WASHINGTON – NCUA told a congressional committee that a government-wide ban on contingency legal arrangements does not apply to suits it has brought against Wall Street banks over the failure of the corporate credit unions because as liquidating agents for the corporates it is not acting as a “government agency.”

The government-wide ban “does not prohibit the NCUA from entering into contingency fee arrangements when it is serving in its capacity as Conservator of as Liquidating Agent of a federally insured credit union,” NCUA’s Inspector General told Rep. Darrel Issa, chairman of the House Oversight Committee, who requested the information. “In brief, NCUA as Conservator succeeds by operation of law to all the rights, powers and duties of the credit union. To be more specific, NCUA as Conservator “steps into the shoes” of the credit union and is no longer functioning as a government agency.”

The lawmaker questioned the legality of the contingency agreements, which were banned for all federal agencies under a 2007 executive order by President George W. Bush. But NCUA responded to an earlier inquiry about the agreements by explaining it is an independent federal agency and not bound by such executive orders.

Issa had called on NCUA for information regarding lucrative fee arrangements the agency has struck with several law firms representing the agency in multi-billion dollar civil suits against Wall Street banks over their sale of mortgage-backed securities to the five failed corporate credit unions. The Congressman asked NCUA’s Inspector General to investigate the use of so-called contingency fees in the Wall Street suits, in which NCUA is requesting billions of dollars in damages in compensation for the failed corporates. With contingency fees lawyers payments are contingent on the amount of money they recover, rather than on an hourly rate.

Issa especially questioned the $170 million in out-of-court settlements NCUA has recovered to date from Wall Street banks Deutsche Bank Securities, Citigroup and HSBC, saying that 25%, or $42.5 million, has gone to two law firms hired under a contingency agreement. “Because of the unusual fee agreement, only $127.25 million flowed into the estates of the failed credit unions,” noted Issa. "Any fee arrangement that reduces the amount of money in the Stabilization Fund places a greater burden on the (NCUSIF) members in terms of fees and assessments," he wrote.

The brunt of the legal claims amounting to billions of dollars, though, are still pending, providing a potential windfall in legal fees for the outside firms representing NCUA, noted the California Republican.

The NCUA Inspector General responded by saying the agency believes the contingency arrangement is the most economical, considering the time and cost involved in analyzing hundreds of securities, issuing hundreds of subpoenas, taking testimony from hundreds of witnesses, drafting complaints and pursing the suits. “We also learned during our review that (Office of General Counsel) anticipated a protracted, complex litigation with considerable risk that there be little or no recoveries,” wrote the IG to Rep. Issa.

“To summarize, we believe that the contingency fee arrangement the Conservator entered into with the firms was a cost effective arrangement, was reasonable in light of the uniqueness of the litigation, and did not result in member credit unions paying, in effect, unnecessarily high legal fees,” said the IG. “Moreover, we believe that NCUA, when it entered into the (contingency arrangements) sufficiently considered the relevant public policy objectives in light of the potential negative impact of contingency fee arrangements on the interests of member credit unions.”

Finally, we found that (the government ban on contingency arrangements) does not cover the NCUA when, in its capacity as Conservator of Liquidating Agent, it enters into a contract for outside legal services on a contingency fee basis.”

NCUA has filed civil suits over the past two years against JP Morgan Chase, Goldman Sachs, RBS Securities, UBS Securities, Credit Suisse Securities, Barclays Capital and Wachovia Securities (now a unit of Wells Fargo), which are all pending, claiming the banks sold faulty MBS that contributed to the failures of the five corporates, U.S. Central FCU, WesCorp FCU, Members United Corporate FCU, Southwest Corporate FCU and Constitution Corporate FCU.

In each of the suits NCUA is represented by Kellogg Huber Hansen Todd Evans and Figel PLLC, one of the two firms which split the $42 million in contingency fees for the three out-of-court settlements, providing a potential for a huge payday for the Washington, D.C.-based law firm.

Congressman Issa asked the NCUA Inspector to determine whether President Bush’s executive order should cover NCUA and whether the contingency fee deals are the best possible alternative under the given circumstances.

According to Issa, the Federal Housing Finance Agency, which is suing several of the same Wall Street banks for securities they sold to Fannie Mae and Freddie Mac, does not use contingency agreements because it considers them a bad value.

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