SOUTHWEST MNGMT., NCUA FAULTED IN CORP. FAILURE
ALEXANDRIA, VA. - AN INTERNAL REPORT ISSUED BY NCUA LAST WEEK FAULTED SOUTHWEST CORPORATE'S MANAGEMENT AND THE AGENCY'S OFFICE OF CORPORATE CUS FOR FAILING TO IDENTIFY THE RISK FROM THE CORPORATE'S HIGH CONCENTRATION OF INVESTMENTS, WHICH LED TO THE 2010 FAILURE OF THE ONE-TIME $12-BILLION SWCFCU.
The report also finds fault with the quality of the ratings on investments that were provided by the three ratings agencies-Fitch Ratings, Moody's Investor Services and Standard & Poor's-upon whose guidance both Southwest Corporate and NCUA relied.
The failure of Southwest Corporate, one of five corporate failures, is expected to cost $141 million to resolve, according to the report issued by the NCUA Office of the Inspector General.
The report said the corporate's management and board and the agency's corporate examiners also did not grasp the importance of the corporate's concentration of its own deposits in a single entity-U.S. Central FCU, the one-time $52-billion corporate that also failed, in March 2009.
"We determined Office of Corporate Credit Unions staff would have likely been able to mitigate these conditions and the expected loss to the Stabilization Fund had appropriate regulatory support--in the form of more specific investment concentration limits--been available to allow the OCCU staff to take exception with and aggressively address Southwest's investment strategy," concluded the report.
"Because of this significant concentration of privately-issued securities linked to the residential mortgages without the backing of the federal government, Southwest management left its balance sheet highly vulnerable to economic conditions in the residential real estate market,"said the IG. "As a result, Southwest was exposed to significantly increased credit risk, market risk and liquidity risk."
The report said between NCUA's March 2004 examination of Southwest and the start of the credit market dislocation in July 2007, Southwest management increasingly made privately-issued RMBS a significant concentration of its investment portfolio. During this period, Southwest management increased its direct concentration of privately-issued RMBS by 263%, from $1.39 billion to $5.05 billion.
Increased Exposure
As a percentage of Southwest's overall investment portfolio, Southwest management increased its exposure to the residential real estate market through privately-issued RMBS from 16% of Southwest's $8.47 billion portfolio as of March 31, 2004 to nearly half of the corporate's $10.54 billion investment portfolio as of July 31, 2007.
In addition, as of July 2007, 36%, or $3.8 billion, of Southwest's $10.54 billion investment portfolio was deposited at U.S. Central. These deposits amounted to an additional 639% of Southwest's capital, making Southwest's total potential exposure to privately-issued RMBS nearly 1,500% of its capital. "Because of the risks within U.S. Central's investment strategy, Southwest's deposits at U.S. Central represented additional significant risk for Southwest," wrote the IG.
FORMER WESCORP MANAGERS
PLAN TO CALL WITNESSES
LOS ANGELES - Executives of WesCorp FCU, who claim NCUA is as culpable as they are for the spectacular failure of the one-time $34-billion corporate credit union, told a federal court here they plan to call examiners and all three members of the NCUA Board as witnesses in the agency's multi-billion dollar negligence suit.
The case, if it goes to trial, promises to provide the first real glimpse of the NCUA's role in the corporate failure. To date, the agency has kept a tight veil over its oversight of WesCorp and the other four corporate failures: U.S. Central FCU, Members United Corporate FCU, Southwest Corporate FCU and Constitution Corporate FCU. A separate suit in the case of U.S. Central was settled this summer just days before it was scheduled to go to trial and the terms of the settlement as well as NCUA's role in the U.S. Central case remain secret. No NCUA employee has been disciplined or terminated for their role in the corporate failures.
Among the broad list of witnesses that could be called by Bob Siravo, former CEO of WesCorp, Todd Lane, its former CFO, or Bob Burrell, the former CIO are: Kent Buckham, who was chief corporate examiner at NCUA and now heads its new office of consumer affairs; Scott Hunt, current director of the Office of Corporate CUs; David Marquis, executive director who formerly was head of examinations and insurance with oversight over WesCorp examinations; and, NCUA board members Gigi Hyland, Michael Fryzel and Debbie Matz. Matz was serving a first term on the board from 2002 to 2005 when NCUA approved WesCorp's expanded investment authority and the purchase of exotic and risky investments, such as collateralized debt obligations, or CDOs.
Other Defendants Listed
The WesCorp figures also have listed several "resident" NCUA examiners, including Lance McAllister and Steve Sherrod, who they say by virtue of working on-site at WesCorp's San Dimas, Calif., offices five days a week knew all along and approved of the doomed corporate's investments. On-site NCUA examiners at WesCorp had their own server and access to all documents, according to the WesCorp executives.
Also named are former corporate field examiners for NCUA, Dan Buckley and Bruce Bakke, along with representatives of the Wall Street rating agencies and others.
