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.

At the May 21, 2007, meeting, WesCorp reported that it had decided on a director of enterprise risk management, promoting Sherelle Messer. At that time capital stood at 5.72%. The meeting marked the first time this year an investment was listed in the "securities watch list."

In June 2007, with WesCorp now behind the date is would typically release its prior year audit, credit unions began asking about the delay in the 2006 numbers. Cloherty reported that WesCorp's previous accounting firm, which had performed its 2005 audit, had concluded that the corporate's derivative documentation was sufficient to achieve hedge accounting. But the new firm used for 2006 financials disagreed. "As a result, WesCorp is unable to issue comparative financial statements for 2005 and 2006. There are several possible outcomes or ways to resolve the issue: come to an agreement with the current auditors; re-audit 2005; terminate the current auditor and re-audit 2006, issue single-year non-comparative statements for 2006 as there is no regulatory requirement for comparative statements."

 

'Going Really Well'

Lane responded that while there is no date by which the audit must be completed, "WesCorp is getting at least a couple of inquiries a day from members on this issue. So it would be good to resolve it quickly. Credit unions will soon be expecting a resolution to this issue."

Siravo closed his report by saying WesCorp's business is "really going well."

Next month, at the July 24, 2007, meeting, Siravo and the leadership team-at least in the board meetings-did not share any concerns over WesCorp's investment portfolio when signs of the mortgage meltdown going on in the country and especially in California were clearly present-and staring the corporate in the face. Sidley reported that one natural-person credit union that had been borrowing from WesCorp was suffering serious problems with its home equity portfolio. He pointed out that about 75% of the CU's assets were home equity loans, most of which were secured by option ARMs.

"Starting in the third quarter of 2006 the monthly payments began going up on the option ARM loans and the borrowers could not make the payments, which also put the second in jeopardy as well," stated Sidley. "Consequently, the credit union has experienced some large losses. WesCorp became involved in this issue the last week of June and has been in communication with both the credit union and NCUA since then."

After earlier allowing its capital to drop below the 6% minimum called for in its internal policy, WesCorp in the minutes projected capital would come back above 6% by June 2007. But capital did not quite reach that mark (5.95%), and the board approved another waiver of the capital standard, this time for June and July.

 

Summer Gets Hot

As the summer heated up in San Dimas, which is east of Los Angeles, so did the pressure on WesCorp to release audited financials for 2006. Nevertheless, the board minutes show that WesCorp was still uncertain when the numbers would be released or which auditing course it would choose.

The minutes make clear, however, that WesCorp realized that the sooner it completed the audit, the better for public opinion. Lane reported that WesCorp had begun receiving inquiries for audited financials from external parties, including creditors. One long-standing WesCorp creditor, whose name is redacted, informed the corporate it was in violation of one of the covenants of their agreement-to provide audited financial statements. "Due to this violation, we are not able to draw down from that line of credit until audited financials are provided," said Lane.

"We have also received inquiries from a significant number of credit unions, the most recent being Hawaii State, [which] informed WesCorp yesterday that they have put a moratorium on new deposits with WesCorp, including future rollovers of maturing certificates," shared Lane.

With creditors and CUs concerned over the lack of 2006 financials, a great deal of discussion ensued among Chairman Bob Harvey (then the CEO of Seattle Metropolitan Credit Union), Lane and Siravo about releasing audited numbers. Harvey, while allowing management more time, was clear he wanted some sort of plan to get the financials out. "There is no question that at some point in time WesCorp will have to fish or cut bait," Harvey told the group.

Harvey was clear that delays could not be tolerated if they began to impact operations. The chairman also stated the plan must address what WesCorp will do if it does not "get a favorable [audit] opinion."

 

Concern Over 'Appearances'

The minutes show that all of that led to significant discussion among the board about "appearances," especially if the decision was to "fire" the current auditor. The minutes show the supervisory committee was clear that if the current auditor were to be fired it would give the appearance WesCorp was "opinion shopping."

Harvey noted that the board and supervisory committee were not "finding fault" with management, but emphasized the audit report is needed to continue operations and that WesCorp is "between a rock and a hard spot."

Discussions were raised about the importance of communicating to credit unions that the delay in financial reporting is the result of an accounting issue and not a "loss" issue.

