The failure of U.S. Central Federal Credit Union was caused by the risky investment practices of its management and by insufficient examinations by the NCUA and weak regulation.
That was the conclusion of the materials loss review by the accounting firm Crowe Horath at the request of the NCUA's Office of Inspector General.
U.S. Central's failure, which has so far cost the Temporary Corporate Credit Union Stabilization Fund $1.45 billion, was caused by the credit union management's failure to establish prudent concentration limits and its heavy reliance on ratings given to securities, according to the report.
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It also faulted the credit union for a growth strategy that included buying subprime mortgage securities because they offered high rates of return but while doing so "did not properly identify and monitor credit risk exposure."
In addition, the report said U.S.Central's board and management "failed to recognize the substantial risk they undertook."
The report also said that the agency's examiners and staff failed to identify and focus on problems with the investment strategy. It concluded that "stronger and timelier supervisory action" could have reduced the size of the losses. It also concluded that the agency examiners were limited in what actions they could take because the regulations on concentration limits were not strong enough.
In his response, NCUA Executive Director David Marquis did not address specific criticisms of the agency's performance but noted that the agency issued a rule last month that is aimed at preventing the concentration risk.
In March 2009, the NCUA placed U.S. Central and Western Corporate Federal Credit Union into conservatorship because of substantial losses from their investments in subprime mortgages.
In September, the NCUA issued new regulations for all corporate credit unions that place greater restrictions on their investments. The agency also conserved three other corporates and released a plan for selling the securities of the five conserved corporates.
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