CU, Examiners Faulted In Eastern Financial Failure
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 loan 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 addition, the purchase of large amounts of CDOs during a short period of time put the credit union's net worth at risk and credit union managers and board members didn't take into account larger risks, such as the nationwide housing collapse, the report said.
After receiving an advisory opinion from state regulators before buying the CDOs, the credit union didn't perform adequate due diligence. Once the CDOs began losing value, the credit union's policies weren't changed quickly enough to trigger rapid divestment from them, the accounting firm concluded.
The credit union's eagerness to grow its member business loan portfolio also caused several serious problems, according to the report.