Editor’s Note: This column was published by Chip Filson prior to last week’s NCUA board meeting. It was originally published on ChipFilson.com. CUToday.info has made minor edits.
By Chip Filson
While NCUA’s $350 million annual budget was the primary board item, that is not the most important financial issue. For there is unfinished business stretching back over a decade. The agency owes credit unions an amount that is 250% greater than the budget it will be discussing.
Here are the details.
In March 2009 then NCUA Board Member Rodney Hood, along with then Chairman Michael Fryzel and Board Member Gigi Hyland. voted to conserve US Central Credit Union and WesCorp, the two largest corporate credit unions.
My hunch is that board member Hood never expected to be overseeing the continued distribution of US Central’s almost $2 billion surplus 13 years later during his second term on the board.
Credit Unions Are Due $846 Million
As of the March 2022 AME financial reports for the five liquidated corporates, NCUA projects over $846 million is remaining to be paid. The majority, $556 million, is from US Central’s estate.
When completed, total AME payments to credit union member shareholders will exceed $3.2 billion. As a comparison, the total capital of the 11 active corporates at December 2021 was only $2.5 billion.
Put bluntly, the collective funds returned by the four liquidated corporates is 132% greater than all the equity in corporates active today. Closing these solvent corporates was a catastrophic error in judgment!
The March 2022 AME financials present the total forecasted payments to the four corporate’s members and the remaining amounts due.
- US Central: $1.832 billion with $ 556 million due
- Members United: $622 million with $130 million due
- Southwest Corporate: $613 million with $127 million due
- Constitution Corporate: $48 million with $32 million due
There are no payments for the $1.1 billion of credit union member capital at WesCorp. NCUA projects a WesCorp deficit after all recoveries at $2.1 billion. This is the only loss to the NCUSIF from the five corporate liquidations. (from line B4-Due to Government March 2022 AME financials)
The Total Corporate Surplus
The above amounts do not include the $2.563 billion added to the NCUSIF when the TCCUSF surplus was merged on Oct. 1, 2017. Adding this amount brings total recoveries to almost $5.8 billion.
This surplus continues to point to the need for an objective review of the entire corporate resolution effort.
When US Central was seized in March of 2009 NCUA Chair Fryzel was quoted in a Wall Street Journal March 21 article as saying, “With us in control, we’d get honest numbers.”
If subsequent events have shown anything, it is that “honest” numbers in an environment of uncertainty depends on who does the accounting, especially when the underlying process relies on valuation models that claim to project the economic climate and related cash flows years or even a decade into the future.
The Core Regulatory Failure
The problem is not the models or their incorrect assumptions, both of which were wrong. The error is that predictions should not be the primary basis for resolution strategy. All models are wrong; some are useful.
The required response is managing the daily dynamics as markets change. Trying to predict the future as the basis for today’s tactics led to disastrous decisions in NCUA’s assessment of the corporate assets.
With NCUA’s ALM/NEV supervisory tests becoming more prominent in today’s rising rate environment, the limitations of financial modeling is a much needed lesson to bear in mind.
The Need for a Look Back
But a look back is important for another reason. Still today, NCUA Chair Todd Harper and senior staff use the apocalyptic estimates and conjectures thrown out in 2009 as projected future events. The hyperbolic forecasts were incorrect then; it is double injury to repeat them today when the actual facts are known.
In the same WSJ article above, Chairman Fryzel was quoted as saying, “Regulators aren’t concerned about the health of any other wholesale credit unions besides the two brought into conservatorship.” Yet just a year later when no longer chair, member Fryzel supported the liquidation of three more corporates, a decision that was devastating for the system and individual corporates. Both Southwest and Members United are paying liquidating dividends on top of returning all their members’ capital shares.
By forecasting disaster, NCUA took unilateral action without any industry involvement except paying the bills. There was no check and balance, no transparency and no alternative solutions developed.
Unfortunately, that unilateral regulatory mindset continues today. It undercuts the unique cooperative advantage of collaboration represented in the common credit union funded resources in the NCUSIF and CLF for individual turnarounds.
Most Important Takeaway
The most important takeaway from the corporate debacle is not estimation failures or the value of patience when resolving problems. Rather, it is NCUA’s failure to understand the unique cooperative capabilities when developing regulatory workout plans.
That lesson should include respect for the institutions in difficulty and a willingness to work together for solutions versus liquidating problems to make them go away.
The one board member who is best positioned to state the importance of this learning opportunity is Rodney Hood. He was there at the Alpha and now, hopefully, the Omega.
His counsel should be heard. And credit unions should get their funds back ASAP. Enough delays!
Chip Filson is a co-founder of Callahan & Associates and well known within credit unions as an author, frequent speaker, and consultant. Filson also previously served as president of the Central Liquidity Facility (CLF) and Director of the Office of Programs at NCUA. For more info: www.chipfilson.com.