ALEXANDRIA, Va.-Not until Feb. 26, 2009, did discussion about real trouble at WesCorp begin in the NCUA boardroom.

That's when it was brought to the board's attention that expected losses at WesCorp were well ahead of the corporate's $2-billion capital position, placing the NCUSIF at risk, and that a total run of shares and cut-off of borrowed funds would result in liquidity demands in excess of $20 billion, far exceeding the cash resources of WesCorp and the NCUSIF.

Owen Cole, president of the Central Liquidity Fund at that time, reminded those in the room that "we are legally obligated to pay cash on the barrel right now for every withdrawal."

A review by Credit Union Journal of heavily redacted NCUA board meeting minutes from three key meetings in early 2009, right before NCUA moved to conserve WesCorp and immediately afterward, tell a story that details deep concerns from NCUA over the timeliness of WesCorp's sharing of credit loss estimates, and the approach the corporate used to derive them-including a "filtering" process the Office of Corporate Credit Unions (OCCU) asserted was being used by WesCorp to minimize forecasts for losses and potential losses.

Members of the board would eventually be sufficiently concerned about actions by WesCorp to ask if "malfeasance" had taken place.

The following details how the fate of WesCorp unfolded inside the walls of the Virginia-based regulator, and shares key points in those meetings.

By early 2009, PIMCO had been commissioned by NCUA to analyze WesCorp's investment portfolio, and early estimates set losses at about $900 million for only 37 securities in a portfolio totaling approximately 900. By the Feb. 26 NCUA board meeting, that finding centered attention on the San Dimas corporate. The minutes reveal that because only a small number of securities were considered potentially troubled by WesCorp's own analysis, discussion of what the real numbers were would fuel boardroom discussions in February and March, and begin walking the OCCU down the path to recommending conserving WesCorp.

Run On Deposits Discussed

On Feb. 26, 2009, with the economy in a deep tailspin and mortgage-backed securities proving that not much backed them at all, the NCUA Board convened at its headquarters. The investment portfolios of corporate credit unions, and by default the natural-person credit unions that owned them, were certainly a focal point. One NCUA staff member, whose name is redacted in documents provided to Credit Union Journal, shared that PIMCO was indicating that projected losses at WesCorp were in excess of $2 billion, and those in the boardroom broached the subject of a run on WesCorp deposits if that information reached the corporate's members.

Board Member Gigi Hyland, who came to NCUA after leading the Association of Corporate Credit Unions, affirmed that with all the potential trouble within some corporates and with NCUA firmly focused on U.S. Central's condition as well, that WesCorp presented the greatest risk. What seemed very risky to NCUA was WesCorp not sharing estimates on its Other Than Temporary Impairment (OTTI) losses. An individual not identified in the minutes stated that "It is troublesome. It is concerning. Our resident examiner has been continually pushing WesCorp. I have expressed to WesCorp's board and to WesCorp's CEO that we anticipate and expect guidance."

The minutes later clarified that guidance meant a clear picture of OTTI.

Hyland asked Scott Hunt, then acting director of the OCCU, what explanation WesCorp had provided for delaying estimates on OTTI that had been requested by NCUA. Hunt responded that WesCorp explained "they do not have OTTI on some of their models, or it is a minor amount."

Hunt said that minor amount WesCorp shared was in the neighborhood of $80 million. But he seemed to disagree with that assessment saying, "But when you look at the portfolio that is a minor amount of what we see coming."

Hunt confirmed that WesCorp was in the process of analyzing its portfolio using an outside firm, one not one routinely used by the corporates. WesCorp would not commit to providing its numbers until mid-March, which did not satisfy NCUA, according to the minutes.

NCUA Mulls Legal Action

With financial markets tumbling and NCUSIF exposure from a collapse of some of the corporates an issue, Board Vice Chair Rodney Hood asked General Counsel Bob Fenner if there was anything the NCUA could legally do to "compel" WesCorp to provide the OTTI data in a more timely manner. Fenner pointed out that an enforcement action, such as a cease-and-desist proceeding, would have to be based on a safety and soundness problem and "just in terms of scheduling" would not get results sooner than PIMCO's final numbers would arrive.

