According to an official agency release, the NCUA took control of the corporates in order to "reduce the systemic exposure given the estimated loss projections in both corporate credit unions; exert greater direct control over and improve the transparency of financial information; and maintain the confidence of member credit unions and payment system counterparties given the expected losses and credit rating downgrades."
The conservatorships were announced less than two months after the NCUA injected $1 billion of emergency capital into U.S. Central to cover a $1.2 billion other than temporary impairment. In all, corporate losses are expected to cost the industry $5.9 billion, according to the NCUA, up from the agency's January estimate of $4.7 billion.
The hit to the share insurance fund will result in an overall charge-off equal to 1% of Dec. 31 shares. Of this, 0.30% will be assessed for the premium charge, and 0.69% is the new impairment expense. Prior to the conservatorships, the impairment was estimated to be 0.51% of insured shares.
"When we came up with the first numbers back in January, we had estimated $3.7 billion for the corporate guarantee and $1 billion for case-specific losses at U.S. Central," NCUA Executive Director David Marquis told listeners during a March 23 Webinar, broadcast on the first business day of the new conservatorships. "We now know we have a heavy concentration of issues that reside at U.S. Central and WesCorp."
Melinda Love, director of the NCUA's Office of Examination and Insurance, told Webinar participants that the new loss estimates included a decrease in the cost of the agency's corporate guarantee program to $930 million. However, case-specific investment losses increased to $5 billion at U.S. Central and WesCorp combined after NCUA had a third-party review the numbers. The agency declined to break down the losses by corporate.
Why the revisions? Since January, the agency had been evaluating corporate investment portfolios to determine a total loss estimate figure. Evaluations were conducted by NCUA staff as well as a report by Newport Beach-based account management firm PIMCO.
The new analysis revealed that the two corporates had "credit losses that far exceeded their capital," said NCUA Executive Director David Marquis, despite both corporates having already filed 2009 financial reports that stated otherwise.
"The reason why we revised the loss-reserve estimate was because we stepped up our due diligence over the issue," Love said. "We completed a detailed review of all corporate-owned mortgage-backed and asset-backed securities, applied stress testing in various scenarios, analyzed market trends and actions by ratings agencies, and factored in a comprehensive review from PIMCO. That increased due diligence allowed us to refine our estimates."
U.S. Central veteran Jim Nance was named the corporate's new CEO. Nance ran U.S. Central's asset-liability division from 1993 to 1996 and was most recently chief administrative officer at Icap Capital Markets in New Jersey.
Comparatively, WesCorp's new CEO Philip Perkins is relatively unknown in the credit union movement. NCUA spokesman John McKechnie confirmed that Perkins was most recently senior vice president and portfolio manager at Delaware Diversified Income Fund in Philadelphia. Perkins previously served as Delaware Investments' senior vice president of mortgage-backed securities and was managing director, global markets at Deutsche Bank A.G., London.
Both were named permanent, not interim, CEOs.
McKechnie said of the picks, "both of these guys are top-drawer executives with lots of experience, and that should help to reassure the industry. We have experienced talented hands at the wheel."
The trickle-down effects of the losses are staggering.
U.S. Central members will lose all of their $750 million paid-in capital, and Marquis said the NCUA's most optimistic figures show at least a 77% impairment to $1.25 billion in member capital shares. All of the NCUA's Jan. 28 $1 billion emergency capital infusion was also eliminated, he said. As of Feb. 28, U.S. Central had additionally reported a $450 million accumulated deficit.
According to data prepared by Callahan and Associates, the write down will result in negative net capital positions for eight of the top 11 remaining corporates. In turn, those corporates will be forced to turn to their members to replenish that capital or be swept into conservatorship.
However, NCUA spokesman John McKechnie said the agency's review, combined with PIMCO's report, "doesn't suggest any other regulatory action was warranted at the other corporates."
"Prior to this, we were in the process of stabilizing liquidity and the system," McKechnie said. "Now, I think this is the resolution stage, and now that we have control of the situation, we'll be able to move on to a return to performance."
However, he did say the NCUA is using current economic figures, and added, "We can't deal with guessing and speculating about future, but we can deal with what have in front of us now."
In addition to the U.S. Central effect on WesCorp, members of the San Dimas, Calif.-based corporate will also lose all of their paid-in capital and member capital accounts. The corporate's Jan. 31 financials reported $930 million in member capital and $211 million in PIC.
Love said the NCUSIF write downs will result in 247 credit unions falling into prompt corrective action status, with WesCorp's capital losses forcing an additional 90 credit unions below 7% net worth.
A lack of transparency was one of the reasons the NCUA gave for making the conservatorship call, but one question remains: Should the agency take some blame for a lack of oversight? After all, both U.S. Central and WesCorp hosted full-time, on-site NCUA auditors.
"At no point during the last eight or nine months, when stresses became apparent in corporates, did we, or frankly, any outside observers feel that these problems were attributed to poor management as much as a collapsing market," McKechnie said.
The agency spokesman pointed to the NCUA's decision to prohibit corporates from purchasing mortgage-backed securities in the summer of 2007. By that time, unfortunately the damage had already been done, he said, but the agency did take proactive steps to minimize and avoid losses.
"Pointing fingers at the NCUA is not an entirely fair criticism," he said, adding, "In a down market, every business decision looks bad in retrospect."