WesCorp's management didn't manage risk well and invested too heavily in residential mortgage backed securities while NCUA examiners failed to "adequately and aggressively" address the risks.
That's the finding of the Materials Loss Review conducted by the NCUA Office of Inspector General; the NCUA placed WesCorp into conservatorship in March 2009. The loss to the Temporary Corporate Credit Union Stabilization Fund is estimated to be about $5.59 billion.
"Management's actions allowed a substantial investment portfolio of privately-issued RMBS, resulting in a significant concentration risk, and left WesCorp increasingly vulnerable to significant credit risk, market risk, and liquidity risk through the portfolio's exposure to economic conditions in the residential real estate sector,'' the report concluded.
The report also faulted WesCorp executives for investing too heavily in RMBS issued by Countrywide Home Loan Inc. In June 2007, Countrywide was the servicer for more than 220% of the underlying mortgage collateral in WesCorp's investment portfolio.
"We believe that in having such a significant concentration of RMBS originated, issued and serviced by a single financial institution, WesCorp exposed its own balance sheet to the economic viability of that single entity as a business enterprise, including the pressures that a company may face to remain afloat in changing economic environments,'' according to the report.
The report said NCUA examiners did not "critique or respond in a timely manner,'' to the credit union's increased concentration in RMBS. However, the report said this failure was in part the result of NCUA regulations that weren't strong enough. The examiners "lacked the regulatory leverage'' needed to force WesCorp to make changes that might have prevented the need for the NCUA to conserve it.
During the agency's examinations from 2003-2008, examiners noticed increased risk concentration but "did not criticize or take action'' until 2008.
In September, the NCUA issued a rule on corporate credit unions that strengthens regulations, including instituting strict limits on risk concentration.
NCUA Executive Director David Marquis said the rules approved by the agency in September prevent the purchase of privately held RMBS and also establishes a new capital structure.
Marquis said that although the RMBS that WesCorp purchased were AAA or AA rated, NCUA officials and others warned that the ratings were not a substitute for appropriate due diligence.