Remembering Black Friday
Larry Fazio was nervous.
It was the afternoon of Friday, Sept. 24, 2010 and the NCUA's Deputy Executive Director was scheduled to speak publicly about the agency's actions that day.
Or had it?
The three conservatorship teams hadn't yet checked in with Fazio to confirm they had executed the supervisory orders. The board had concluded its closed meeting that morning and the open meeting was about to begin. National and trade press were waiting.
“I finally got green light so I could actually talk about it,” he said.
Fazio said those in attendance had a feeling something big was about to be revealed. After all, it was a Friday, when regulators typically execute conservatorships, and a closed meeting had preceded the open meeting.
“There was speculation for months,” Fazio told CU Times about the day referred to as Black Friday. “Every time we had a closed board meeting people thought this was the day. After enough of those had happened they thought maybe it was just another special closed meeting. But I think people figured it out because there was a closed and an open meeting.”
John McKechnie, who five years ago was the NCUA's director of the Office of Public and Congressional Affairs, also remembered the pressure of waiting for everything to fall into place before the special board meeting began.
“I remember how easy it was to get some national press to come to [the] NCUA that day,” McKechnie, who left the NCUA in March 2011 to join Washington advocacy and strategy firm Total Spectrum, said. “Usually they won't come if there isn't a problem and I think they suspected something was going to happen. I remember I got a call from CNBC's Squawk Box. There was something in the water that they sensed, something big was about to happen.”
“I think we were all nervous, but in a way we had gotten used to a certain level of stress and pressure,” he added.
Alloya Corporate Federal Credit Union President/CEO Todd Adams had a very different recollection of Black Friday.
CFO of Members United at the time, Adams was not shown the door by the NCUA. As the senior-most executive still at the credit union, he immediately began reassuring employees.
“Obviously it was a difficult and emotional day,” Adams recalled. “The staff was surprised and shocked. But I’ll give credit to the NCUA. They were extremely professional given the circumstances.”
Surprise and shock among Members United employees didn't last long, Adams said.
“Both members and staff knew there was a financial concern,” he said. “Because of that transparency and level of education, that probably made it less of a shock. And remember, we’re a credit union as well. It's just imbedded in our culture to serve our membership. Even during the darkest hours, we had conversations internally that we don't know what the future holds, but we do know we’re here to serve our member credit unions, to continue operations uninterrupted. And the staff, they got that.”
Adams said he was very proud of how Members United employees put their own feelings of uncertainty aside and focused on serving members.
“You couldn't find a more positive team,” he said. “They came back in on Monday and did exactly what they had been doing on Friday.”
Black Friday didn't commence the corporate crisis. If anything, it provided closure to the uncertainty regarding what the NCUA would do about struggling corporates and their unrealized and realized losses.
For more than two years prior, natural person credit unions faced two related challenges: The country's most severe financial downturn in history and the resulting loan losses in their own shops, and losses at corporate credit unions that were quickly depleting member-contributed capital.
McKechnie said the summer of 2008 was when the corporate crisis began at the NCUA. The FDIC seized the Pasadena, Calif.-based IndyMac Bank on July 11, 2008, but not until after customers began a run on deposits following a June 26 letter by Sen. Charles Schumer (D-N.Y.) urging regulators to prevent the bank's collapse. In the 11 days that followed the letter's release, customers withdrew more than $1.3 billion. Cable news stations broadcasted images of customers lined up outside the bank's branches.
McKechnie recalled how the event increased volume to the NCUA's toll-free consumer line.
“Before the crisis, we’d get 20 to 30 calls a month, mostly service complaints about credit unions,” he said. “But after IndyMac, in one week we got almost 500 calls and almost all of them were asking how credit union accounts were insured.”
NCUA Chairman Michael Fryzel was sworn into his position on July 29, 2008. Shortly thereafter, on Aug. 28, the Wall Street Journal reported that the system's five largest corporate credit unions were in trouble due to losses from mortgage backed securities investments.