"It is a problem between two accounting firms and WesCorp is stuck in the middle," said board member Gordon Dames, then the CEO of Mountain America Credit Union in Salt Lake City.

Lane responded that WesCorp did have a communication plan and had followed it, adding that he had connected with about 95% of WesCorp members regarding the situation.

"Regardless of their understanding of the situation at a staff level, the credit unions have a difficult time explaining it to their board of directors," said Lane. "There are only a handful that have some intimate knowledge of derivatives and hedge accounting and FAS 133. So the best communication in the world, one that provides a lot of clarity at the staff level, is difficult when you take it to the next step with the board. While the credit union staff may understand it, it is not that meaningful in the end when it is being explained to a board of directors."

 

Special Meeting Of Board

On Tuesday, Aug. 14, 2007, at 8:30 a.m. Pacific time, Harvey called a special meeting of the board via telephone, largely, as the minutes showed, to discuss the economy and steps WesCorp would take to ensure it had necessary liquidity.

"This is a very interesting time," observed Bob Burrell about the economy, adding he had not seen "anything like it in the last 30 years. A number of players, especially in the subprime market, were hurt substantially in markets that have weakened dramatically. Lower-rated subprime bonds-an area that WesCorp is not involved in-was especially hard hit. Some bonds are trading for only a few cents on the dollar at this time."

In its material loss review of WesCorp following its conservatorship, NCUA's Office of Inspector General concluded the corporate should have had much greater investment risk controls and been "more vigilant about investing so heavily in higher risk residential mortgage loans taken out by borrowers with the questionable ability to repay the mortgages. ... WesCorp pursued a strategy of purchasing privately issued RMBS collateralized by subprime and Alt-A residential mortgage loans, which we believe reflected relaxed lending standards. Specifically, we determined the underlying collateral was comprised largely of subprime and Alt-A mortgages underwritten with risky loan terms or characteristics."

According to the IG, using NCUA-provided data valued as of December 2008, WesCorp's RMBS portfolio classified as Alt-A and subprime was $13.7 billion and accounted for 60% of the total $22.7 billion investment portfolio and 87% of the $15.8 million privately issued RMBS segment of the portfolio.

Discussing the impacts on Wall Street and the growing inability to sell assets, Burrell said, "liquidity is the name of the game. WesCorp wants to take some decisive actions to make sure WesCorp has enough liquidity to carry us through this period."

 

Reaching Out To FHLB

Burrell proposed WesCorp increase the credit limits to the institutions that are still actively involved in the market, noting the Federal Home Loan Bank (FHLB) was not having any financing problems and seemed to be a stable source of liquidity. "They are prepared to lend us up to 30% of our total assets. Staff is not suggesting that we go to that limit, but we are looking at increasing our limit. Market prices are substantially depressed across all markets. Spreads have doubled in the last 30 days. There is some stability at the moment, but we're waiting for the next shoe to drop.

"We're in a very unusual situation," continued Burrell. "WesCorp wants to take decisive action to ensure liquidity is available at reasonable prices, and that is what this proposal is designed to do."

Harvey asked for a motion, which was approved, to increase for three months the repurchase counterparties limits from 50% to 100% of capital. The second part of the motion was to increase the amount of membership stock that could be held with the FHLB-San Francisco from $100 million to $200 million.

Siravo closed the meeting reporting that mergers that were in progress with Colorado-based SunCorp and Tennessee-based VolCorp "are going well."

 

'Solid As A Rock'

The WesCorp CEO added that in regard to what was discussed about the trouble in the financial markets, in respect to WesCorp, "we're as solid as a rock. WesCorp's numbers coming out this month will be stronger than projected. There aren't any write-downs, write-offs or potential for significant gains or losses to be realized. Everything is tight."

In September 2007, WesCorp's securities watch list expanded, as did WesCorp's need to extend its capital requirement waiver. With capital at 5.99%, the corporate extended the waiver through December. The minutes, from December 2007 forward, never again addressed WesCorp's capital ratio. However, next month, at the October, 2007 meeting, VP of Balance Sheet Management David Trinder discussed a "method for computing WesCorp's internal total capital ratio, saying, "WesCorp's internal requirements will meet regulatory requirements."

WesCorp's board then approved an amendment, not detailed in the minutes, to its corporate policy.

