. It’s not unusual to have a contingency arrangement with law firms in that type of situation, but we couldn’t have moved forward – the alternative would have been to do nothing, and the credit unions would be out $5 billion.”
On top of that, Matz and nearly every other source interviewed for this story – and for previous coverage on this matter – said that since the suits against the big banks began, there have been almost no complaints from credit unions regarding the lawsuits.
Gigi Hyland, who also served on the board with Matz and Fryzel, could not be reached for comment.
Just politics?
Perhaps not surprisingly, once news of Wagner’s letter broke, the Independent Community Bankers of America moved quickly to praise the lawmakers involved in the move and take a smack at NCUA, with ICBA President and CEO Camden Fine saying the regulator was bilked and threw away taxpayer monies.
“The NCUA is a taxpayer-subsidized agency because it is funded by assessments paid by tax-exempt credit unions. What’s more, at the time the NCUA incurred these legal expenses, the agency was supported by a draw from the U.S. Treasury Department,” Fine wrote in a letter to the House Financial Services Subcommittee on Oversight and Investigations.
John McKechnie, a former NCUA staffer and now a credit union consultant with Washington-based Total Spectrum, called that attack “wrong-headed and, frankly, silly.” While it’s perfectly fair to debate the amount of fees charged during the corporate recoveries, he said, “that discussion shouldn’t obscure the key point, namely that banks sold a lot of junk leading up to the market meltdown of 2008-09…The banks live in the ultimate glass house when it comes to the competence of their own regulators, and they should own up to their own problems rather than try to change the subject.”
Some analysts CU Journal spoke with debated whether or not Congress may be attempting to send a message to other regulators beyond the credit union movement by exercising its role in providing oversight. After all, the money has already been paid, so there appears to be little that Congress can do from an enforcement perspective, they said.
One observer, however, said it’s not about oversight but optics.
“This is politics,” said Oliver Ireland, a banking expert and partner with Washington-based law firm Morrison Foerster. “There’s always war between the banks and the credit unions, so anything that makes the credit unions look bad may make the banks happy, and that may go for regulators as well. I don’t know whether that plays into it or not, but if I’m a congressman or congresswoman and I can point to waste in Washington, that’s a political issue. Is it real waste or not? I don’t know. Anytime you say you paid somebody $1 billion in legal fees, you’ve got to ask yourself whether that could have been done cheaper. And the answer to that, I don’t know.”
Ireland didn’t say whether there was precedent for after-the-fact investigations into regulators’ legal dealings, but noted that this may be part of a much grander tradition.
“They’re trying to tar this with the brush of government waste – and there’s a lot of precedent for that,” he said.
