By Ray Birch
BIRMINGHAM, Ala.—As the dust continues to settle on the corporate credit union crisis and some credit unions receive their final disbursements, one former NCUA chairman believes the agency performed under pressure—even though there were a few “black eyes”—against a task in which it was impossible to take perfect steps.
"There will always be critics on both sides, some who believe the crisis was overblown and would have worked out if the corporates were given time to work through their issues, and others who believe that NCUA should have taken even more Draconian action that would have conserved all of the corporates and let the agency determine what to do from there,” said Dennis Dollar, principal at Dollar Associates.
Instead, what the agency did, according to Dollar, who was NCUA chairman from 2001-2004, was take a balanced approach that involved a significant price tag for the credit unions with capital invested in one of the five failed corporates.
“But the approach recognized that some corporates did not have losses requiring capital to be impaired and let them work things out,” recalled Dollar. “The actions taken were criticized from both sides, as balanced approaches often are, but time has proven that a more nuanced approach was one that produced some pain, but some ultimate victories for credit unions, as well.”
Dollar’s comments are part of a series in CUToday.info examining the decisions related to cleaning up after the corporate failures, including the NCUA’s Corporate System Resolution Program https://www.ncua.gov/support-services/corporate-system-resolution, the creation of the NCUA Guaranteed Notes (NGN) program, and more.
At the time, the agency repeatedly stated if there were any recoveries of the primarily mortgage-backed securities that had sunk underwater and in which the corporates had invested heavily—and many people at the time considered recoveries to be unlikely—it would be more than a decade away.
Now, a date that had seemed so far away has arrived, with many of the affected CUs having received early payouts following years of litigation by NCUA and other recoveries.
Writing Off The Capital
As CUToday.info reported, after the 2009 conservatorship of the five corporate credit unions, after which many of the affected credit unions wrote off their capital investments as a complete loss, more than $368 million was returned in April to more than 2,000 of those credit unions. The funds went to credit unions that held capital in the former U.S. Central Credit Union, Members United Corporate FCU, and Southwest Corporate FCU.
Capital-holders in the defunct Constitution State FCU and Western Corporate FCU (Wescorp) did not see any payouts, according to NCUA staff.
In mid-2020, nearly 900 credit unions that had membership capital shares in the failed Southwest Corporate FCU shared in a $171-million management estate payout. Southwest Corporate eventually merged with Georgia Corporate to create Catalyst Corporate FCU (which eventually absorbed much of the former Wescorp).
Dollar reminded that some capital was lost, which is always painful.
“But the corporate system was saved, which was a big long-term victory for credit unions,” he said. “NCUA had to go to the Treasury Department to borrow the funds to establish the separate Corporate Stabilization Fund, which protected the NCUSIF from being dramatically impacted. But the Treasury loans were paid back years before the terms expired. So, again, there were plusses to go with the minuses. Overall, I give the agency a solid grade in what was essentially a task that made it impossible to earn an ‘A.’"
‘An Unfortunate Black Eye’
One of the minuses cited by many critics of the corporate failures is the fact NCUA had examiners dedicated full-time to the largest of the corporates, including having examiners on-site at what was then Wescorp’s San Dimas, Calif. headquarters.
At the time it failed, Wescorp had approximately $23 billion in assets and approximately 1,100 credit unions as members.
“They had put full-time examiners on site to help watch the corporates day in and day out, hoping to mitigate the risk,” said Dollar, responding to a question on how NCUA missed the growing risk. “Whether it was because those examiners became institutionalized or if rotating them out with fresh eyes might have been a better strategy, there is no doubt but that the supervisory oversight of those larger corporates did not prevent the ultimate need to conserve them.
“That was an unfortunate black eye for NCUA that, although they tried to get ahead of the potential problems in those corporates, it was an unsuccessful allocation of resources. They took the hit for it and bucked up to accept the rightful criticism that they had not done enough in supervisory arena on the corporates.”
