LOS ANGELES - Richard M. Johnson is worried that Washington regulators -overreacting to one institution's ruin - will slap strict limits on all corporate credit unions, reversing years of progress.
"Corporates are a hell of a success story," the president and chief executive of Western Corporate Federal Credit Union said in an interview. "We shouldn't get to the point where we say: Let's do things the way they were done 15 years ago."
The National Credit Union Administration plans to issue regulations by yearend clamping down on corporates' investments and beefing up their capital.
Mr. Johnson, 71, hopes the rules will strengthen safety and soundness without causing harm. But he fears the regulations will roll back powers corporates have gained since 1982.
Wescorp is the largest of 42 corporates, with about $12 billion in assets and 900 member credit unions in California, Nevada, Washington, and Alaska.
The NCUA's proposed regulations, issued for comment last week, would force corporates to operate "matched book" portfolios, in which investments are funded with deposits of similar maturity.
If implemented, the rules would require Wescorp to overhaul its investment portfolio.
"If we have to match dollar for dollar, day for day, it would be hard for us to offer any competitive rate," Mr. Johnson said. "If we're just a machine and can't manage our risk," Wescorp could not beat its competition.
A matched book "isn't rocket science - it's dumber than a rock," said Mr. Johnson, who talks with the bluntness one would expect from a man who spent 31 years as a Marine.
The NCUA has said it wants to force corporates to focus on their role as liquidity centers. But overly protective regulation could backfire, warned Mr. Johnson, who has been at the helm of Wescorp since 1976.
If corporates can't match the competition's rate on investments, credit union funds will flow out to brokers and other institutions, Mr. Johnson said. That could make it tough for corporates to lend to cash-strapped credit unions.
Mr. Johnson said if the new regulations go too far, corporates could find themselves reliving the late 1970s, when their investments were limited to those of credit unions.
An amendment to the Garn-St Germain Act of 1982 allowed the NCUA to expand the range of investments that corporates could make. Eventually they gained the ability to invest in foreign-owned banks, commercial paper, and asset-backed securities.
As a result, corporates have become more sophisticated and now offer credit unions a wide range of services. Take away or inhibit Wescorp's investment function, Mr. Johnson said, and the services it provides, such as wire transfer and settlement operations, will suffer.
"I don't want to be just a liquidity facility" because it isn't profitable enough, he said. "Our liquidity function is subsidized by our other activities."
But the new regulation is likely to force Wescorp and other corporates to reposition themselves as predominantly liquidity centers. The reason: the failure of Capital Corporate Federal Credit Union in January.
The Lanham, Md., institution got caught in a liquidity crunch after rising rates devalued its portfolio, which was heavy with mortgage derivatives. The collapse, the largest in the industry's history, caused Congress to drag the NCUA up to Capitol Hill three times in 30 days to defend its oversight. The tone of the hearings suggested that if the NCUA didn't act to prevent another Cap Corp, a Congress would.
Agency sources said the NCUA is particularly uneasy with Wescorp's investments because it, like Cap Corp, holds many collateralized mortgage obligations. Wescorp has nearly $5 billion of agency CMOs, or 43.7% of its investment portfolio.
Some observers share the regulator's concern and applaud its proposed remedy.
"Wescorp is not handling its portfolio properly," said one industry analyst, who requested anonymity. "Most of their money is overnight funds. You don't take that kind of money and spread it out two or three years."
At the end of 1994, the fair market value of Wescorp's investments was $320 million below par value, an amount that's 140% of its capital.
About half of the corporates are contending with such unrealized losses on CMOs in their portfolios. Wescorp is second only to Indiana Corporate Federal Credit Union, which faces potential losses that total 224% of its capital.
Mr. Johnson objects to the "liquidation mind-set" that stresses the declines in values of investments Wescorp intends to hold, and he argues that comparisons between it and Cap Corp are not valid. Wescorp runs extensive risk management models on its portfolio, Mr. Johnson said. That's something Cap Corp did not do, according to a General Accounting Office study.
Indeed, Mr. Johnson is confident enough about Wescorp to have organized an independent panel from its member credit unions to draft a list of concerns about the corporate in light of the Cap Corp debacle. Wescorp has hired the accounting firm Coopers & Lybrand to check out its books with those questions in mind.
Others agree that Wescorp is a safe operation.
"Corporate credit unions are a success story by any kind of measure you want," said Charles W. Filson, president of the Washington consulting firm Callahan & Associates. "Within that context Wescorp obviously has been a leader."
The way Wescorp's has structured its deposits, he said, offsets the interest rate risk it would otherwise be subject to if it had to liquidate investments to honor withdrawal demands. For example, deposits matched against some CMOs will only be worth the market value of the asset if they are withdrawn early.
Another legacy of the Cap Corp episode is tension between the NCUA and Wescorp.
Before Cap Corp's seizure, Wescorp made a pitch for taking it over. Mr. Johnson said NCUA Chairman Norman E. D'Amours cavalierly dismissed the proposal.
"If I had to do it all over again I wouldn't have had my staff work as hard to come up with a plan," Mr. Johnson said.
Tensions with the regulator trouble him. In the past Wescorp has helped train examiners and even supported the agency's controversial decision to kick trade group officials off the corporates' boards.
Perhaps that's why Mr. Johnson clings to a stubborn hope that the final rules - crafted by Allen Carver, the 27-year agency veteran who runs the NCUA's office of corporate credit unions - will be ones Wescorp can live with.
"Carver owes his life to credit unions," Mr. Johnson said. "He doesn't want to do anything to harm them."