SAN DIMAS, Calif.-Dwight Johnston was stepping up to make a presentation at a WesCorp conference in 2008 when the jokes began again.

"Have you bought a house yet, Dwight," kidded WesCorp FCU CEO Bob Siravo as he introduced Johnston to the crowd of 400 CU executives and board members at the Credit Union Outlook Conference at the Wynn Las Vegas hotel.

Credit union folks in the big ballroom laughed, which is what Siravo expected from his kidding.

Johnston's housing situation was something of a running joke inside WesCorp, which was flying high at the time as the country's second largest corporate credit union. Its chief economist, Johnston, had put his money where his contrarian mouth was, selling his Southern California home in 2004 in the belief the local market and the country were facing a significant housing bubble that was headed toward an inevitable burst.

Johnston had regularly advised the WesCorp management team and board of his position on the tentative future of the housing market. The advice was anything but embraced. WesCorp was betting big on America's surging housing market and pouring hundreds of millions of dollars of its member credit unions' money into mortgage-backed investments as the U.S. raced headlong into a full-blown housing bubble.

WesCorp, like a number of other large corporates, would keep on betting on the "recession-proof" U.S. housing market right up until the end, and if its chief economist wanted to rent, well, that was his mistake. Real estate is the safest investment in the U.S., after all.

"A lot of people at WesCorp, in a nice way, sort of took my move as a joke," said Johnston, who, after leaving WesCorp, operated his own firm before recently being named the chief economist at California and Nevada Credit Union Leagues. "They said, 'There's crazy Dwight, selling his house,' as well as, 'You know economists, they're hardly ever right.'"

The Birth of the California Corporate

Western Corporate Federal Credit Union was born quietly in 1969 as California Central Federal Credit Union to provide liquidity to credit unions in California. In 1975 it expanded its charter to serve all CUs in NCUA's then Region VI, which included the western United States. A year later it changed its name to Western Corporate FCU, or WesCorp as it was better known.

Over the next 42 years it would come to reflect the Golden State itself, growing into the biggest and brashest of the corporate credit unions (other than the corporates' corporate, U.S. Central in Kansas). It offered rates and services that were the envy of many corporates, and many natural-person CUs pressured their own corporates to match its offerings, or else.

WesCorp would eventually move into an impressive corporate campus and lay claim to some $32-billion in assets. And then, much more quickly than all but a few might have ever projected, it began reporting quarter after quarter of potential losses, then partial losses, and finally write-offs to the tune of billions of dollars. On March 20, 2009, its life ended.

The once industry-leading giant became emblematic of bad bets, poor management and almost meaningless regulatory oversight-although NCUA board minutes reviewed by Credit Union Journal indicate some at the agency believe WesCorp was selectively "filtering" its numbers to minimize its losses and potential losses.

Its remnants would be reincorporated as Western Bridge Corporate Credit Union, but it would be years before anyone knew what was on the other side of that bridge. Despite extraordinary efforts to resurrect it under another name, most credit unions refused to sign on. Finally, what was left was picked from the scrap heap by another corporate, and on July 6, 2012, WesCorp's offices officially closed.

In this issue, Credit Union Journal offers a deeper look at the life and death of Western Corporate Federal Credit Union.

Living In A 'NINJA' Market

Johnston and his wife bought a home in Upland, Calif., in 1998, when the California housing market was fairly stable. Once the new century arrived, the housing market in 2001 began to explode, as it did in all the so-called "sand states," such as Arizona, Nevada and Florida. By 2004 the Johnstons' home had doubled in value. The country was caught up in a housing euphoria not seen in U.S. history. In some markets buyers were "flipping" a home on the same day it was bought, and turning a profit. Proof of income on loan contracts seemed almost a quaint, if meaningless, notion. Suddenly, "subprime" was as good as prime, and only a few naysayers were asking pesky questions such as how such a market trend could be sustained.

"I looked around at all the home prices skyrocketing," recalled Johnston. "I saw the crazy news stories, like a couple-a maid and a bus driver-buying a $700,000 home. I knew about the 'NINJA' loans that at the time were joked about-no income, no job, no assets."

Most of all, Johnston spotted signs in the economy that he argued pointed clearly to obvious signals that the rate of appreciation in housing could not continue. "I said to myself, 'This is nuts. I am getting out now and banking the money.'"

Raining On The Parade

While at WesCorp, Johnston, well respected nationally, authored a daily economics blog closely followed by credit unions in which he often included his housing market concerns. Those same issues were raised in the packets distributed to members of WesCorp's board of directors, itself made up primarily of credit union CEOs. Johnston reported directly to Chief Investment Officer Bob Burrell, who at the time was widely regarded by many inside WesCorp as the "investment guru."

Burrell had joined WesCorp in 1997 and would remain with the corporate until 2010.

"Management was well aware the housing bust was possible," said Johnston. "But from 2004 through 2007, no one inside WesCorp really wanted to hear about it."

No one wanted to hear about it for any of a variety of reasons, and in that regard WesCorp's story isn't all that different from other types of investment firms across the country. No one wants to rain on the Good Times Parade. WesCorp was making money for itself, its management team, and its member credit unions, and the latter would take their liquid funds elsewhere if it ratcheted down the yields it was paying.

Like other firms, too, WesCorp kept plunging into more and more housing-backed investments-investments that would lead to costs of $7 billion to resolve according to NCUA's latest numbers-was faith in the rating agencies and the risk models WesCorp was running against a possible housing downturn. Johnston said those models always showed its AAA-rated mortgage-backed securities could withstand a housing decline.