Hunt added that WesCorp was only compelled to publish its financials before its annual meeting. "And there is nothing that says an annual meeting must be held by X date. That is a problem."

Hunt also shared what the NCUA Office of Inspector General's report on WesCorp later revealed, that WesCorp's problems were a large exposure to subordinate tranches and CDOs, and especially residential mortgage-backed securities.

While it is unclear from the redacted minutes who was speaking or the specific nature of the conversation, an individual in the meeting room is quoted as saying that there was belief the "credit impairment alone at WesCorp is over $6 billion."

Discussion Absent Related to U.S. Central

Discussion of conserving Kanas-based U.S. Central was not addressed in any of the redacted minutes reviewed by Credit Union Journal, and commentary available for review regarding the corporates' corporate, which was conserved at the same time as WesCorp, was limited.

On March 19, with the complete PIMCO analysis in hand and NCUA able to see the full extent of WesCorp's potential losses, the first comments of Hunt to the board were, "I am here today to request the board's approval to place Western Corporate Federal Credit Union, otherwise known as WesCorp, into conservatorship." Hunt then noted that WesCorp's securities portfolio showed $3 billion in unrealized losses that placed 150% of the corporate's capital at risk. "WesCorp is insolvent, with no prospect of improvement in the foreseeable future."

Hunt emphasized that WesCorp management's initial failure to complete an OTTI on the investment portfolio delayed the reporting of year-end financial informationand "exacerbated OCCU's lack of confidence."

When an OTTI number was finally produced ($740 million), it showed that virtually all of WesCorp's retained earnings were impaired, pointed out Hunt, who added that credit loss alone in the WesCorp portfolio is "higher than management of WesCorp acknowledges... Almost half of WesCorp's investment portfolio consists of securities that are below investment grade... A corporate credit union unable to provide liquidity management for its members has failed its essential mission."

Hunt stated that conserving WesCorp is the "best way for NCUA to maintain member confidence in the credit union system, liquidity, and integrity of the payment system."

In making the recommendation to conserve, Hunt accurately predicted that due to the economy, make-up of WesCorp's financial statement, and CUs' need for liquidity and payment services, that NCUA would be operating WesCorp "for several years." Hunt, too, cast doubt on the chance of saving WesCorp, saying, "exhaustive efforts that will allow for some reasonable return to membership, merger or reincarnation in another structure will be forthcoming, but likelihood of success of this scenario is not estimable."

Conservative Vs. Pessimistic Forecasts

At this point "conservative" loss estimates were set at $2.4 billion and "pessimistic" estimates as high as $5.1 billion, Hunt explained, emphasizing the importance of communication to and education of member credit unions during the coming months to maintain confidence in WesCorp.

Hunt concluded his presentation to the board by pointing out that a total of $19 billion in assistance for WesCorp was being requested.

Board Chair Michael Fryzel asked Hunt about the timing of the conservatorship. "In your remarks you have repeatedly said that the PIMCO study confirmed what we already believed... Is this something we would not have done if we did not have PIMCO?"

Hunt said no, and then went on to address issues the agency was aware of within the WesCorp portfolio, issues within the entire investment market, signs from the rating agencies, and analysis completed on corporate portfolios by vendors, which all pointed to trouble ahead for WesCorp. He said PIMCO was the "last layer" of confirmation of concerns that "quantified exposure across a full spectrum of WesCorp securities."

However one member of the board who was not identified, stated that "it was not until the recent examination of WesCorp that there was an actual drop in their ratings. So I am wondering, one, are we a little too late, and two, are there any lessons learned from this for other corporate credit unions?"

Hunt acknowledged that WesCorp ratings lagged, however they did not reflect the supervision of the corporate, he said. "The ongoing supervision we had at WesCorp... was an extraordinarily high level," Hunt said, noting that NCUA had a resident examiner who returned "real-time information from the operations of WesCorp."

