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SUBPRIME MBS HIT SUNK MEMBERS UNITED CORPORATE

ALEXANDRIA, Va.-An over-concentration of subprime mortgage-backed securities caused the failure of Members United Corporate FCU, the one-time $14-billion corporate that is restructuring itself, NCUA said in a new report issued last week.

By the time of its September 2010 takeover by NCUA, Members United, the conglomeration of three corporate credit unions, had almost $5 billion-70% of its investments-tied up in either subprime MBS or Alt-A MBS, according to the report by NCUA's Office of Inspector General.

Members United was one of three corporate failures taken under conservatorship by NCUA in September 2010, then liquidated weeks later, along with Southwest Corporate FCU and Constitution Corporate FCU. By then, losses at Members United had erased $900 million of capital for its 2,050 credit union members, one-fourth of all credit unions. Since then, the estate of the corporate failure has cost the NCUA's corporate bailout fund an additional $400 million in losses, according to the report.

Members United, which was chartered in 1975 as Mid-State Corporate CU before merging with Empire Corporate FCU and Central CU Fund, is in the process as recapitalizing and reorganizing itself as Alloya Corporate FCU.

The findings by the agency's inspector general show Members United to be the third of five corporate failures tied to the subprime mortgage market, following similar findings on the demise of WesCorp FCU and U.S. Central.

The report spreads the blame evenly between Members United's management and NCUA's supervision, saying the failure can be attributed, "in part to inadequate management and Board oversight that exposed the credit union to excessive amounts of financial risk due to significant holdings of private label mortgage-backed securities including subprime and Alt-A mortgage-related securities."

 

INSPECTOR GENERAL: NCUA SLOW TO GRASP IMPLICATIONS

But the inspector general, as he did in the failures of WesCorp and U.S. Central, concluded that NCUA was slow to grasp the import of the corporate's reliance on subprime mortgage securities.

"We determined NCUA did not timely or adequately identify key risks related to Members United's investment portfolio," the report explained. "Specifically, NCUA failed to identify and require corrective action on the credit risk in Members United's investment portfolio related to the concentration of mortgage-backed securities until May 2008. By that time, severe market dislocation had occurred and Members United's significant holdings of RMBS were experiencing rapid declines in value and were increasingly illiquid."

"We believe stronger, more-timely supervisory actions and restrictions on concentrations could have provided opportunities for reasonable divestiture of investment securities without incurring significant realized losses, which eventually caused the NCUA to conserve Members United."

The report noted that under NCUA's expanded powers authority, Members United was allowed to hold subprime MBS with lower investment ratings, that eventually deteriorated at a rapid rate during the mortgage market panic of 2007-2009.

The report also says that Members United's CEO Joseph Herbst was slow to act on the corporate's holdings at U.S. Central during the deterioration of the one-time $52 billion corporate because he was then serving as chairman of U.S. Central. Members United eventually lost all $308 million of its capital invested in U.S. Central exacerbating its own investment losses.

In addition, Members United was severally impacted by the bankruptcy and other financial difficulties at the monoline bond insurers which provided insurance for some $5 billion of MBS. Losses on those insured MBS could amount to as much as $1.2 billion, according to the report.

 

FED DEBIT COMPROMISE DEBIT COULD HURT PRICE CAP DELAY

WASHINGTON-The Federal Reserve is planning to amend its proposal to cap debit fees at a higher rate, setting a compromise between the heated controversy between merchants and banks and credit unions and at the same time threatening efforts by the banks and credit unions to delay implementation of the rule.

In the face of a withering lobby by the Electronic Payments Coalition, comprised of banks, credit unions and Visa and MasterCard, the Fed is apparently preparing a final rule that would lift the proposed cap from the seven cents or 12 cents proposed in December to a higher level, several sources have told the Credit Union Journal.

A higher cap is expected to satisfy some lawmakers who want to avoid voting on a bill to delay the rule for as long as two years, thus making it more difficult to pass the delay bill, the sources said.

Last year's Wall Street reform bill required the Fed to pass a final rule on the debit caps by April 21, but Federal Reserve Chairman Ben Bernanke told congressional leaders the issue was too complicated to do so, but the Fed will still pass a rule before the July 21 implementation deadline set by Dodd-Frank. It's not clear when the Fed will vote on the final rule.

Members of the Senate and House are waiting to see what the Fed's final rule requires before they vote on separate bills to delay its implementation in order for the Fed to conduct a more comprehensive study. The bill to delay is opposed by Illinois Sen. Richard Durbin, author of the debit provision, who has pledged to filibuster the delay bill, meaning it will require 60 Senate votes.

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