As 2008 progressed, Johnston recalled 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. "But all these sophisticated models failed to capture the extent of what was really behind the securities-so garbage in and garbage out."

At WesCorp portfolio meetings post-2005, Johnston could often be heard groaning in the meeting room every time the investment team rolled out a new mortgage-backed security purchase. "I would say, 'Why don't we start buying 10-year Treasury notes?' That would get a big laugh," he recalled.The fact that WesCorp leadership would tease Johnston about what were seen as overly pessimistic economic observations that ran counter to the corporate's investment plans was not a result of a management team moving blindly forward, but instead a byproduct of a team that looked at markets as optimistically as it could, according to Johnston.

"Bob Siravo and Bob Burrell remained very positive about the future of WesCorp almost until the very end. They were both very positive people. I don't think any employee at WesCorp really anticipated there were problems until the first Other Than Temporary Impairment losses were reported, which occurred in 2009."

The Optimism Paradox

It was that optimism that helped lead to the demise of a one-time $32-billion corporate, which for much of its life was as respected as any provider to credit unions.

What happened at WesCorp? The analyses run the gamut, from those who suggest WesCorp's rapid growth was driven in part by management seeking to build the nation's preeminent and largest corporate, to those who feel it was outright greed, as management's goal was to line their own pockets. Still others blame NCUA for first, opening up the corporate system to national competition, and second, for failing to rein in WesCorp or even recommend a more conservative approach, even as the agency had examiners on site for 15 years.

Those more closely connected with WesCorp, often working inside the former giant, feel the fault lies in all of those places and more-the economy, the investment rating agencies, NCUA, WesCorp management, and the drive by WesCorp in the later years to offer more services at low prices to natural-person credit unions. The latter, they say, stressed already thin margins and pushed WesCorp to seek greater investment yield.

Before Bob Siravo joined WesCorp as CEO, Western Corporate FCU was associated with one person: Dick Johnson. The former marine colonel was known as a no-nonsense but charismatic leader who had built a solid foundation and reputation for the corporate and who, in turn, had instilled a great deal of faith in the organization among the natural-person CU members.

Johnson led WesCorp from 1976 to 2002, taking it from $70 million in assets to $18 billion. At the time Johnson retired, capital exceeded $1 billion, providing sufficient earnings to pay for 100% of the corporate's expenses. Employees topped 450 and WesCorp was operating out of eight buildings spread across five western states. It offered virtually every financial service a credit union needed. Of the top 100 CUs in the country, 96 were members of WesCorp at the time Johnson retired. It was quite a success, given its modest beginnings.

In the late 1970s, WesCorp was a small central credit union housed at the California Credit Union League. Then-league President Bill Broxterman envisioned an expanded mission for the organization and became general manager. He later hired Johnson as manager and transferred three permanent employees from the league to help run the fledgling business.

"That was the beginning," said Johnson. "We had one office and a computer terminal linked to a single computer in Texas. It was a 'dumb' terminal with no ability to make changes. We could only read and input information, and it didn't help that not one of us was computer literate. We each had a telephone and a few credit unions would call us to find out how much they had in their accounts. There was very little activity. The board consisted of a few active duty credit union people and more retired past CU league chairmen."

The Battle In The Early Days

Johnson recalled it was a battle in the early days to get credit unions to switch their business from banks, because banks provided free checking. "Early on that was hard, if not impossible, to do. Credit unions did not want to switch their checking relationship, plus they were getting it free from banks, so they thought. They were earning very little on their money."

Slowly, WesCorp began to turn the tide, getting more natural-person credit unions to come on board as it offered a more competitive checking product than the banks, said Johnson, while at the same time it was also adding more services. As even more credit unions joined the organization, it was able to provide services at lower prices while continuing to build its product menu, he said.

"We gained more expertise, we added CDs, and then we got investments. I hired a really smart guy, Bob Burell, with 25 years of experience in investment banking. We were able then to pay rates that competed with any financial institution in the country."

But Johnson stressed that WesCorp under his leadership never attempted to pay the highest rates in the market. "We competed, but we never wanted to attract hot money." WesCorp's philosophy under Johnson, was "always about the people. Bring in the right people, treat them well, and they will have a great work attitude. Our staff did. WesCorp was a great place to be," said Johnson, who described WesCorp in the 1980s and 1990s as a bustling enterprise filled with people trying to do their best for natural-person credit unions. "It was great to walk down the hallways and see our employees hard at work," added Johnson, who noted that as WesCorp grew in size in the '90s, it became harder for him to stay in close touch with employees.

To fix that, Johnson recalled spending two weeks working among the rank-and-file to better understand what they were doing, find out what they needed in their roles, and to get a better handle on what credit unions needed from WesCorp.

"I always believed the answers to improving our business would come from our rank-and-file employees. It's that simple. They knew more than I did. They looked out for the best interests of our members, and if something was not in the best interests of our CUs, we didn't do it. Adhere to that thinking and your business success follows."

On The Move

In 1992, WesCorp relocated from the league's offices in Pomona, Calif., north to San Dimas, where it would operate out of an impressive and professional office space. The California league itself would eventually leave Pomona for Rancho Cucamonga, Calif., as well.

WesCorp's success was put on fast forward after Bob Siravo arrived as CEO, said Johnson, who believes his successor's business philosophy differed from his own. Siravo was a retired Air Force officer who had been CEO of Travis FCU before retiring and later taking over as CEO at WesCorp.

