SAN DIMAS, Calif. – Out of all the investments made by WesCorp FCU over the past few years, perhaps the worst turned out to be risky collateralized debt obligations that appear to have little intrinsic value and have caused a staggering $545.6 million in losses – and counting.
That’s a 90% write-down on an original par value of $609 million worth of the CDOs, securities that are themselves comprised of asset-backed securities. The losses on the CDOs were among the largest component of WesCorp’s $1.2 billion loss for 2009.
“None of this stuff is federally insured or guaranteed,” said Charles Felker, vice president for credit union bond house First Empire Securities and the former chief investments officer at NCUA. “What you have here is privately issued debt.”
“With the benefit of hindsight, some of this stuff became dynamite,” Felker told Credit Union Journal yesterday.
Unlike collateralized mortgage obligations, or CMOs, CDOs, are securities backed by securities. In the case of CMOs, there is an actual asset – a mortgage – underlying the bond. Still, most of the CDOs sold in the market were backed by mortgage securities of some sort, either residential mortgage-backeds or commercial mortgage-backeds. According to Felker, CDOs also were comprised of such risky bonds as: high yield, or junk bonds; emerging market bonds; real estate investment trust debt; U.S. bank loans; and, distressed debt.
While some of the major losses in the biggest banks – Citibank estimated it lost some $100 billion – were related to investments in CDOs, very few credit union entities ventured into this arena, according to Felker. In fact, natural person credit unions in only two states, Florida and California, are allowed to invest in asset-backed securities such as these. Major losses, as much as $90 million, were realized on CDOs by Eastern Florida Financial CU, contributing to last year’s failure of the one-time $2 billion credit union.
But the losses related to CDOs at Eastern Financial, which eventually was merged into Space Coast CU, pale in comparison to those at WesCorp.
The structure of the WesCorp CDOs is layered, so that layers with Triple A ratings are on top of those with Double A ratings, then Single A, and so on. “When they were bought by the corporates no doubt they were investment grade. There had to be a credit enhancement to get it to investment grade level,” said Felker, of the layer of top rated securities.
In its latest financial report, for February, WesCorp reported $454.8 million of credit losses on CDOs, with as much as $90.8 million more in market value losses, or unrealized losses.
WesCorp officials declined to comment, referring all inquiries to NCUA which has run the one-time $34 billion corporate under conservatorship since last March. “Those CDOs are of poor credit quality and WesCorp took the requisite write-downs several months ago,” said John McKechnie, chief spokesman for NCUA. “Auditors have taken no issue with their valuation on WesCorp’s balance sheet.”