Rules Not to Blame
But Dollar also asserts that in NCUA's defense, the rules in place at the time for regulating the corporates were not to blame.
“The corporates that ended up getting conserved and losing their capital were operating under the same rules as the corporates such as Corporate One, VolCop and Corporate Central that did not have their member credit unions lose a single penny of invested capital,” said Dollar. “It was much more the balance sheets and strategic direction of the corporate than it was the rules they operated under, that determined their fate when the capital markets took a hit in 2008 and 2009.”
Dollar reminded that the corporate investments that went under were rated AAA by the ratings agencies.
“It was the ratings of the safety of the investments that were manipulated, not the rules that allowed the corporates to invest in these highly rated securities,” said Dollar. “The ratings agencies were much more to blame for the debacle that took place than were the corporates that bought the securities, even those that may have had too much concentration risk in certain types of investments."
‘C’ Investments at Best
Dennis Dollar
Coming up with the “right” solution to save the corporate system proved very difficult, said Dollar, after all those AAA-rated securities turned out to be class C investments at best, contributing to the huge mortgage market meltdown and recession that followed.
“Letting the market work without creating a backstop to absorb the losses would have lost the corporates that were eventually restructured and saved,” said Dollar. “Plus, it would have adversely impacted the capital of some credit unions that had capital in corporates to where, even if they weren't swept under by the losses, they would have needed years to build it back.”
A total bailout of the corporate system would have created even more debt to be carried by either the NCUSIF or the Corporate Stabilization Fund the agency ultimately created, hurting the credit union system in the eyes of Congress and the general public, asserted Dollar.
“So, when you look at the alternatives, the balanced approach taken by NCUA has proven itself to be the right approach, even though it certainly wasn't a perfect approach,” Dollar said. “There were no perfect solutions, nor even any really good ones. NCUA stepped forward and addressed the situation in the best way it felt it could and, with the support the Treasury Department, has turned a corporate debacle into a distant—though painful for many—memory here in 2021."
Billion-Dollar Legal Fees
As for another issue that has also drawn criticism, the more than $1 billion in legal fees/contingencies paid to the law firms that filed suit against the Wall Street banks that sold the investments—a figure many believe is too high—Dollar believes NCUA made the right move.
"The legal settlements were key to bringing about some returns to those credit unions that lost capital in the conserved corporates,” said Dollar. “It can be argued about which law firms were used, what affiliations brought about their hiring and the agreed upon contingency fee structure. But the bottom line is that no top-flight legal firms were going to take on these cases and fight for top dollar without a contingency arrangement.”
Dollar acknowledged it would have been fortuitous to gather billions in settlements without having to pay the attorneys more than an hourly rate to get those results.
“But that is not the way the legal system works,” he said. “The investment in the legal fees, although high, brought about results that did eventually return some of the lost capital to the credit unions who had invested in the corporates that were conserved. They still had losses, but those losses were mitigated by the legal recoveries. It takes good lawyers to bring that result."
Dollar concluded naysayers will continue to “say nay” even after the facts have proven otherwise.
“Because one cannot prove what would have happened differently if other steps had been taken or not taken—hindsight is always quick to reflect on what was lost rather than what was saved,” he said. “But the facts are that the corporate crisis had the potential to still be dramatically impacting credit unions as a whole 12 years later, yet the industry is safe, strong, growing and viable.”
‘That’s Why It’s Called a Crisis’
NCUA’s actions were always going to be seen as controversial and less than ideal, Dollar continued.
“The options are always bad in a crisis, that’s why it’s called a crisis,” he said. “Yet, NCUA worked with the Treasury Department to develop a balanced approach that resulted in some lost capital, some conserved corporates and some black eyes on their corporate supervision. But it also resulted in a return of some lost capital, early payoff of the Treasury notes that funded the Corporate Stabilization Fund, minimal impact to the NCUSIF, a rejuvenated corporate system and an industry now with the highest capital levels in decades. Overall, a better-looking picture twelve years later than—than what we looked at in 2009."
More in this series: