Callahan and Associates' President Chip Filson and Executive Vice President Jay Johnson broadcast the shot heard around the credit union world March 24 when they publicly challenged the NCUA's conservatorship of the $34 billion U.S. Central Federal Credit Union and the $23 billion Western Corporate Federal Credit Union.
The duo's late afternoon Webinar drew 201 subscribers, but word of Filson's objection got around quickly, particularly his opinion that credit unions have the right to challenge the NCUA's actions in court.
The biggest question surrounds NCUA contractor PIMCO, hired by NCUA Chairman Michael Fryzel to evaluate corporate investment portfolios. The idea seemed like a good one when Fryzel revealed PIMCO's involvement in early February. Corporate investment losses were mounting, and the Newport Beach, Calif.-based account management firm has a reputation as securities experts.
However, the chairman did refuse to answer questions regarding PIMCO's methodologies and how much the agency paid the firm. NAFCU filed a Freedom of Information Act request on those points, but they were not answered by the FOIA's March 19 deadline.
Then the NCUA placed the system's two largest corporates under conservatorship on March 20, citing $5 billion in estimated credit losses that will cost federally insured credit unions nearly 1% of deposits and another $4 billion in capital write-downs for members of the affected corporates.
Now, PIMCO's analysis has came under fire. Filson said the NCUA Board should have questioned such a big swing in estimated losses-from the corporates' own $1.2 billion already reported to their boards to the NCUA's nearly $9 billion estimate. He accused the agency of "creating of crisis where one does not exist," and compared the conservatorship action to the hysteria of Y2K.
Credit unions have the right to apply to U.S. District Court within 10 days of the conservatorship, Filson said, for an order requiring the NCUA Board to show cause regarding why it should continue possession and control of the credit unions.
"This is the single most important statutory protection you have," he said. "Let's be clear. If nothing happens within the next 10 days, the NCUA has total, unrestricted, absolute power of your credit union and its assets, and it's not subject to any review by any party after that point in time."
U.S. Central's former Vice Chairman Charles Thomas, President/CEO of the $223 million West Virginia Corporate Credit Union, said he was familiar with Filson's call for legal action but referred questions regarding any potential U.S. Central challenge to former Chairman Joe Herbst, President/CEO of the $8.2 billion Members United Corporate Federal Credit Union.
Jeannine Smith, Members United spokesperson, said "Joe Herbst is not available for an interview and has no comment."
When asked if WesCorp's former board was considering challenging the regulatory action, former Chairman Bob Harvey, President/CEO of the $522 million Seattle Metropolitan Credit Union, said he had no comment at this time.
Retired Western Corporate Federal Credit Union CEO and U.S. Central Board Member Richard Johnson said he agreed with Filson, saying, "I think the cure the NCUA is offering is worse than the sickness."
Furthermore, Johnson said he doubts the NCUA has enough staff to handle all the credit unions that will require prompt corrective action as a result.
The industry veteran referred to the NCUA's last corporate takeover, when it placed Capitol Corporate Credit Union into conservatorship in 1995.
"This kind of activity smacks of days of old, during the CapCorp days when the NCUA would go into their closet and decide what they were going to do without talking to anyone about it," he said.
Johnson defended dismissed executives at U.S. Central and WesCorp, and said he doubted either corporate could have successfully passed overly optimistic numbers off on the agency, as alleged by NCUA Executive Director David Marquis during the agency's March 23 informational Webcast.
"They see all the books, they get the board package, and they know every single investment," he said, "so how is it they didn't see any problem before?"
The NCUA has said it will release an executive summary of the 4,500-page PIMCO report. Marquis also provided some specific examples of why the agency analysis varied so much from the corporates' during the Webcast, saying the new values included more recent numbers and drilled down further into credit quality, examining individual mortgages.
However, Filson challenged that, saying he spoke with a dismissed member of WesCorp's board who said the corporate also examined the credit quality of individual mortgages when it prepared its numbers.
In a three-page FAQ sheet, the NCUA released March 24, the agency stressed PIMCO did not lead the valuation effort but merely confirmed the numbers produced by NCUA staff.
The NCUA also addressed its decision to hire the firm, saying it chose PIMCO based on its reputation, scope of analysis, source of data inputs, specificity of date detail, quality, independence and ability to deliver results quickly.
"NCUA, like the Fed and FDIC, uses private-sector entities such as PIMCO to supplement our own information about very technical, very specialized matters such as bond portfolio holdings in corporate credit unions," NCUA Director of Public and Congressional Affairs John McKechnie said. "The information supplied by PIMCO enabled NCUA to gain additional details about mortgage backed security holdings, the structure of investments, and potential losses that could occur from impairments. It did not dictate NCUA actions in conserving the two corporate credit unions."
He continued, "It is also important to note that any valuations arrived at by PIMCO were considered by NCUA in the context of our own review--NCUA did not ask for 'stand alone' analysis by PIMCO that would have enabled them to derive inaccurate or artificially high or low numbers, as is being alleged.
"Details of the PIMCO engagement, such as PIMCO's methodology and other confidential, proprietary information, are not public."
Terry Halleck, president/CEO of the $7 billion The Golden 1 Credit Union said she is concerned about PIMCO's conflict of interest in valuating corporate securities, due to its due role as one of the private investors that could bid on "toxic" securities through new federal programs.
The $900 million Orange County's Credit Union was mentioned in Filson's Webcast as one particularly hard-hit credit union. President/CEO Shruti Miyashiro said said while OCCU ended 2008 with capital just under 10%, the NCUA's actions will cost the credit union $17 million, reducing capital to just shy of 8%.
"We do look forward to hearing from NCUA about the perceived conflict of interest," Miyashiro said. "It is our hope that NCUA's commitment to transparency will make available detailed methodology and reports used to take their urgent action last Friday. We welcome open, fact-based communication."