With 2007 winding down and concern from member credit unions over the delay in reporting 2006 financials not subsiding, at the November 2007 board meeting WesCorp approved changing audit firms and re-auditing 2006 financials at a cost of $400,000. Lane reported that the new audit team, whose name was redacted in the minutes provided to Credit Union Journal by NCUA, had been at WesCorp for the past three weeks and that WesCorp was on target to have audited 2006 financials by year's end.

Siravo told the board that 2007 had been a banner year for WesCorp despite the accounting issues.

 

Strain Being Felt

But that banner was starting to show some tears. Besides the securities watch list now expanding each month, the first signs from the minutes of any WesCorp action that would indicate potential concern about its investment portfolio came when the board approved holding until maturity a First Franklin Mortgage Loan Trust security downgraded by Standard & Poor's from AA to BBB.

A month later, at the December 2007 meeting, the sting of the economy meant talk of potential losses could not be put off. For the first time minutes record boardroom discussions addressing unrealized losses. Siravo set the number at $844 million for the end of November, saying WesCorp planned to hold the securities until maturity and that "there is plenty of liquidity to hold them."

Siravo closed out his monthly report saying WesCorp's team "continues to do a wonderful job. Payment systems is on course, investments had a very good year; and the Hawaii operation is also having a wonderful year."

 

A New Year, But...

The calendar turned to 2008. But the new year did not mean a new direction for WesCorp's investment portfolio or America's real estate markets. At its first meeting of 2008, on Jan. 22, Laura Cloherty began by going straight to unrealized losses that had reached $931 million-and suggesting through a detailed explanation that the situation at WesCorp was not as bad, or at least the same, as at many other corporate CUs.

"There have been a number of questions regarding this figure and what it represents. This number is not necessarily comparable to the unrealized losses on other corporate financial statements for several reasons," said Cloherty. "WesCorp has three separate components in this number. The largest component is the fair-value mark on our securities, and that is the biggest piece. At the end of November that amount was $850 million and at the end of December it was $912 million. Our securities mark on a pure level improved in December, though because of accounting requirements, some of the positive gains are moved out of the securities' fair-value figure and are booked under FAS 133, so they are not seen in this number.

"There are two other components that make up WesCorp's unrealized loss, but they are not as big as the fair-value mark component," continued Cloherty. "These components are the effective piece of WesCorp's cash flow hedges, and the final component, which is new as of the end of 2007 and is part of required transition entry for FAS 158, which requires that all benefit plans be booked on the balance sheet. Previously the benefit plans were off-balance sheet. When WesCorp's unrealized loss is compared to other institutions, it is not necessarily apples to apples. The fact that our fair values are in the unrealized number and not realized is due to the fact that WesCorp does not believe the losses to be other than temporary, and it is expected that the values will be recovered."

 

Requirement Is Waived

While those inside WesCorp shared concerns that outside its walls others might perceive the corporate had been opinion shopping with its 2007 change in auditors, the board voted to waive an internal requirement that WesCorp rotate its external audit partner every five years. The minutes indicated that a new partner was brought on for the initial 2006 audit to abide by the supervisory committee rule. That firm, the minutes revealed, was replaced by the same firm that provided WesCorp's 2005 audit opinion, which the corporate giant was happy with, and then delivered the 2006 re-audited financial statement that was released Dec. 31, 2007.

"Based on the recent audit issues and WesCorp's current derivative accounting issues, it seems to be in WesCorp's best interest to waive this particular aspect of the supervisory committee responsibilities for the short term," said Supervisory Committee Chairman Dave Roughton. "This waiver would allow [the current auditor] to work with WesCorp for the audits of 2006, 2007 and 2008."

Siravo lauded the team for getting the '06 financials out by Dec. 31, citing "extraordinary efforts of WesCorp's accounting department and the auditors. ... Both staffs began working as many as 18-hour days, including weekends. Christmas day was about the only day during this period that staff was not working on the audit."

When the board met in early March 2008, after failing to meet in February, Siravo still believed the SunCorp merger would take place, but now the merger package would be submitted to NCUA when the unrealized losses on WesCorp's balance sheet "no longer exceeds RUDE plus PIC capital." The VolCorp merger, which was never completed, was not discussed, nor was it mentioned in the minutes after the November 2007 board meeting. That merger was scuttled in part due to a unique situation in Tennessee that required the legislature to vote on the matter.

