Western Corporate FCU's business decision to invest in collateralized debt obligations and securities backed by Alt-A and negative amortization mortgages was a bad one.
According to the seized corporates' March 31 financial report, released today, WesCorp posted a $5.6 billion credit loss, most of it from Alt-A and "Pay-Option" ARMs, which are usually negative amortization. WesCorp also posted a $390 million credit loss on its CDOs, rendering its $420 million CDO portfolio virtually worthless.
The credit losses were produced by comparing WesCorp's estimates with third-party provider Clayton IPS, LLC, and choosing the more conservative of the two. Almost all OTTI figures were taken from the Clayton estimates, WesCorp said.
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WesCorp elected to early-adopt provisions of FASB Staff Positions FAS 115-2 and FAS 124-2, effective March 31, 2009. The new guidance separates impairments into the amount of the total impairment related to the credit loss and the amount of the impairment related to all other factors.
WesCorp calculated credit loss by using Clayton's estimated cash flows, which were based upon the current yield for fixed rate securities and used forward yield curve assumptions for adjustable rate securities. WesCorp then discounted those expected cash flows based upon the same forward yield curve discount assumptions that were used to generate the expected cash flows.
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