--handerson@cutimes.com
The duo's late afternoon Webinar drew 201 subscribers, but word of Filson's objection got around quickly, particularly his opinion that credit unions have the right to challenge the NCUA's actions in court.
The biggest question surrounds NCUA contractor PIMCO, hired by NCUA Chairman Michael Fryzel to evaluate corporate investment portfolios. The idea seemed like a good one when Fryzel revealed PIMCO's involvement in early February. Corporate investment losses were mounting, and the Newport Beach, Calif.-based account management firm has a reputation as securities experts.
However, the chairman did refuse to answer questions regarding PIMCO's methodologies and how much the agency paid the firm. NAFCU filed a Freedom of Information Act request on those points, but they were not answered by the FOIA's March 19 deadline.
Then the NCUA placed the system's two largest corporates under conservatorship on March 20, citing $5 billion in estimated credit losses that will cost federally insured credit unions nearly 1% of deposits and another $4 billion in capital write-downs for members of the affected corporates.
Now, PIMCO's analysis has came under fire. Filson said the NCUA Board should have questioned such a big swing in estimated losses-from the corporates' own $1.2 billion already reported to their boards to the NCUA's nearly $9 billion estimate. He accused the agency of "creating of crisis where one does not exist," and compared the conservatorship action to the hysteria of Y2K.
Credit unions have the right to apply to U.S. District Court within 10 days of the conservatorship, Filson said, for an order requiring the NCUA Board to show cause regarding why it should continue possession and control of the credit unions.
"This is the single most important statutory protection you have," he said. "Let's be clear. If nothing happens within the next 10 days, the NCUA has total, unrestricted, absolute power of your credit union and its assets, and it's not subject to any review by any party after that point in time."
U.S. Central's former Vice Chairman Charles Thomas, President/CEO of the $223 million West Virginia Corporate Credit Union, said he was familiar with Filson's call for legal action but referred questions regarding any potential U.S. Central challenge to former Chairman Joe Herbst, President/CEO of the $8.2 billion Members United Corporate Federal Credit Union.
Jeannine Smith, Members United spokesperson, said "Joe Herbst is not available for an interview and has no comment."
When asked if WesCorp's former board was considering challenging the regulatory action, former Chairman Bob Harvey, President/CEO of the $522 million Seattle Metropolitan Credit Union, said he had no comment at this time.
Retired Western Corporate Federal Credit Union CEO and U.S. Central Board Member Richard Johnson said he agreed with Filson, saying, "I think the cure the NCUA is offering is worse than the sickness."
Furthermore, Johnson said he doubts the NCUA has enough staff to handle all the credit unions that will require prompt corrective action as a result.
The industry veteran referred to the NCUA's last corporate takeover, when it placed Capitol Corporate Credit Union into conservatorship in 1995.
"This kind of activity smacks of days of old, during the CapCorp days when the NCUA would go into their closet and decide what they were going to do without talking to anyone about it," he said.
Johnson defended dismissed executives at U.S. Central and WesCorp, and said he doubted either corporate could have successfully passed overly optimistic numbers off on the agency, as alleged by NCUA Executive Director David Marquis during the agency's March 23 informational Webcast.
"They see all the books, they get the board package, and they know every single investment," he said, "so how is it they didn't see any problem before?"
The NCUA has said it will release an executive summary of the 4,500-page PIMCO report. Marquis also provided some specific examples of why the agency analysis varied so much from the corporates' during the Webcast, saying the new values included more recent numbers and drilled down further into credit quality, examining individual mortgages.
However, Filson challenged that, saying he spoke with a dismissed member of WesCorp's board who said the corporate also examined the credit quality of individual mortgages when it prepared its numbers.
In a three-page FAQ sheet, the NCUA released March 24, the agency stressed PIMCO did not lead the valuation effort but merely confirmed the numbers produced by NCUA staff.
The NCUA also addressed its decision to hire the firm, saying it chose PIMCO based on its reputation, scope of analysis, source of data inputs, specificity of date detail, quality, independence and ability to deliver results quickly.
"NCUA, like the Fed and FDIC, uses private-sector entities such as PIMCO to supplement our own information about very technical, very specialized matters such as bond portfolio holdings in corporate credit unions," NCUA Director of Public and Congressional Affairs John McKechnie said. "The information supplied by PIMCO enabled NCUA to gain additional details about mortgage backed security holdings, the structure of investments, and potential losses that could occur from impairments. It did not dictate NCUA actions in conserving the two corporate credit unions."
He continued, "It is also important to note that any valuations arrived at by PIMCO were considered by NCUA in the context of our own review--NCUA did not ask for 'stand alone' analysis by PIMCO that would have enabled them to derive inaccurate or artificially high or low numbers, as is being alleged.
"Details of the PIMCO engagement, such as PIMCO's methodology and other confidential, proprietary information, are not public."
Terry Halleck, president/CEO of the $7 billion The Golden 1 Credit Union said she is concerned about PIMCO's conflict of interest in valuating corporate securities, due to its due role as one of the private investors that could bid on "toxic" securities through new federal programs.
The $900 million Orange County's Credit Union was mentioned in Filson's Webcast as one particularly hard-hit credit union. President/CEO Shruti Miyashiro said said while OCCU ended 2008 with capital just under 10%, the NCUA's actions will cost the credit union $17 million, reducing capital to just shy of 8%.
"We do look forward to hearing from NCUA about the perceived conflict of interest," Miyashiro said. "It is our hope that NCUA's commitment to transparency will make available detailed methodology and reports used to take their urgent action last Friday. We welcome open, fact-based communication."
--handerson@cutimes.com