 

Securities Are Reclassified

The April 22, 2008, meeting began as did most board meetings in 2007 and 2008-with Cloherty reviewing WesCorp's positive financial results. She reported that for March the increase to retained earnings was above plan by $7.3 million. "The majority of this variance was driven by a positive variance of $6.3 million in net interest income (NII)."

But what may have also impacted the positive numbers, the minutes showed, is WesCorp deciding to reclassify some of its securities to held-to-maturity (HTM). "There are now $9.7 billion of securities classified as HTM," reported Cloherty. "The majority of WesCorp's CDO (collateralized debt obligations) securities were selected-and all of its Alt-A securities-for reclassification. WesCorp already has the ability and intent to hold these securities until maturity. This reclassification serves to solidify that intent. These securities were selected primarily because there is no longer an active market in these sectors, and therefore a recovery in value may be prolonged . . . this classification protects us from recording additional unrealized losses going forward."

On May 19, 2008, after WesCorp earlier in the year had addressed its unrealized losses as not being comparable to unrealized losses on other corporate financial statements, Cloherty addressed what WesCorp's call report showed as negative equity, and again provided a detailed explanation.

"WesCorp has received questions regarding the negative equity that is shown on this report," she said. "Under the shares and equity section, line item number three, total shares, this number contains WesCorp's $1-plus billion of MCA accounts that count as part of our capital. In item number four, you will see the total equity is negative. Although WesCorp does not have negative capital, it is the format of the NCUA report that is giving the impression of negative capital."

Cloherty went on to explain that capital is best described on "schedule C-1. On this schedule, you will see the $1-plus billion of MCAs included. The total capital as of the end of March 2008 was actually $2-plus billion. WesCorp does have unrealized losses of $1.6 billion, but does not have negative capital."

Cloherty concluded by saying she wanted the board to understand what member credit unions are seeing, so the board could respond if they received questions.

Siravo in his report noted that the "spreads are narrowing and the unrealized losses are starting to decline." He also noted that the merger with SunCorp "looked good."

At the following month's meeting, Cloherty reported that May was another strong month, with net interest income ahead of plan by $7.5 million. "On a year-to-date basis, NII is performing well above plan by $18.9 million. ... The unrealized loss amount shows an improvement of $135 million from April's figure."

After a year in which WesCorp struggled to release audited financials, on July 22, 2008, the summary of the 2007 audit was finally released. The name of the auditor was not redacted in the minutes and indicate it was performed by KPMG. A person not listed in the minutes as a WesCorp staff member or member of the board or supervisory committee, joined the meeting via teleconference at 9 a.m. to report there were no material weaknesses, no deficiencies and no required communication to the supervisory committee that were a result of the audit.

Siravo reported that WesCorp's financials "are very strong" even with negative income for the month of June.

 

Public Relations Concerns

While the minutes indicate that WesCorp appeared happy with the 2007 audit, at its August 26, 2008 meeting Cloherty said WesCorp was nevertheless considering two additional outside audit firms. That brought a comment from board member Jim Jordan that the supervisory committee and staff needed to be very aware of the public relations aspects of another audit firm change.

It would not be until the final meetings in 2009 that there was discussion at the board meeting that would spark serious concern among attendees about WesCorp's future. But there were some indications prior to that. Siravo, in 2008, expressed concern over WesCorp's efforts to make sure its liquidity positions were solid. "There is not a cause for alarm, but WesCorp wants to be very prudent in how it's set to deal with liquidity."

WesCorp member credit unions were getting antsy about the economy, their own bottom lines and their corporate. WesCorp responded by waiving for three months a policy that required the corporate to maintain a minimum of $1 billion in immediately available funds, due to "volatility in member balances and uncertainty of overnight funding sources."

The SunCorp merger also had taken a turn, with Siravo stating that from discussions with NCUA, "WesCorp would put the merger proposal on hold for a month and then re-evaluate the issues."

 

Liquidity Gets Attention

By September 2008, the topic of liquidity was high on Siravo's report. He updated the board on the liquidity issues in the broader credit union industry and the frozen capital markets, discussing WesCorp' s preparation to borrow from the Federal Reserve Bank and the increase in funding of the Central Liquidity Facility. Siravo also discussed the capital structure of the corporates.

