Audits typically are prosaic matters, filed by accountants, read by accountants and swiftly forgotten. Not so the recent audit of NCUA’s Temporary Corporate Credit Union Stabilization Fund, announced by the agency on Dec. 27, a day when many are on vacation.
Despite the timing of the release to coincide with a nationwide gap in attention, a firestorm has erupted about the audit and, more broadly, the NCUA’s handling of the huge losses incurred in the meltdown of five corporate credit unions that the NCUA conserved in 2010.
For its part, the NCUA applauded the audit, “The Stabilization Fund’s clean audit opinion by an independent body demonstrates our commitment to robust financial reporting,” said NCUA Board Chairman Debbie Matz in a prepared statement.
The applause stopped there, however, and what has followed is a wave of criticism and a torrent of questions from critics of the audit.
Throwing down a gauntlet was industry expert Chip Filson, who, in a blog on his company’s website (creditunions.com), asked a pointed question about what might loom as the audit’s most salient detail, how much is the industry’s IOU? Why did “the contingent liability for losses increase from $6.4 billion as of December 2009 to $7.8 billion?” wrote Filson.
The audit performed by a leading firm, KPMG, addressed this in a footnote. “The increase in the aggregate contingent liability from 2009 to 2010 of approximately $1.4 billion is primarily a result of increased losses in the previously conserved CCUs and three additional CCUs, all five of which were [conserved] during 2010.”
But, groused Filson, “For more than 18 months the NCUA had presented the $6.4 billion contingent liability for the TCCUSF in the financial statements released in open board meetings. In public comments during the campaign to have credit unions voluntarily prepay TCCUSF assessments, NCUA board and staff reaffirmed this estimate.”
Filson continued, “At the Dec. 15, 2011 open board meeting (seven days before the audit’s release), NCUA published its TCCUSF statement from Nov. 30, 2011, which showed the $6.365 billion figure.”
His bigger point: Was the agency caught by surprise with the increase, and if so, how?. Or was it being disingenuous?
A sharp question, but that $1.4 billion may be just the tip of an expensive iceberg, said a number of industry experts and corporate credit union executives.
Industry consultant Marvin Umholtz pointed out that the value of the underwater securities in the NCUA’s portfolio is inherently unclear and, therefore, the losses arguably could turn out to be much higher still.
That is, $7.8 billion in losses may be just the beginning, suggested Umholtz. “The uncertainties about how deep the hole really is will haunt the industry for years to come,” he said.
Haunting just may be the apt word. Pete Duffy, managing director at Sandler, O’Neil, said that a continuing concern at the larger credit unions where he consults is that “the wide bandwidth and uncertainty about how potential losses are calculated.” He elaborated that his clients have been contemplating sizable investments–opening new branches, for instance–but a roadblock for some has been the uncertainty about the losses and how deep individual credit unions may have to dig.
A senior executive with a corporate credit union, who requested anonymity because he was not authorized to speak on the record on behalf of his institution, said the estimates offered by the NCUA are inherently vague.
“Read the notes to the report and note the loss recognition estimates are based on modeling that can have dramatically different outcomes,” the executive said. “It will take 10 to 20 years to figure out how right or wrong they are compared to actual.”
Another corporates executive focused on a more fundamental issue. Is the KPMG audit report in fact clean–as proclaimed by Matz in her statement–or is it a qualified opinion? Superficially, that question appeared to be answered in the audit. Wrote KPMG, “In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the TCCUSF.”
The NCUA, in its commentary, touted that verdict as offering a clean opinion.
Yet the audit, pointed out several experts who had closely analyzed it, is characterized by an unusual density of long footnotes and opinions throughout, along with persistent criticism of the NCUA’s handling of the crisis. That is what a corporate CEO noted in his comments. “The audit expresses an unqualified opinion, but given that it contains a sufficient deficiency in internal controls over the corporate system resolution program, it is not what would, in my experience, be called a clean opinion. Given the fact that the survival of many small credit unions may well depend on accurate estimates of losses, I can’t think of anything more critical to credit unions than the prompt establishment of functioning internal controls over this program.”
“The solvent corporates have worked hard to restore and maintain confidence in the system, and we don’t want to see that work endangered by internal control deficiencies that can be addressed and solved,” he added.
The NCUA, for its part, in response to a request from Credit Union Times, has offered comments in response to its critics. In particular, in response to complaints about the vagueness of the estimated liabilities faced by credit unions, the NCUA Office of Public and Congressional Affairs wrote in an email, “To date, credit unions have paid $5.6 billion in depleted member capital when the corporate credit unions were liquidated and another $3.3 billion in assessments. At the Aug. 29, 2011, open board meeting, NCUA provided its estimate that credit unions would be assessed another $1.9-$6.2 billion in assessments. The range is wide given the complex and illiquid nature of the legacy assets.”
As for the Umholtz complaint about not knowing how deep the black hole of losses can go, the NCUA wrote, “Credit unions can go to NCUA’s website, click under Credit Union Resources and Information, and select Corporate System Resolution Costs to find NCUA’s most recent estimates on the full cost of the corporate credit union resolution. NCUA has regularly communicated that these estimates will change over time with new information about the economy and actual performance on the complex underlying legacy assets. NCUA will update total cost estimates on its web site semi-annually.”
Finally, with regards to the $1.4 billion jump in contingent liability reserves noted by Filson, the NCUA said, “The 2010 reserve increased by $1.4 billion over 2009 levels based on updated loss projections and accounting for new guarantee obligations in 2010 as part of the corporate resolution process. Further, NCUA disclosed beginning on Sept. 24, 2010, an estimated range of remaining stabilization fund assessments of $7 to $9.2 billion. The 2010 TCCUSF audited financial statements show a net position of negative $7.5 billion, which is within the range reported.
As to what all the to-and-fro over many billions of dollars means, NAFCU President/CEO Fred Becker indicated that, from his chair, there are two realities. The first is that “the securities are tainted. It should surprise no one that it is difficult to put a value on these securities,” Becker said. There are and will continue to be uncertainties about the size of the liabilities because no one knows the value of off-setting securities.
Becker’s second point, “It’s questionable that the agency is as transparent as it could be.”
And that is not likely to change any time soon.