"WesCorp grew very fast under Bob. It took me 26 years to get to $18 billion, and Siravo got to $32 billion in seven years. When I was CEO, we always were careful to stay within our capabilities. It was not always a good idea to bring in more money.

"Bringing in lots more money rapidly wasn't something I thought about, nor did I know how to do. So I did not try," continued Johnson. "Watching Siravo work made me realize it was time for me to retire because I realized I could never do the things he could do; he was a very skilled and talented man."

Johnson kept in touch with many WesCorp employees after he retired, and recalled having lunch with Bob Siravo on several occasions, but said he did not pass on any guidance. "I try not to give advice. If someone asks my opinion I give it. But as a retired guy, I am not as up to date as those still working. They spend hours and hours on the issues. I don't."

In those meetings with Siravo, and with numerous other employees who would stop by Johnson's house nearly every month, the former CEO said that until the end he never believed WesCorp would collapse. "We were so strong. Credit unions really supported us. I could never imagine WesCorp failing."

Johnson wasn't alone in believing WesCorp could withstand any storm. Also confident was Walter Laskos, WesCorp's director of public relations, who joined the corporate from KeyBank in Cleveland, Ohio, and who recalled that it wasn't until right up to the Other Than Temporary Impairment (OTTI) losses began to mount that WesCorp management let on that there might be financial problems.

So Many 'Good Things,' But...

Laskos, who was let go in the second wave of staff cuts in October 2010, told Credit Union Journal that he continues to have many good memories of WesCorp as a great place to work. "We did so many good things for credit unions and then do one thing wrong and that's what people remember."

The year NCUA conserved WesCorp, 2009, would have been the institution's 40th anniversary, observed Laskos, who cited some of the "numerous" accomplishments of the corporate in its last 10 years.

"The IT department created a secure portal to communicate with members. We created a mobile banking app that was affordable even for the smallest credit unions, and we offered extensive educational programs," he observed. "We developed webcast technology to better reach members, offered great assistance in the areas of risk management and compliance, and created the first magazine of its kind for credit unions on balance sheet management. We did a lot for credit unions."

Despite the eventual problems, Laskos emphasized the skills of the investment team. "There was a great deal of ability in that area, despite what people may say today. The problems at WesCorp did not happen because people did not know what they were doing. Remember, all of these investment problems happened to the whole world."

Like Dwight Johnston's recollection of the internal state of affairs at WesCorp, Laskos, too, said employees did not perceive any real issues over which to be concerned until 2008. That year, Laskos said, it became clear the economy was in trouble and there were real problems brewing with mortgage-backed securities. "The message to the troops was reassuring in that we had the means to get through the problems, we had the capital. We'll do it. That message, at that time, was comforting to employees," said Laskos.

But with the banking industry and Wall Street continuing to report mounting losses, Laskos said employees could not help feeling that the "world was crumbling around you, and here is WesCorp moving forward. But then at some point you get the suspicion there are real issues with our investments. That caused concern."

That employee consternation was finaly recognized by Siravo in late 2008, and management began to change the message. "We had monthly staff gatherings where Siravo would address everyone," Laskos shared. "Little by little he let on about the issues we faced. I recall Bob saying at first that there were problems with certain certificates, that they may be 'problematic. We don't know yet. We may have to claim some losses.' So it was a gradual approach to letting us know."

Dealing With The Media

Laskos asserts that management was not being deceitful, and believes managers shared news as they received it. Laskos did, however, acknowledge that he believes senior management did all it could to manage the release of information so as to not create a panic, especially among its member credit unions.

As it became apparent, both to credit unions and to the media, that WesCorp was in trouble, Laskos said his job and that of others responsible for communications at WesCorp became challenging. "The most difficult aspect of my role was finding ways to communicate with journalists so they understood exactly what was going on. It was a complex situation."

Laskos said WesCorp assembled communications packages, did newsletter stories, and developed webinars to educate its members about OTTI and how certificates are bundled. There were also complaints inside WesCorp that the media was not getting the message right, including complaints over Credit Union Journal's own coverage of potential losses.

"This was such a complex situation that we had to have reporters getting the message precise, I mean surgeon precise. You talk to WesCorp, go back and write your story in a way that does not precisely capture what was said, you create misunderstanding among the population and the credit union community. That is not good."

Laskos said he always tried whenever possible to connect journalists with the experts at WesCorp-Burrell or CFO Jim Hayes-yet sometimes media stories still were inaccurate, he said. "That, obviously, created more strife internally. There was an awesome responsibility on the journalist in terms of accuracy, and using the right words to tell the story."

Laskos insisted that it was always an honest exchange of information with the media. "The last thing you want to do is deceive or say things to the press that are not true. That is like putting a noose around your neck and jumping."

'Very Frustrating To Me'

But some credit union CEOs think that's exactly what WesCorp's senior management did in the years leading up to its failure. Henry Wirz, CEO of the $1.9-billion SAFE CU in North Highlands, Calif., and a one-time member of the WesCorp board and Supervisory Committee, told Credit Union Journal that he does not believe WesCorp was being transparent regarding the losses, or sharing what they knew when they knew it.

"That was very frustrating to me because our CFO then, Dave Roughton, was on the WesCorp Supervisory Committee," said Wirz. "For example, in early 2009 it was apparent WesCorp had fairly significant OTTI losses. I recommended that even though the OTTI loss numbers were not fully validated that Bob Siravo come out and say, 'We do have OTTI, and it could be a big number.' At least bring that out and put it on the table."