"There is enough capital in the system, but because of the way it is structured it isn't working. The BASEL structure partially recognizes PIC and does not recognize MCAs," said Siravo. "When the rating agencies evaluate the corporates, they end up not having enough RUDE. This needs to be changed. The first step is with U.S. Central and getting them up to a minimum standard. Action is not being taken now because there are some issues with the accounting firms. The answer will be figured out eventually."

Minutes showed that WesCorp, again, changed accounting firms for its 2008 audit.

Liquidity pressure mounted for WesCorp in October 2008. Director Warren Nakamura and the ALCO team reported that in the last month S&P downgraded a total of 66 WesCorp securities, or $2.1 billion. "There were 21, or $664 million, that were downgraded below policy minimum, and 45, or $1.4 billion, below regulatory required minimum. The ALCO recommends that the board approve holding these securities in portfolio subject to acceptable credit watch memos being produced."

 

Doing A 'Very Good Job'

Despite the growing number of securities downgrades, Siravo in his report for that month saw no OTTI in the foreseeable future. "There are still questions as to whether WesCorp will have any OITI in 2008. So far, the answer is no. WesCorp will know more next month when more analysis has been completed . . .WesCorp is doing well, the cash flows are good. Deposits are down, but it is not critical and staff is doing a very good job."

The CEO also observed how WesCorp members were viewing their corporate at a time when a lot of scrutiny within the credit union community was being directed toward the corporate's campus in San Dimas. Whether he was holding information back or member CU execs were holding their tongues, the CEO noted that he's been doing a lot of speaking at credit union meetings with WesCorp "receiving strong support and feedback."

Again, in November 2008, the ALCO requested another three-month waiver of the $1 billion minimum in immediately available funds "because the market has not improved since August," said Nakamura. The policy waivers, including lowering the capital minimum, in hindsight indicated WesCorp was hoping the economy would turn quickly despite very deep and fundamental problems. The waivers would prove to be little more than delay tactics.

The minutes showed WesCorp charged forward despite the warning signs, whether they came from NCUA, opinions from its chief economist or from within its own balance sheet. WesCorp's securities watch list had steadily expanded since mid-2007. Now, according to the November minutes, this entry had been largely replaced with a long list of security downgrades. Still, Siravo stated that "WesCorp's financials are doing well and the spreads have been very helpful toward making 2008 a banner year."

But Tony Kitt, SVP of payment systems, showed some concern, at least for member perception of WesCorp's problems, saying that marketing and member services are "focusing very intently on member confidence. WesCorp is working on a campaign to show the value of corporates to credit unions, as well as [their] safety and soundness."

 

Happy Holidays

In line with WesCorp's overly optimistic view of what was in store for the economy and the housing market, in December, 2008, two days before Christmas, Cloherty reported that November was the strongest single month ever recorded by WesCorp. "The increase to retained earnings for November was $10.9 million, which represents a favorable variance to plan of $6.9 million. On a year-to-date basis the increase to retained earnings is ahead of plan by $35.3 million."

At the same time WesCorp reported record earnings, the handwriting on the wall for its securities portfolio was getting clearer, the minutes showed. Cloherty reported that in November the unrealized losses increased in total by nearly $700 million. "The majority of this decline in value was attributable to the CMBS sector, which was hit hard in November. Although it is not recorded in WesCorp's financial statements, values in the HTM portfolio also declined by an additional $887 million, primarily driven by declines in the Alt-A sector."

Cloherty and WesCorp were apparently looking for some relief from the Federal Accounting Standards Board (FASB) so as to avert having to post OTTI anytime soon, with Cloherty reporting that FASB met on Dec. 15 to discuss OTTI measurement issues. But relief would not be forthcoming.

 

'Surprised' At Moody's

"WesCorp staff listened to the meeting and was disappointed in the narrow scope of FASB's discussion on the issue," she said. "It is apparent that WesCorp cannot expect any movement on this issue from FASB in time for year-end reporting. There was some discussion on the possibility of fair value measurements being written back up if the values recover in the future, which is not allowed today. This solution is really too little, too late, in WesCorp's opinion."

