ALEXANDRIA, Va.-Former Director of the Illinois Department of Financial Institutions Michael Fryzel joined NCUA in August 2008, and immediately concerns over the corporate system made their way to the new chairman's desk. In an interview with Credit Union Journal, Fryzel, now a member of the NCUA board, describes the mood and the thinking at NCUA in the months leading up to the conservatorship of WesCorp and U.S. Central, and shares how quickly concerns over WesCorp turned to full-fledged recognition there were significant problems and conservatorship was the only option.

Credit Union Journal: Apparently, it did not take long for you, as the new chairman, to become aware of issues at WesCorp?
Fryzel: In that first week there were rumblings about concerns within the corporate structure of the credit union industry. As we started looking into those concerns and asking questions we found there were tremendous issues with mortgage-backed securities held by the corporates. It was very clear in my mind we had a pending and significant problem developing, and U.S. Central and WesCorp were a focus. My first question was, "How could this happen?"

CUJ: How could it happen?
Fryzel: No one had the answers at that point on how the situation was allowed to deteriorate so quickly. Immediately we held numerous staff meetings talking about the situation, getting documentation, getting information from the corporates, sitting down with people who had been working with the corporates at our agency. We were trying to determine where we were at, get a handle on the significant problems, and what we were going to do to address them.

CUJ: When did it become clear NCUA had to step in?
Fryzel: In the fall of 2008 it was determined that action had to be taken, that the corporates would not be able to survive without some severe action, and that if we did nothing and let nature take its course, there would have been thousands of natural-person credit unions impacted, some going out of business.

CUJ: Looking back, was there ever a real alternative to conserving WesCorp?
Fryzel: No. The corporate could not survive any longer on its own. It needed significant help and the only way that help could have been given is if we took control, to provide the type of assistance they needed-from us, the Treasury, and through the different programs we came up with to put liquidity into the system, and then develop the corporate stabilization plan with the consent of Congress to get this matter resolved.

CUJ: Was conservatorship the only solution proposed?
Fryzel: We came up with all types of scenarios as to how we should handle the situation, including what would happen if we conserved U.S. Central and WesCorp, and if necessary conserved the entire corporate system.

CUJ: If NCUA raised the matter of conserving the entire system, there must have been concerns over a complete failure of the corporates?
Fryzel: Correct, which is why we did not take that action. In the end we did not see a total failure occurring. We weighed all the different factors and considered what the impact would be from each decision on natural-person credit unions and the CU industry forever going forward. We had to continually look at what was going on, how significant the problem was becoming, and how deep the problem was in an effort to really make the right decision.

CUJ: In retrospect, with trouble obviously brewing at WesCorp earlier than late 2008, why did it take so long to come to the conclusion to conserve WesCorp, which occurred March 20, 2009?
Fryzel: NCUA did not have the expertise to really look at these investments in-depth. I remember in the fall (of 2008) asking, "What is the dollar value of these investments, the potential losses,' and my staff could not give me the answer because we did not know the answer. We did not have the people who could find out the answer. I said we have to go outside and get the expertise, and that's when we hired PIMCO to do the first study of these mortgage-back securities. That's when we got some hard-core definitive, honest information.

Before we conserved we were getting information from the corporates that did not make sense, the numbers did not match with what we thought they should have been, both at WesCorp and U.S. Central. We were not getting the numbers we should have been getting. Only when we got the PIMCO numbers did we know for certain we were on the right track, which is why we had to conserve.

CUJ: You had examiners on site at Wes-Corp for 15 years. It has been asked many times, where were the regulators?
Fryzel: Examiners were on site, and I asked the same question: "My God. They are sitting over there, what are they doing every day? What were they looking at?" Looking back, though, when you have an examiner at WesCorp every day, he becomes very familiar with the people he is dealing with. He takes for granted what (management) is telling him and does not look far enough into what is being said to make determinations as to whether or not that is actually the situation at the corporate.

CUJ: NCUA has taken a lot of heat from natural-person CUs over WesCorp's failure, as have the corporate's leaders. Who is to blame for the collapse?
Fryzel: I said in the beginning there was enough fault to go around for everyone. NCUA could have done a better job. The corporate's officers and directors did not do their jobs. The two major trade associations should have been more involved with the corporates-they were always promoting the corporates and they should have wondered what was going on. Even natural-person credit unions did not do their due diligence.

CUJ: But, as you mentioned, that was not always the perception of credit union leaders.
Fryzel: You had no idea what it was like that first year. I would go out to visit credit union audiences and you would think I was the one who caused the corporate crisis. Credit unions wanted someone to blame. I said we can blame each other for not doing the job that should have been done.

CUJ: But NCUA certainly felt blame resided with WesCorp management, enough for the board-during a March 16, 2009 meeting-to ask Scott Hunt (then acting director in the Office of Corporate CUs) whether any "malfeasance" occurred, and whether WesCorp was "filtering" its numbers.
Fryzel: There, we were basically laying the groundwork for NCUA to be able to go after anyone we needed to go after to mitigate damage to the credit union system. The actions that were taken by the officers and directors of WesCorp, and some of the other corporates, were totally out of the purview of what they should have been doing. They were negligent in their duties. They did not perform the type of tasks that should have been performed to make sure that corporate remained safe.

CUJ: Looking back, is there anything you would have done differently?
Fryzel: I feel really good about the steps we took. They were not popular at the time, people criticized the steps and said we were doing the wrong things; that they would not work. But the steps worked exactly as we hoped they would. I always told credit unions this will cost you a lot of money to get this done over a long period of time, but you will be left with a corporate system that is better . . . In addition we put in place the type of regulations that will prevent this crisis from ever happing again. And we have a much stronger corporate system today than we have ever had.

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