But up until the day of the conservatorship, just hours before NCUA took over, Siravo was assuring that all was OK at WesCorp, sending an e-mail to member credit unions 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."

Stuart Perlitsh, CEO of Glendale Area Schools FCU in Glendale, Calif., who with other credit unions eventually filed a lawsuit against WesCorp's board and management, believes that the WesCorp management team knew long before late 2008 that real trouble was coming.

It must be noted that efforts to verify that account and others in this story were not successful. Through his attorney, Siravo declined to comment due to pending litigation related to WesCorp.

Perlitsh said he learned of a discussion between WesCorp senior management and another credit union CEO about WesCorp's future. That information, Perlitsh said, was shared during a party at the Las Vegas Wynn Hotel in 2007 during WesCorp's annual meeting. "I heard that Siravo said 'You better enjoy the annual meeting here because this is the last one,'" Perlitsh related.

Perlitsh explained that Siravo was not forecasting the demise of WesCorp, but that the expensive parties at annual conferences would be over due to potential problems with WesCorp's investment portfolio.

"At that point, I believe, he began to see the handwriting on the wall. Of all the things WesCorp did during its collapse-its brashness, it's grandiose plans-not telling credit union members soon enough about their troubles may have been their biggest oversight," said Perlitsh, whose $324-million CU lost $1 million in WesCorp capital.

The Middle Ground

Laskos takes a middle ground, contending that WesCorp leadership was in no way being deceitful to staff or to its members. Instead, he said, it made decisions to not release all of the information out of concerns over creating a panic, and because accounting standards often made it difficult to arrive at an OTTI number with which everyone was confident.

"In that dire financial climate, you have to be extremely careful with your language. While management's intentions were good, you wonder if all the decisions were the proper ones. Maybe we were not as open as we should have been."

Some sources contend that had WesCorp been more open about its issues to NCUA, the regulator might not have moved to place it into conservatorship. In fact, through NCUA board meeting minutes obtained by CU Journal, NCUA imtimated that WesCorp's limited cooperation in sharing OTTI numbers, and relying at length on its own estimates that proved to be far lower than outside firms, contributed to the decision to conserve WesCorp (see related story, page 28).

But others note NCUA was all but embedded in the WesCorp management team and its balance sheet, having had examiners on site for more than a decade. Moreover, NCUA granted numerous waivers to WesCorp in the corporate's final years.

The presence of those examiners did not stave off the inevitable, however, and on March 20, 2009, on a Friday afternoon, as is NCUA's standard practice, 65 of its agents entered the front doors of WesCorp's main offices to take control. While there were great concerns around WesCorp's performance at the time, the conservatorship shocked many in the CU community. On that day, technically, WesCorp no longer existed. It was now Western Bridge Corporate Credit Union.

Laskos recalls his disbelief when he got the news. "I will always remember that day. A colleague's father passed away and I was driving that afternoon to Orange County. I got a call from an MSNBC reporter asking me if I had a comment, and I had no idea what he was talking about."

Not A 'Crank Call'

Laskos could not believe what the reporter told him, and he thought it was a crank call. "But I remained professional and said I would get back to him. I was glad I did that, because five minutes later I got a call from the LA Times, so I knew something was going on. Then I got a call from a coworker telling me, 'NCUA has taken over. There are suits all over the place.' Traffic was ridiculous, too. It took me an hour to turn around the car and get back to San Dimas. I spent the weekend addressing calls from the media and members.

"I think NCUA may have found themselves in a situation they never experienced before," continued Laskos. "WesCorp was the largest corporate. That conservatorship had to be an overwhelming task. The weekend that happened, NCUA had a battalion of auditors and accountants going through the books and every nook and cranny of the organization. It was a heck of a diverse group that invaded WesCorp; young accountants, older accountants, male, female, all taking assessment of what was going on."

Former WesCorp Chief Economist Dwight Johnston didn't learn about the takeover until the next day, Saturday. He had turned off his cellphone late Friday and when he turned it on the next morning he had 15 messages. "I knew something was wrong. I said, 'Uh-oh, this is not good.'"

When he learned of the conservatorship, Johnston said he was shocked. "I never thought this could happen. NCUA's analysis of WesCorp had such drastically different outcomes than our own analysis. Like every other WesCorp employee, I questioned the NCUA analysis. But time passes and things change. You get over the shock and then you realize WesCorp is not coming back, at least not in its original form."

Laskos said the takeover "created a whole new world" for WesCorp staff. "We all began to wonder, will we have a job on Monday? What will be expected of us? We knew we would no longer have control over our own destiny."

A New CEO Arrives

One day later NCUA brought in Phil Perkins from Delaware Investments in Philadelphia, to take over management of WesCorp, its previous management team and board having been dismissed, including Siravo and Burell. CFO Todd Lane (now CFO at California Coast CU), according to reports, had left of his own volition before the conservatorship. HR Director Thomas Swedberg was retained for a period, sources stated. It was not clear through numerours queries by Credit Union Journal whether Chief Risk Officer Timothy Sidley was employed at the time NCUA took over.

Siravo's contract entitled him to a $6.9-million SERP, which was paid May 13, 2008, well before NCUA took control. However, that led the NCUA board to propose a plan that would severely limit executive severance payments for managers at troubled credit unions. Both CUNA and NAFCU opposed such a plan.