Siravo, in his monthly report, admitted to being "surprised" by the "severity" of Moody's Dec. 22 downgrades on securities, many of which were held by other corporates and WesCorp. He added that he expected S&P to take a similar action. The CEO noted that WesCorp had been notified by NCUA that the SunCorp merger was on hold and that NCUA was not ready to move forward due to the "unstable conditions."

Cloherty kicked off the Jan. 20, 2009, meeting saying that December 2008 financial statements could be skewed due to the fact OTTI, "if any exists at year end," was not reflected in the numbers. She said December data needed for the analysis was not available at the time the December books were closed, and added that WesCorp was running a concurrent internal analysis for those holdings in its portfolio where it is believed the greatest risk of loss existed.

 

Outside Eyes

By late 2008, however, other eyes had begun to review WesCorp's investments, eyes not commissioned by WesCorp or employed by the corporate. Hoping to pull back the covers and gain greater insights into potential trouble at WesCorp, NCUA commissioned PIMCO to conduct an analysis.

It would later be revealed by NCUA and its Inspector General that WesCorp's internal analysis contained forecasting assumptions and models that were overly optimistic about the future of the housing market and the economy. That internal analysis led to minutes showing that as of September 2008, WesCorp's CDO holdings were still showing no losses.

The CDO securities, the IG would later reveal, were troubled, collateralized partially with non-investment grade real estate-related securities.

 

'Garbage In, Garbage Out'

As reported by Credit Union Journal in July 2012, WesCorp Chief Economist Dwight Johnston stated that in 2008 management at WesCorp tweaked their ALM models to factor in a potential, larger economic downturn. But those models never considered any scenario in which WesCorp's securities would be affected to the point where the return of principal would ever be a question, Johnston said. "But all these sophisticated models failed to capture the extent of what was really behind the securities-so garbage in and garbage out."

Meantime, WesCorp was meeting with an audit firm, whose name was again redacted, to review the methodology used for its internal analysis. "The determination of the existence of OTII is complex and requires judgment," said Cloherty.

That judgment led to a huge difference between WesCorp's internal portfolio analysis-which would be shared with NCUA at the close of February-and PIMCO's review.

Up until the final months of WesCorp's life, before it became Western Bridge Corporate FCU, did the country's second-largest corporate feel any real pressure from outside the organization to change its course, the minutes showed-not even with NCUA examiners in house, leading many to wonder why the CU regulator waited so long to move.

But the freedom to set its own course was slipping away quickly in early 2009. The board minutes show the walls had begun closing in on WesCorp, Siravo and the rest of the management team.

Just 10 days after the Jan. 20 meeting, Chairman Bob Harvey called a special meeting of the board via telephone with one topic on the agenda: the OTTI issues within the corporate system and all the national news about the losses. The minutes revealed that the board had many questions for Siravo, many stemming from all that was happening around WesCorp, including the write-downs being reported by U.S. Central Credit Union in Kansas.

 

Negative Press Coverage

Harvey opened the meeting by commenting that the board had seen the numerous newspaper articles related to investment losses among corporates. "There are still many questions regarding the corporates and their future," said Harvey, before asking Siravo for details and some explanations.

Siravo said "the situation is still fluid and information is coming from many different directions. Some of the information is accurate and some is not, and the information is changing." He discussed the OTTI write-down that U.S. Central had recently reported and how analysts had come to the current position for U.S. Central. WesCorp's OTTI write-down situation was discussed, including the fact WesCorp was hiring an additional firm to analyze to its portfolio.

Questions were asked about NCUA hiring PIMCO to review WesCorp's portfolio and the possible outcome of U.S. Central writing down the full $1.2 billion OTTI on their balance sheet. Just as natural-person credit unions were getting concerned over their own PIC in WesCorp, the minutes showed WesCorp itself had $67 million of PIC II investment in U.S. Central.

 

An Understatement

At the Feb. 22, 2009, board meeting, Siravo's initial observation-in retrospect-was a huge understatement. The CEO said that the corporate system's OTTI problems "are probably the biggest issue that is occurring in the credit union industry at this time. WesCorp is being looked at closely, since it is the only corporate that has not yet reported OTTI. WesCorp is working very hard and has three consultants analyzing the portfolio to assist with a final decision on the OTTI issue."

