Corporate credit union investments took a nosedive early in 2009, and corporate network owners and regulators spent the rest of the year creating and debating ways to pay for the resulting losses. The NCUA's Central Liquidity Facility opened the year issuing nearly $5 billion in Credit Union System Investment Program (CUSIP) notes on Jan. 9, which allows corporates to pay down external borrowings to avoid another liquidity crunch like the one that occurred in mid-2008. But rating agencies soon communicated bigger balance sheet troubles loomed for corporates, downgrading seven retail corporates that same day. And although U.S. Central assured members it would only write off between $100 million and $150 million in fourth-quarter investment losses, Fitch Ratings nonetheless dropped the wholesale corporate's individual ratings from "A" to a "D" on Jan. 15. After meeting behind closed doors a few times during the month, the NCUA Board announced its landmark corporate stabilization plan on Jan. 28, which included an advance notice of proposed rulemaking on restructuring the corporate system, a voluntary corporate share guarantee program, a $1 billion emergency capital bailout for U.S. Central, and a NCUSIF premium assessment for natural person credit unions that, at the time, was due in full in September 2009. At that time, the NCUA said it estimated corporate investment losses would cost the industry nearly $4 billion total, which included the $1 billion U.S. Central bailout required by the wholesale corporate after its actual 2008 losses were revealed to be $1.1 billion not the $150 million originally estimated. On Feb. 10, NCUA Chairman Michael Fryzel announced that the NCUA had hired PIMCO to perform an independent valuation of corporate investments. Prior to U.S. Central's billion-dollar write-off, corporates had applied little permanent impairment to their mortgage-backed securities. However, some had billions of dollars in "unrealized losses" on their books, which signaled the potential for impairment. Fryzel defended his decision to hire the Newport Beach, Calif.-based PIMCO, which also manages some of the world's largest funds, saying the NCUA needed an independent source by which to value the investments. The move set off a controversy regarding the subjective nature of mark-to-market accounting that continues to this day. The issue centers around the practice of permanently writing off investments based on estimates of future performance. Western Corporate Federal Credit Union had the largest discrepancy between unrealized and realized losses, and debate on the issue peaked after the NCUA placed both the $23 billion WesCorp and the $34 billion U.S. Central into conservatorship March 20. U.S. Central's Francis Lee was replaced by new CEO Jim Nance, who ran U.S. Central's asset-liability division in the 1990s, and was most recently chief administrative officer at Icap Capital Markets in New Jersey. WesCorp's dismissed CEO Robert Siravo was replaced by newcomer Philip Perkins, who was most recently senior vice president and portfolio manager at Delaware Diversified Income Fund in Philadelphia. Both were named permanent CEOs. The NCUA staged a Webinar the following Monday to explain the decision to seize the industry's two largest corporates. In it, NCUA staff revealed that they agreed with PIMCO and other third parties that management and volunteers at WesCorp and U.S. Central failed to record permanent losses in their investment portfolios. NCUA Executive Director David Marquis said that WesCorp, in particular, ignored third-party firms that advised writing down investments. Marquis also said that based on new information, corporate stabilization costs had increased to nearly $6 billion. The announcement resulted in a backlash of industry leaders who doubted the loss estimates and the motivation behind PIMCO, which had stated publicly it was among firms interested in buying distressed assets from financial institutions. In particular, Callahan & Associates President Chip Filson questioned the decision, pressing the NCUA to make the third-party reports from PIMCO and others public. The phrases "trickle-down losses" and "systemic risk" became common among credit union leaders as they realized that due to the industry's cooperative nature and use of the share insurance fund to pay for corporate losses, all federally insured credit unions were on the hook for corporate losses. The NCUA said it expected U.S. Central members to lose all $750 million in paid-in capital, and Marquis said the most optimistic figures showed at least a 77% impairment to U.S. Central's $1.25 billion in member capital shares. All of the NCUA's Jan. 28 $1 billion emergency capital infusion was also eliminated. WesCorp was also expected to lose all of its contributed member capital, worth more than $1 billion. The NCUA released a summary of its analysis of distressed corporate securities April 10 and a highly redacted copy of the PIMCO report the following week. Although both reports withheld specifics, the NCUA revealed that WesCorp had not only invested in subprime mortgage-backed securities, it had invested heavily in securities backed by alt-A and option ARM mortgages, which were beginning to experience foreclosures. Additionally, WesCorp had invested in mezzanine tranche securities, which means the corporate would absorb losses before other investors. Industry attention soon shifted to how to pay for the losses, which would require at least a 1% assessment for federally insured credit unions. The NCUA and trades appealed to Congress, which approved measures May 6 that allowed the industry to stretch out the costs of the bailout to as long as eight years. The move provided relief for natural person credit unions. According to Melinda Love, director of the NCUA's Office of Examination and Insurance, the trickle-down effect of corporate stabilization and WesCorp losses alone would knock more than 300 credit unions below 7% net worth. As home values continued to sink and the economy remained sluggish at best, corporates that invested in mortgage-backed securities reported additional losses that turned retained earnings to retained deficits. The NCUA advised corporates to eliminate their retained deficits by impairing member capital in October and November. Many corporate leaders traveled to Washington for a Nov. 5 meeting with NCUA Chairman Debbie Matz to appeal the accounting guidance. However, Matz stuck by her guns, saying the agency would "explore creative ideas" that could allow corporates to replace depleted capital "if confirmed losses are less than recognized losses." New capital requirements were the most prominent among proposed corporate regulatory changes released by the NCUA Nov. 16. If approved, corporates would be required to maintain three minimum capital ratios to achieve adequately capitalized status. They include a leverage ratio of 4.0% or greater, a Tier 1 risk-based capital ratio of 4.0% or greater and a total risk-based capital ratio of 8.0% or greater. Additionally, retained earnings would have to constitute a portion of capital. Compliance would be phased in; only two of the 28 corporates would be "adequately capitalized" and 16 would be "critically undercapitalized." Other proposed regulatory changes include investment restrictions, liquidity requirements and changes in corporate governance. –[email protected]