"We no longer have confidence in the management and are now running them both," then NCUA Chairman Michael Fryzel told Credit Union Journal at the time, referring to both WesCorp and U.S. Central Credit Union, which had been put in conservatorship on the same day as WesCorp.

In the months leading up to the conservatorship, NCUA had hired PIMCO to "perform an analysis of corporate credit union residential mortgage-backed securities (RMBS) in order to receive an independent, objective assessment of potential losses resulting from holding the securities to maturity and to verify NCUA's reserve methodology for calculating the credit union premium to recapitalize the National Credit Union Share Insurance Fund," according to the agency. "The results of cash flow projections (for the underlying loans) showed a wide range of possible value results due to the volatility of the items that impact cash-flow projections. Market prices derived from third-party vendors and PIMCO's internal analysis were significantly lower than the aggregate fair value of the same securities reported by the corporate credit unions (as of Jan. 31, 2009)."

PIMCO's Role Is Disputed

PIMCO's involvement soon became a subject of controversy. PIMCO was paid $4.5 million by NCUA for its original analysis of the corporates' investment portfolios, and another $1.25 million for an additional report. The payment wasn't the issue; the fact PIMCO might bid on some of those distressed assets was. Critics, most especially the Washington Credit Union League's then-CEO John Annaloro, were outspoken in claiming PIMCO had a "conflict of interest" and was benefiting from "insider" information.

A 2009 Freedom of Information Act request by CUNA and NAFCU found that its contract addressed the issue of such a potential conflict. "While adviser [PIMCO] does not make a market in the securities in the portfolio, adviser or its affiliates (for itself or on behalf of its clients) may own positions in such securities or the assets underlying the securities (whether long or short), and adviser and its affiliates (for itself or on behalf of its clients) shall not be restricted from transacting them in any way," the contract stated.

PIMCO disclosed at that time that if it owned any reviewed securities, the valuations provided to the NCUA "may differ" from those it provides for its own portfolio management purposes.

For Laskos, the late-March days following the conservatorship were particularly tough. His role as chief communicator with the media changed. All communications were routed through then-NCUA spokesperson John McKechnie. "We had to get approval from NCUA on any communication. If I wanted to put out a release from Phil Perkins, NCUA had to approve it. Everything you wrote had to be reviewed. I felt like I was in kindergarten."

Laskos said it was difficult at first for staff to get back to any sense of normalcy, with a great deal of uneasiness inside the San Dimas offices. Eventually, however, staff refocused on the task of serving members. Laskos insisted that staff worked even harder to serve membership after the conservatorship. "We had layoffs all along, and here the employees are continuing to deliver quality. We had strong resolve-morale was challenged for sure. There is a lot to be said for the folks at WesCorp, the rank-and-file. These are high-caliber people."

Those people, however, would eventually get pink slips as four to five waves of personnel reductions took place before WesCorp was officially wound down earlier this month.

'The Hardest Thing To Take'

Former WesCorp CEO Johnson saw that same resolve in WesCorp staff who would stop by his home to visit. He said many wanted to work so hard for the member credit unions because, through no fault of their own, they felt WesCorp had let members down.

"I think that was the hardest thing to take for many from the collapse," Johnson suggested. "It pains me to see these good people put out on the street. You have all this talent, and once you close the doors this talent goes away. Some people had been there for 30 years. That's lots of knowledge and talent. Once that is gone it's gone."

Phil Perkins, the CEO named to replace Bob Siravo, has remained relatively low profile over the past several years, although he did participate in a number of town hall meetings with credit unions. That's due in large part to NCUA keeping a muzzle on all communication out of WesCorp. But the work done by Perkins during the time he served as CEO was lauded by several people, who described him as a strong leader who kept staff motivated, informed and performing.

"Phil Perkins came in and did a very good job of keeping everyone up-to-date on how WesCorp was doing," said Johnston. "He would go out on road shows and talk to members about what happened, how the losses occurred and why. Suddenly the losses began to make more sense."

WesCorp's troubles may have started as far back as 2002. A number of sources told Credit Union Journal they believe that a push to give members more services at low costs, a focus of Siravo according to individuals close to WesCorp, put pressure on the corporate giant to make more on investments to cover those expenses. That, combined with NCUA opening up corporates to serve national fields of membership, drove competition, putting more pressure on already thin margins.

Perkins simply assessed that WesCorp could not have avoided the mess. "Obviously, buying $22 billion of private label mortgage-backed securities in hindsight is a huge mistake. But very few large institutions who built their portfolios after 2000 avoided the problem. It's a mistake in which WesCorp had enormous company."

The Role of 'Overconfidence'

SAFE's Wirz, who was closely involved with WesCorp operations for years as a member of the WesCorp board and supervisory committee, was not as lenient with his assessment, citing his own view that it was overconfidence in their own abilities by the management team that ultimately was the problem.

"Looking back on what they now made public, I say WesCorp was negligent in the types of securities they bought," stated Wirz, who readily agreed hindsight is always 20/20. "I know it's easy to say that now. I am not certain if I would have come to this same conclusion at the time WesCorp was investing, but I hope I would have."

Wirz believes the investment success WesCorp had been having until the market's bottom dropped out had led to complacency that in turn led the corporate's risk-management analysts to not carefully investigate what was underneath the AAA-rated securities. The success led to a kind of "myopic overconfidence," stated Wirz, "like, 'We know how to do this and we don't make mistakes.' That was an issue."