WesCorp 'Filter' Discussed

Hunt added that in 2007 WesCorp had stopped purchasing the securities that eventually became troubled and that the continually deteriorating real estate market prevented WesCorp from doing anything with the securities. "What I am trying to say here is there has not been an out" that would have avoided conservatorship, said Hunt.

What also gave the OCCU concern was what Hunt termed a "filter' used by WesCorp that "prohibited a significant number of its bonds to actually flow through its process that would actually be reviewed by its outside vendor." He added that "we have information or intelligence that WesCorp decided to use its own numbers, its internal-based numbers for credit impairment and disregard the results that its external vendor provided."

During the ensuing March 26 board meeting it would be pointed out by Rick Mayfield, a member of Hunt's staff who was analyzing the issues at the $32-billion institution, that WesCorp's filtering process "did not allow a lot of the securities to actually fail...to the point that they were sent out." Adding, "that filtering process is full of flaws" and "kept a lot of the "bad securities out."

Delayed Reporting

In the March 16 meeting Hyland then asked Hunt, "So what you are saying is that WesCorp applied a variety of filters to the securities it then handed over to its external vendors to analyze, number one. Number two, that if you try to compare those, I think there are 37 bonds that are an apples-to-apples comparison with what PIMCO did, that the external vendor comes up with a higher amount of credit losses than originally would have been shown because of WesCorp's filter?"

"Yes," replied Hunt.

Hyland then reminded that Hunt has shared that WesCorp delayed reporting its financial statements and OTTI calculations and asked, "Is there any malfeasance with respect to WesCorp's management or board in the particular actions or in the actions that WesCorp has done?"

"I cannot say we can define any actions at malfeasance at this time," said Hunt. "Perhaps after conservatorship, should the board determine that is the course of action we take today, we may find out such information but we cannot say so with certainty at this time."

Vote On Conservatorship

Later in the meeting, Hood added he was concerned that WesCorp had "changed auditing firms over two or three different years just to get the numbers for which they were searching."

After further discussion, Hyland then moved that the board place WesCorp into conservatorship, and the board passed the motion 3-0.

In the March 26 board meeting, six days following WesCorp's takeover, after Hunt addressed what actions were employed following the conservatorship to bring an orderly transition of WesCorp to NCUA control and maintain member confidence, the subject of WesCorp's transparency regarding OTTI and its sharing of data in a less-than-timely manner was raised again.

Hunt pointed out that to monitor its portfolio, WesCorp used internal analysis that was supplemented by analysis from RiskSpan and "NIR." In discussing the full findings from PIMCO and internal analysis from WesCorp, Fryzel posed to Hunt that possibly WesCorp's interpretation of its losses were much lower than PIMCO's due to the limited number of securities WesCorp looked at and released to outside vendors.

Hunt concurred, saying he believed bonds fully modeled by RiskSpan were 37 out of the approximately "900 securities held by WesCorp."

Significant Differences

The board, particularly Fryzel, honed in on the difference between how the extent of the 37 securities' credit impairments differed from analysis performed by RiskSpan, PIMCO, and by WesCorp itself. The differences, the meeting minutes showed, were significant-about a $900-million credit impairment determined by PIMCO, $700 million by RiskSpan, and $200 million by WesCorp.

Fryzel asked if NCUA could state with confidence that WesCorp indicated that the impairment of the 37 securities was $200 million. "That is the information we pulled from the exam," stated Hunt. "Our staff on site pulled this analysis together and summarized that data, yes. We have a summary to that effect."

Those in the boardroom continued to ask why such a big difference existed with WesCorp's analysis, compared with that of PIMCO and RiskSpan. Hunt and Mayfield suggested a big reason was that WesCorp, in its analysis, was hoping for a dramatic turnaround in the real estate market. Mayfield called WesCorp's outlook "unrealistically optimistic" and agreed with Hyland, who stated, "So there were two factors they were counting on; that the housing market would skyrocket and go up very quickly" and "foreclosure activity would cease dramatically."

NCUA Executive Director David Marquis asked Mayfield whether WesCorp was even looking closely at external economic data to bounce its portfolio analysis assumptions off of. "They were not even going to that extent," responded Mayfield. "It was pretty bad."

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