Inside The Failure Of WesCorp

SAN DIMAS, Calif.-Just 17 days before a team of NCUA representatives descended on the offices of WesCorp here to place it into federal conservatorship, its CEO, Bob Siravo, was still holding on to the possibility the corporate giant would suffer no investment losses as a result of the mortgage meltdown.

At a special meeting of the WesCorp board of directors on March 3, 2009, Siravo told those attending, "The far outside OTTI possibility" in the WesCorp portfolio "is still zero."

Siravo made the statement at a time when all other corporate credit unions were reporting other than temporary impairment (OTTI) losses due to the mortgage bubble bursting. NCUA had been pressuring WesCorp to provide it with OTTI loss-related numbers, too-which it had finally done four days earlier. The then $32 billion-asset corporate had loaded up with bad bets on mortgage-backed securities and would eventually see its losses reach into the billions, a cost that would be borne by natural-person credit unions everywhere.

This story is part of an extensive look at how Western Corporate FCU went from rapid growth and one of the most innovative and largest corporate credit unions, to one of the biggest failures in credit union history. In the July 23, 2012, Credit Union Journal provided an in-depth look at life inside WesCorp in its final months from the perspective of members of its former management team.

This second story is based primarily on WesCorp board minutes from January 2007 until its conservatorship in 2009. To obtain these minutes, CU Journal waited nearly a year for NCUA to comply with several Freedom of Information Act requests the publication filed for this information.


Discouraging Word Seldom Heard

In the year leading up to that Friday afternoon, March 20, 2009, when 65 of NCUA's agents entered the front doors of WesCorp's main offices to take control, the term "OTTI" was rarely heard inside the Western Corporate Federal Credit Union board room-at least not with some hard numbers tied to the corporate's investment portfolio.

It was not until that final board meeting on March 3, the last of Siravo's WesCorp career before NCUA removed both the management and the board of directors, did the CEO speak of OTTI losses coming from the corporate's securities-and the potential loss range he shared was well below the estimate PIMCO would deliver to NCUA later that very same month.

The PIMCO analysis-which showed potential losses that placed 150% of the corporate's capital at risk-would be the final piece of information that would lead the CU regulator to move to conserve WesCorp, according to NCUA board minutes previously reviewed by Credit Union Journal.

Today, the credit union community-yearly Corporate CU Stabilization Fund checks in hand-is painfully aware of the issues that ultimately sank WesCorp: management's decisions to take on increasingly risky investments to reach for yield and compete within a corporate system that had become highly competitive; failure to hedge investments well; and simply poor timing.

But perhaps the biggest mistake the corporate made, according to many industry observers, is that it failed to either recognize or admit its problems to itself, its member credit unions or to NCUA.

As would later be revealed by NCUA's Office of Inspector General, WesCorp relied on its own internal forecasting models whose assumptions about the economy turned out to be wildly optimistic. That stance led many within the CU community feeling burned, distrustful of all corporates, and unwilling to recapitalize the remnants of WesCorp, Western Bridge Corporate FCU.

Present at the meetings reviewed by CU Journal were the key members of the management team who would eventually come under fire from credit unions and then NCUA in a lawsuit that alleged negligence and breach of fiduciary duties. All parties settled before going to trial: Siravo (who would leave WesCorp with a $6 million payment via a SERP, but later pay back $600,000 of that); Chief Investment Officer Bob Burrell, CFO Todd Lane; HR Director Thomas Swedberg; and Chief Risk Officer Timothy Sidley.

The board, in the end, ultimately never faced any litigation. Present over the course of 27 months of meetings reviewed by CU Journal were board members who included John Merlo, Robert Harvey, Robin Lentz, Gordon Dames, James Jordan, Timothy Kramer, Warren Nakamura, Brian Osberg, Susanne Longson, Sharon Updike, Wayne Hope, Adam Denbo, and Diana Dykstra. Over that same course of time, the supervisory committee was comprised of Dick Cochran, Darren Williams, Dykstra, Dave Roughton and Donna Bland.


A 'Banner Year'

Perhaps most striking, as the board minutes revealed, is the lack of discussion by WesCorp management of real problems bubbling up within its investment portfolio. The minutes would show more attention, in fact, was paid by Siravo to patting staff on the back for WesCorp's financial performance. For example, in January 2009, less than three months before NCUA shut down the corporate, Siravo lauded staff for a "banner year" in 2008.

Credit Union Journal reached out to Siravo on two occasions via his attorneys. Siravo declined to comment.

Just as WesCorp failed to heed the persistent advice of its chief economist, Dwight Johnston, who put his money where his forecast mouth had been and sold his Southern California home in 2004 and rented due to fear of a housing market collapse, WesCorp apparently paid little attention to its own internal warning signs as far back as 2007. In a Jan. 23, 2007, board meeting, VP/Controller Laura Cloherty, in the treasurer's report, alerted the board that in December 2006 WesCorp's internal total capital ratio had fallen below its internal policy level of 6%, noting the ALCO recommended allowing the capital ratio to decline below 6% from December 2006 to May 2007. The board approved the waiver of corporate policy and would later extend the time period, despite Cloherty stating at the outset, "This ratio serves as an early warning for us."


Where Were The Auditors?

One question many have had following WesCorp's collapse is where were the auditors? The board minutes indicate that auditors did indeed flag issues of concern, even as the corporate was seeking more internal expertise. At a Feb. 25, 2007, meeting, Sidley shared that WesCorp was still in the process of finding a director of enterprise risk management and that completing the enterprise risk assessment program by April 30 would be difficult.

In March 2007, the WesCorp board began wrestling with findings from its new audit firm; the names of all audit firms are redacted from the minutes provided to Credit Union Journal, except in one instance where KPMG is cited.

Siravo stated that auditor had "identified a list of discussion items in the derivatives area they want to discuss further," adding, "It looks like they may have some questions regarding the specificity of WesCorp's documentation in the derivatives area."

WesCorp, according to the minutes, changed audit firms for its 2006 financials due to a supervisory committee rule that states the corporate must rotate its external audit partner every five years.

The new audit firm's concerns carried over to board discussions the following month. Siravo stated that the auditors' issues with WesCorp's derivatives was an accounting issue not a safety and soundness matter.

"There are two different methods for the accounting of derivatives," said Siravo. "One method is the short and abbreviated method and it has to do with balanced book in relative simplicity in matching up terms. This is the system that WesCorp has been using for much of its derivative portfolio and the system has been fine-tuned with a lot of direct discussions with WesCorp' s previous CPA firm."


Form Over Substance?

Siravo shared that the new audit firm had a problem with the documentation that backs up WesCorp's hedge accounting. "It may be a form-over-substance issue and [auditors are] questioning whether WesCorp qualifies for derivative accounting treatment in 2006 as well as in 2005. If we cannot get agreement, [the auditor] will direct WesCorp to restate its financials for the last couple of years."

In response, CFO Todd Lane noted that any restatement is not good and will make the rating agencies uneasy. "The net amount is not the issue, it's the volatility in WesCorp's income statement. WesCorp's ROA is too thin to tolerate this fluctuation," said Lane, who added that WesCorp's hedges are "good solid economic hedges."

In April 2013, Lane was the last of the five members of the WesCorp management team to reach an out-of-court settlement with NCUA in its civil lawsuit. Lane has strongly objected to any suggestion of negligence while at WesCorp, and today is CFO at California Coast Credit Union.