What also became apparent to Wirz, and to millions of Americans who watched the securities and stock markets plunge, was the rating agencies could not be counted on, or in many cases, even trusted. Wirz said it appears the rating agencies seemed to have become more interested in their fees than their evaluations. He noted that the investment firms, too, were putting on great shows of their own. "They would come in with their compelling presentations, mathematically derived formulas for determining risk-everyone drank the Kool-Aid."

But not everyone. Wirz cited that Owen Cole, then-head of NCUA's Central Liquidity Facility, had been raising concerns to the NCUA board about the investments of the corporates, including WesCorp, during 2007 and 2008. However, according to Wirz, Kent Buckham, then-director of the Office of Corporate Credit Unions, did not hold those same concerns about the risk WesCorp was taking at the time.

NCUA's Statement In Response

Credit Union Journal contacted NCUA asking for a statement from or interview with Buckham. An NCUA spokesperson responded: "Both NCUA's Office of the Inspector General and the GAO have conducted thorough examinations and released reports on corporate credit union failures and the causes of those failures. These reports speak for themselves regarding NCUA actions during that time period."

There are plenty of fingers to point and plenty of culprits to point them at, sources agree, and Wirz directs one squarely at NCUA for not learning from its mistakes following the failure of Capital Corporate FCU in Maryland in 1995. He faults NCUA for not carefully analyzing the corporate system at that time and coming up with a sound rebuilding plan. Instead, Wirz asserted, NCUA reacted by opening up corporates to a national field of membership and letting the system consolidate on its own. That, Wirz emphasized, led to an "arms war," as corporates competed for business, generally by what they paid on investments."

Indeed, Credit Union Journal, along with other publications, often fielded competing press releases from WesCorp and Dallas-based Southwest Corporate, touting the above-market returns each was paying. Southwest Corporate was eventually placed into conservatorship, too, and was merged with Georgia Corporate to form Catalyst Corporate. Catalyst Corporate's bid was accepted by NCUA to acquire the remnants of Western Bridge Corporate.

That "arms race" on investment returns was likely exacerbated by a tougher business environment, according to the NCUA Office of Inspector General's report on WesCorp, which itself pointed to a September 2004 Government Accountability Office report. That earlier report, noted the IG, predicted that corporates were facing an increasingly challenging business environment that would potentially stress their overall financial condition.

"Since 2000, a large influx of deposits, coupled with low returns on traditional corporate investments, had constrained earnings and caused a downward trend in corporates' overall profitability. To generate earnings, corporates increasingly targeted more sophisticated and potentially riskier investments," the IG stated.

'Stars In Their Eyes'

Greg Stockdale, CEO of the $35-million 1st Valley in San Bernardino, Calif., attributes much of WesCorp's demise to the former giant having "stars in its eyes," arguing WesCorp's basic motivation was simple: it just wanted to be bigger and bigger.

"They were the only corporate courting the very large credit unions. Every other corporate, for the large part, had medium to small credit unions," said Stockdale. "WesCorp wanted to pump up their assets for reasons that later became clear. They got all full of themselves and went off on all kinds of tangents."

Like Wirz, Stockdale faults WesCorp's management for placing too much faith in their own skills and not heeding the advice of others. "They would give you this song and dance on what they were doing with investing, and if you did not understand, well, then you were not sophisticated enough and needed to go back and sit down because 'We know what we are doing.'"

From his perspective inside WesCorp, Laskos, too, believes there was a problem with the outlook of management and the corporate's changing direction. "My personal feeling, and with others as well, is that we were kind of getting out of balance, leaning more toward profits and being an investment house. We were starting to stray from our roots. We were missing the point of being a cooperative."

Glendale Area Schools' Perlitsh puts it more bluntly. "Grandiose plans for sure. They went after profit, wanting to be the largest corporate and the last man standing. The bigger they got the fatter the bonus. This was greed on a grand scale. Bob Siravo and Bob Burrell went after those private label securities because they were big fat coupons. All they were looking at were those things were AAA rated. WesCorp lost its moral compass."

'That's What Killed WesCorp'

The defense that all of the corporates suffered losses, so why should Wes-Corp be any different does not hold water, insisted Perlitsh.

"We heard excuses from WesCorp that they were a victim of the global economy. To that I say, 'wrong.' Those excuses are disingenuous. If that were true, then how did folks like (Alabama's) Corporate America and (Ohio's) Corporate One get through the economy still standing? As we defined in our complaint against WesCorp management, 80% of their investment portfolio was in these toxic securities when most other corporates held about 37%. That's what killed WesCorp."

The report issued by NCUA's Inspector General echoes Perlitsh, and pulls few punches, stating, "WesCorp management's actions contributed directly to conditions that resulted in NCUA placing the corporate under federal conservatorship."

The report confirmed what many had already said-that WesCorp's management and board of directors did not implement appropriate risk management practices to adequately limit or control significant risks in its investment strategy.

"Although management invested in high investment grade securities (AAA and AA), management implemented an aggressive investment strategy with unreasonable limits in place that allowed for excessive investments in privately issued residential mortgage backed securities (RMBS)," stated the IG. "Management's actions allowed a substantial investment portfolio of privately issued RMBS, resulting in a significant concentration risk, and left WesCorp increasingly vulnerable to significant credit risk, market risk, and liquidity risk through the portfolio's exposure to economic conditions in the residential real estate."

