Most of the retraction was due to the confiscated corporate's well-publicized investment woes. WesCorp recorded a $7.6 billion OTTI as of year-end 2008, $6 billion of which were write-downs on option ARM mortgage-backed securities. WesCorp also recorded an additional $5 billion in unrealized losses in 2008.
The corporate's 1,000 members felt the loss the hardest, seeing their cooperative equity drop from $21.5 billion at 2007 year-end to less than $5 billion at the end of 2008.
However, the 2008 numbers won't mean another big hit to member capital in addition to the $5.7 billion OTTI WesCorp reported in its first-quarter 2009 financial statement. Rather, WesCorp wrote in its notes to the first-quarter financial statement that the majority of that period's OTTIs were actually attributable to 2008 year-end.
Additionally, WesCorp elected to adopt new FASB accounting rules as of Jan. 1, earlier than required. This further complicated matters. The new rules allow for only expected credit losses to be counted as OTTI. So, of its $7.6 billion 2008 year-end OTTI, WesCorp said its estimated credit loss is only about $5.6 billion.
As a result, WesCorp will add back $2 billion and some change in noncredit losses, or unrealized losses, during first-quarter 2009. Like other corporates that adopted the rules early, WesCorp will restate its January, February and March 2009 financial statements as numbers are shuffled to accommodate the new rules.
Despite the $2 billion positive accounting entry, the largest retail corporate and its members are still left holding a $5 billion accumulated deficit. The NCUA has said it will not require WesCorp members to recapitalize the institution.
WesCorp valued its portfolio using FASB Level 3 pricing, which derives value from potentially subjective "unobservable inputs." Level 3 pricing is only allowed if an asset's market is so inactive only distressed fire-sale prices are available to determine value.
Because Level 3 pricing lacks recent transaction prices, it is more subjective in determining values and requires significant input from expert sources to avoid auditor scrutiny, according to several articles written on the subject. WesCorp contracted with well-known valuation firm Clayton IPS Corp., which the corporate said determined the values for the majority of its bond portfolio.
The NCUA accused WesCorp's previous management of favoring internal, optimistic values after the corporate's March 21 conservatorship. However, under NCUA management, WesCorp said it used the more conservative estimate of losses from the Clayton analysis and its internal analysis for each security in determining audited, 2008 year-end values.
"WesCorp's auditor was comfortable with this approach and relied upon it when approving the December 2008 financial statements and issuing WesCorp's 2008 audit," said NCUA Director of Public and Congressional Affairs John McKechnie.
WesCorp also recorded a nearly $7 million benefit payout on a "nonqualified defined benefit plan" in 2008, much higher than the $293,000 paid out in 2007. It also added another $4 million worth of "plan amendments" to the plan's 2008 budget. WesCorp officials were unable to provide more information regarding the plan transaction by press time.