Extensive investments in collateralized debt obligations, unrealistic growth patterns that went unchecked and the failure of state and federal examiners to realize the risk of certain practices all helped cause the failure of Eastern Financial Florida CU.
That's the conclusion of the material loss review conducted on behalf of the NCUA's Office of Inspector General by the accounting firm of Crowe Horwath.
The credit union had lost $149.2 million in its last two years of operation before the NCUA merged it into Space Coast Credit Union in June 2009, at a loss of approximately $40 million to the NCUSIF. Florida regulators had place the credit union into conservatorship in April 2009.
Eastern Financial Florida CU bought $94.8 million in CDOs between March and June 2007 and these were funded by short-term borrowings. Most of the CDOs were backed by home equity loans asset-backed securities.
The report concluded that the credit union's management and board "failed to place prudent limits on CDOs or the types of underlying collateral' and had "weak investment policy and committee oversight regarding CDOs."
In evaluating the actions of examiners, the report found plenty of shortcomings.
During state and federal exams, there was insufficient attention paid to the risks of CDOs and the examiners didn't go into enough detail when analyzing the credit union's transactions. In addition, the NCUA should have made the credit union commit to written plans for managing certain risks.
In a written response, NCUA Executive Director David Marquis acknowledged that "there were early opportunities to better understand the depth of risks," and for regulators to increase supervisory efforts.
As a result, "NCUA has intensified its monitoring and supervision efforts in all credit unions including state-chartered credit unions to ensure more timely corrective actions."
To read the report, go to: http://www.ncua.gov/Resources/OIG/Files/Reports/2010/OIG-10-04_MLR_EFFCU_5-5-10.pdf