Account Is Disputed

Like others, Perlitsh strongly believes WesCorp was on a march to grab size, leveraging their accounts to make more investments and money, and was not focused on providing liquidity for CUs that needed to borrow money. Perlitsh said he recalled asking then-WesCorp board chairman Robert Harvey, the former CEO of Seattle Metropolitan Credit Union before retiring in 2011, why WesCorp was spending what apparently was a lot of money on a lavish annual report booklet. "It looked like something right off of Wall Street. I asked him why they spent so much, and he said, 'We need this to show it up and down Wall Street so we can borrow these funds.'"

But Harvey, when contacted by Credit Union Journal, disputed that account and said he did not make the comment. Harvey did, however, agree there was a need to spend money on the report.

"The point was about making sure it was very clear what the financial position of WesCorp was, so that individuals who wanted to dig into the numbers had a source document they could rely upon," Harvey said. "A source document that was prepared by a top CPA firm. It was not about spending a lot of money so we could borrow, it was about spending a lot of money so people could know what WesCorp's position was. I don't think our report was any greater than any other institution our size."

In addition, Perlitsh accuses WesCorp of self-indulgence, not listening to credit unions that had advice regarding their portfolio, and not paying attention to brokers, as well. Perlitsh said in 2007 he spoke with a broker at Cantor Fitzgerald who questioned why WesCorp had so much invested in in private-label, mortgage-backed securities. Perlitsh said he passed those questions along to WesCorp, only to get push-back that Cantor Fitzgerald's concerns were unwarranted.

Questions Have Gone Unanswered

In the months and years after WesCorp was placed into conservatorship by NCUA and its losses continued to mount, the questions that have been heard again and again have been "where was the oversight? Where was management? The board? Where was the regulator that had its own examiners sitting right there in WesCorp's San Dimas, Calif., offices?"

The answers have been few. NCUA's own investigation by its Inspector General seems to identify only one part of the problem; not why the problem was able to exist and fester. A review by Credit Union Journal of NCUA board minutes in the months leading up to the conservatorship suggest some within the agency believe it was being fed "filtered" numbers that did not reflect how grave the situation was (see related story, page 28).

The IG report pulled the covers back on what WesCorp had really been investing in, revealing the poor collateral behind the residential mortgage-backed securities. Several sources, as well as the IG, raised questions as to whether anyone, including NCUA's onsite team at WesCorp, were even considering that question.

The IG stated that WesCorp should have been "more vigilant about investing so heavily in higher-risk residential mortgage loans taken out by borrowers with 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."

The IG reviewed 176 of the 681 RMBS and determined that with many of the securities the borrowers and underlying mortgage collateral were approved with higher-risk loan terms and characteristics. The report stated that 134 RMBS were classified as Alt-A and 32 as subprime. Many of the mortgage loans were interest-only, adjustable rate with payment option, and included negative amortization features. High LTVs accompanied many of these loans made to less-than-prime borrower credit scores.

Sand, Swamps & Paper

In short, WesCorp was like many other firms guilty of helping to create and perpetuate a market cycle that had no other potential outcome but to crash. Mortgage rates-especially on adjustable rate loans-were low and downpayments often non-existent, and many consumers who were little-qualified to do so were snapping up 4,000-square-foot, five-bedroom "starter homes." Builders in places like Nevada, Arizona and Florida couldn't find enough desert and swamp in which to build acres and acres of homes on spec. Lenders were so busy what would later be known as "robo-signing" was taking place on documents. Firms such as WesCorp seemingly couldn't get enough of the mortgage paper as investments, but when some of those ARMs began to reprice in 2006 and an overbuilt market began to teeter, WesCorp and other corporates found themselves holding a lot of paper that turned out to be just that: paper.

NCUA's report on WesCorp found that the securities it held even included loans collateralized with what the IG termed "scratch-and-dent mortgages," loans that have one or a combination of defects stemming from originations made outside a lender's implemented credit guidelines, deficiencies in loan documentation, errors made in following regulatory compliance laws, irregular payment history or borrower defaults.

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.

After carefully reviewing the WesCorp portfolio, the IG concluded that WesCorp management and staff "may have given more weight to the credit...than to their own rational assessment of the actual risks presented by the underlying residential real estate mortgage collateral, borrower qualifications, and WesCorp's increasing exposure to the residential real estate market."

If examiners, too, were allowing WesCorp management to rely solely on the rating agencies, guidance from NCUA's Corporate Examiner's Guide suggests the examiners were not following policy. "A credit rating is not a substitute for prudent due diligence and should only be considered as one factor in an investment decision," the guide states. "Credit risk managers must be mindful that credit ratings are generally a lagging indicator."

The Drive For Yield

But from someone inside WesCorp, the perspective is different. Laskos asserted that WesCorp's collapse was a system-wide problem, driven by all the corporates chasing higher-yielding investments to pay greater CD rates. "What occurred at WesCorp, in my opinion, points to a number of failures, and no one entity can take sole blame. Look at what was going on among the corporates-all the competition." Laskos recalled credit unions across the country would call WesCorp for their rates, then they would call Members United or Southwest Corporate, before again calling WesCorp and saying other corporates were offering better returns. "They would play one corporate against the other. That was the world we lived in."

Glendale Area Schools' Perlitsh believes the fault lies not just with management, but with the WesCorp board as well. "This really slays me. We are talking about billions in losses and counting. Siravo was installed in 2002, how could that place, which was performing well, get raped, pillaged and plundered in six years? And then the board gives Siravo a $6-million SERP? We named the board in our lawsuit as defendants and NCUA let them walk. I think they need to stand to answer."