Fryzel quickly convinced Congress to lift the $1.5 billion cap on the Central Liquidity Facility and grant the NCUA a temporary increase to $41.5 billion to address a liquidity crisis among the corporates.
That was only the beginning. The following year was a difficult one for corporate credit unions and their credit union members.
By January 2009, the $34 billion U.S. Central FCU was forced to write down $2.3 billion worth of private label MBS to slightly less than 50 cents on the dollar. The loss resulted in a $1.1 billion net loss for 2008 year-end. Two days later, the NCUA injected $1 billion in capital into the corporate's corporate from the NCUSIF.
Because markets were so unstable and uncertain, the perpetual capital note did not have a maturity date, U.S. Central EVP of ALM Dave Dickens said at the time.
The U.S. Central capital injection was part of the NCUA's Corporate Credit Union Stabilization Plan, which also included a guarantee of corporate credit union deposits for natural person credit unions, proposed rules that would restructure corporates and an NCUSIF premium assessment. The CLF had also issued nearly $5 billion in Credit Union System Investment Program notes in January, which allowed corporates to pay down external borrowings and avoid another liquidity crisis.
On March 20, 2009, the largest shoe dropped in the corporate crisis: The NCUA placed U.S. Central and the $23 billion Western Federal FCU into conservatorship.
On March 30, Fryzel asked Congress to increase the NCUA's borrowing authority from the Treasury Department to $30 billion from just $100 million in a letter to Senate Banking Committee Chairman Christopher Dodd (D-Conn.) and Ranking Member Richard Shelby (R-Ala.).
In May 2009, Congress approved a plan that would allow the industry to pay off corporate losses over an eight-year term.
The NCUA experienced turnover on the board when Debbie Matz was sworn in on Aug. 5 as the agency's newest board member and new chairman. Fazio recalled how fortunate it was that President Obama nominated Matz, because in a time of crisis, the two-time board member was able to hit the ground running without having to learn about credit unions or the system.
The corporate crisis was still far from over. Losses were still mounting at U.S. Central and WesCorp, as well as at Members United, Southwest, Constitution and other corporates. Debate raged within the industry over changing accounting standards and whether the devalued securities would recover. Credit unions were even unsure how to account for corporate capital losses as they budgeted for 2010 and closed out their 2009 financials.
As summer came to a close in 2010, the corporate crisis was still unresolved, and a plan to unwind corporate legacy assets had not yet been revealed.
Until Black Friday.
Following the conservatorships of the final three corporates, the NCUA was able to pool together corporate mortgage backed securities and issue NCUA Guaranteed Notes, investments backed by the legacy assets. The move transferred credit risk away from credit unions and into the market, allowing credit unions to begin repaying Treasury through NCUA assessments.
Eventually, Members United and Southwest recapitalized and formed Alloya Corporate FCU and Catalyst Corporate FCU, respectively.
Five years later, the corporate crisis has faded into a memory.
Fazio recalled he had wanted to place the three corporates into conservatorship earlier in 2010, because the industry was awaiting a final resolution.
“The system was on life support but nobody knew the long-term prognosis,” he said.
However, Fazio said everything worked out for the best, including the timing, and other than a few “in the weeds” details early on, in hindsight he wouldn't change a thing. He credited a long list of NCUA staffers for a job well done, as well as Fryzel and Matz, who he said worked well together during the crisis despite the turnover in the chairman's seat.
Adams said his takeaway from Black Friday was that the cooperative business model works, despite dark days when credit unions saw corporate losses trickle down into their own financial books.
“It took the power of credit unions working together and working with regulators to hold those securities to maturity,” he said. “That took cooperation. This situation was new to our industry and credit unions understood that we couldn't sell those securities and realize big losses. In very uncertain times, credit unions worked together to realize that ultimate objective – to take legacy assets, set them up in estates and finance the NGN notes with the intent to hold the securities to the end and collect as much principle and interest as possible, which minimized losses.”