Article Alleging Miscalculation, Downplaying Of Losses In Error

The July 9, 2009 CU Journal online article "Documents Show NCUA Miscalculated U.S. Central Losses," regarding the minutes of the National Credit Union Administration (NCUA) Jan. 28 Closed Board Meeting, contains several inaccuracies and mischaracterizations that warrant correction.

1. The headline states that NCUA "miscalculated" losses when in fact none of the losses discussed in the article or in the NCUA Board minutes that served as the basis for the article were provided by NCUA. At the January 28 Closed Board Meeting, NCUA only reported losses that were provided by individual corporate credit unions, or firms that were contracted by the corporate. NCUA has neither regulatory authority, nor policy rationale to make loss estimates on behalf of corporate credit unions.

2. The article also suggests that NCUA Acting Director of Corporate Credit Unions Scott Hunt "tried to downplay" the losses. A more complete reading of his statement shows that Mr. Hunt's discussion of the Other Than Temporary Impairment (OTTI) charge was intended to clarify the disparity in credit losses and the recognition of loss on the US Central financial statements. GAAP in effect as of 2008 required OTTI losses to reflect the difference between market value and book value, which in the case of US Central exceeded the estimated credit losses. The reference to the credit loss estimate of $400-$700 million was the estimate provided by US Central. Thus, if the securities were held to maturity, the expected losses would be less than the OTTI recorded by US Central. This was an important part of the discussion of the adequacy of the $1 billion capital note placed at US Central.

3. PIMCO was hired by the NCUA to evaluate credit losses at all corporates, not just WesCorp and US Central. Furthermore, it is inaccurate to imply that the PIMCO report "led to the takeover of the two corporate giants..." NCUA's action was based on its own supervisory information, supplemented by outside information provided by PIMCO. The actions were not dictated or necessitated by anything except the conclusions, drawn by NCUA staff and approved by the NCUA Board, concerning the circumstances of the two corporate credit unions, including their economic value and ability to meet liquidity demands.

4. The November 2008 action by the NCUA Board that issued the Capital Order for Part 704 of the regulation is characterized as "in effect agreeing to ignore billions of dollars in depleted capital." This is not an accurate description of the reason for NCUA's action. By issuing the Capital Order, NCUA was not ignoring the true capital of any corporate; rather we were attempting to prevent the automatic trigger of a regulatory provision in Part 704 that would impede a corporate in offering services to members. For example, there are capital-based regulatory limits on providing loans to members. As providing liquidity to a member is a core corporate function, NCUA considered the continuation of this program essential to maintaining confidence in the corporate system. This approach is in line with other actions under the Corporate Stabilization Program. It is important to note that the Board vested OCCU with the authority to establish a different capital based limit if safety and soundness concerns arose.

Since last summer, NCUA has been taking prudent, and as subsequent events have proven, effective steps to enhance stability in the corporate system. These steps have been deliberate and appropriate, and are completely consistent with NCUA's statutory responsibility as a safety and soundness regulator. NCUA has not engaged in the kind of guesswork suggested by this article, either at the Closed Board Meeting referenced or at any time in the following months.

Robert M. Fenner
General Counsel
National Credit Union Administration
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