Siravo too, seemed to be hoping for a bailout, if not a miracle, from newly elected President Barack Obama to turn the economy around. Citing the Obama Stabilization Plan that sought to inject $1 trillion into the economy, Siravo said, "The impact may be more of stabilization, rather than a lift. It's projected that there will be a second trillion that will follow in the fall, and this should lift the economy. The homeowner's assistance plan will have a positive effect. WesCorp is hopeful that the final details on March 4 will include private-label mortgages. WesCorp holds private label bonds."

 

'Outlook' Is Cancelled

Prudently, Siravo then discussed the possibility of canceling WesCorp's CU Outlook meeting in Las Vegas and finding a new location.

On March 3, 2009, Harvey would call his final board meeting as WesCorp chairman. He did so at 10 a.m. Pacific Time, and called the group together via phone. It was the second special board meeting in less than two months. Harvey called the meeting as soon as he received a letter from NCUA, which he said he had been delayed in picking up, ironically, because he had been attending CUNA's GAC just a few miles from NCUA's headquarters in Alexandria, Va. WesCorp received the letter Feb. 23.

The minutes do not state clearly the precise wording of the NCUA letter, but it is apparent NCUA pressure was mounting on WesCorp to share OTTI numbers. In minutes from NCUA's 2009 board meetings, the agency shared that it had been working for some time to get OTTI numbers out of WesCorp, even considering legal action to "compel" WesCorp to produce OTTI numbers (CU Journal, July 23, 2012).

Siravo started the meeting addressing the OTTI issue, making note of the letter WesCorp received the previous week from NCUA. Siravo explained the process and modeling that staff had been using to establish an estimated OTTI number for NCUA, and said on Feb. 27, 2009, WesCorp had given NCUA an estimated OTTI number of $222 million on its Alt-A portfolio. WesCorp's low OTTI estimate was $106 million based on "relatively defensible standards," according to Siravo.

 

'Possibility Is Still Zero'

The CEO, whether knowingly holding back the reality of WesCorp's situation or blinded by hope, still held onto the chance the economy would turn around dramatically and no losses would be incurred. Siravo made a statement that PIMCO auditors, sifting through WesCorp's portfolio at the time, would have been shocked to hear: "The far outside OTTI possibility is still zero."

Siravo stated that WesCorp was not forecasting that any bond would break until November of 2009. "The largest portion of the breakage is in 2012 or 2013, so market recovery could have a significant impact on these numbers. Modeling WesCorp received from NIR suggests that there may be as much as a 30% increase in the performance of WesCorp's bonds with the Obama modification plans."

For its CDO portfolio, Siravo said OTTI would likely be $180 million, taking combined OTTI to about $500 million. Siravo estimated that PIMCO would come in higher-but even Siravo's estimates of PIMCO's analysis were well below what the audit firm would soon share with NCUA, which would be the final piece of information NCUA said it used in making its decision to place the corporate in conservatorship. According to 2009 NCUA board meeting minutes, Scott Hunt, then acting director of NCUA's Office of Corporate Credit Unions, said PIMCO's analysis was the "last layer" of confirmation of concerns that "quantified exposure across a full spectrum of WesCorp securities."

PIMCO's OTTI estimates, as NCUA board minutes showed, were about $900 million on the securities it modeled. But on March 19, Hunt outlined to the NCUA board the real problem: "Conservative" WesCorp loss estimates were $2.4 billion and "pessimistic" estimates were as high as $5.1 billion.

NCUA's Hunt, along with Rick Mayfield, then a member of Hunt's staff, said WesCorp was hoping for a sharp turnaround in the real estate market and that foreclosure activity would improve dramatically. Mayfield added that WesCorp, in its modeling, was not even looking closely at external economic data off of which it could bounce its portfolio analyses.

 

'Safe and Sound'

While Siravo would eventually tell the WesCorp board there was a potential for up to $500 million in OTTI, a huge disparity existed between how WesCorp viewed its problems and what its investment sheet told others. In one of his final directions as WesCorp CEO, Siravo said the corporate would build a bridge between the OTTI numbers WesCorp produced and what was expected from PIMCO.

All of WesCorp's credit union members received a glimpse of Siravo's perspective on the country's economic future when the CEO-just hours before NCUA showed up and took over-sent an e-mail stating, "WesCorp is-and continues to be-safe and sound. ... We don't expect the credit losses to exceed our reserves and undivided earnings. Additionally, no member capital will be impacted by our current estimate of OTTI."

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