That civil lawsuit filed by Glendale Area Schools and six other credit unions (1st Valley CU, Tulare County FCU, Cascade FCU, Northwest Plus CU, Stamford FCU and Kaiperm FCU) in November 2009 against the WesCorp board and management alleges negligence and breach of fiduciary duties. At press time the suit had not gotten to the bottom of the causes of the WesCorp collapse, as Perlitsh hoped it would. Charges against the board were dismissed in July 2011, and NCUA, which took over the suit as plaintiff in December 2009, making it-oddly enough-both the defendant and plaintiff in the case, reached settlements with WesCorp's Burrell, its former chief risk officer, Timothy Sidley, and its former director of human resources, Thomas Swedberg. All have agreed to settlements of their cases, leaving only Siravo and Todd Lane, former chief financial officer, as litigants in the amended NCUA complaint.

"We lost $1 million here, and it is my responsibility as CEO, as well as our board's, to recover our loss," said Perlitsh. "How can you have a $2-billion loss without someone being held accountable? You don't create this kind of loss and get a free pass. That is what the suit was all about. I don't care what my tombstone says. I am all about accountability and responsibility, and I stand on that principle."

The Search For Plaintiffs

Finding six other CEOs to join him in the suit was not easy, stressed Perlitsh, who suggested that the same unwillingness on the part of many western CUs to take a stand against WesCorp is representative of what led to the problems in the first place-not questioning the corporate giant about its investment activities.

"Some CEOs lacked the testosterone, for lack of a better term, to stand up and say something is wrong," said Perlitsh, a situation with which he said he became quite familiar when recruiting credit unions to be part of the lawsuit. "Getting that other six was really difficult. I wish I would have recorded my conversations with CEOs. They were incensed that I would think about suing WesCorp, and even more incensed that I would name the board as defendants. I felt like I was suing the Catholic church."

The road to reaching the bottom of what went wrong runs 2,643 miles, directly to Alexandria, Va., insisted several sources who hold NCUA accountable for many of the problems that led to WesCorp's demise.

"The NCUA did not ring the alarm bell until very late," said SAFE's Wirz. That, in itself suggests negligence, the CEO believes, particularly in light of the fact NCUA's lawsuit against WesCorp alleges negligence on the part of the corporate's management. "Why, then, do you not consider NCUA to have been negligent, to miss serious warning signs?"

Examiners Are Critiqued

The IG report states that examiners in NCUA's Office of Corporate Credit Unions' (OCCU) were at fault, and that, specifically, the OCCU did not adequately and aggressively address WesCorp's increasing concentration of privately issued RMBS or the increasing exposure in WesCorp's balance sheet to "credit, market and liquidity risks." Examiners were chided in the report for failing to "critique or respond in a timely manner" to WesCorp's growing risk concentrations of securities backed by higher risk mortgage collateral, much of it concentrated in California and issued, originated, and serviced by Countrywide (Mortgage).

The IG found that examiners did not require or even advise WesCorp management to limit or reduce its concentration of privately issued RMBS, or its concentration of RMBS backed by Alt-A and subprime mortgage collateral and collateral comprised of exotic adjustable-rate mortgages.

Moreover, examiners continually indicated WesCorp's investment portfolio was "well diversified" and its exposures and credit limits were "within regulatory constraints," the IG shared.

Although examiners recognized as far back as 2003 in exam reports the increasing concentration of privately issued RMBS in WesCorp's investment portfolio, the IG stated examiners did not issue a Finding or Document of Resolution to address that concentration until five years later in February 2008, after credit and liquidity issues were apparent.

By July 2007, WesCorp's privately issued mortgage-related securities ($19.9 billion) represented 71% of its total investments of $27.9 billion and 64% of its total $31.3 billion in assets.

The IG found it "concerning" that NCUA would appropriately issue warnings and guidance to its federally insured credit unions in 2005 and 2006 regarding higher-risk mortgage loans, yet WesCorp continued to invest heavily in securities collateralized by these same higher-risk mortgage loans that created exposure to increased credit risk.

Regulatory Support Lacking

The report suggests NCUA did not have appropriate regulatory support in place-in the form of more specific investment concentration limits-to address the growing and risky concentration.

"As a result, OCCU examiners did not have the regulatory leverage to limit or stop the growth of WesCorp's purchase of privately issued RMBS, which would have likely mitigated WesCorp's severely distressed financial condition and expected loss as a result of the extended credit market dislocation, and thus averted NCUA's ultimate conservatorship of WesCorp."

In addition, Office of Corporate CU examiners informed the IG that WesCorp management knew it was in compliance with NCUA requirements. "Therefore, the examiners knew they had limited, if any options to address the concentrations," the report concluded.

But worst of all, insists SAFE's Wirz, is that NCUA has never been transparent about what went on at the former corporate giant. "They have never showed us the PIMCO data or data from any other accounting firm. They have shared nothing. We may never know all the facts because NCUA is not being transparent."

Wirz surmises that NCUA does not want a full airing of the WesCorp collapse and all that contributed to its demise. "They could have had an inquiry, bring in the likes of (Callahan's) Chip Filson, (former CUNA CEO) Dan Mica, and a group of industry experts to do a postmortem. As an industry, we would learn from that."

NCUA's restructuring of the corporate system, giving corporates very little investment authority, is itself an admission the agency does not have the expertise to provide oversight, Wirz intimated. "They decided to get rid of what they could not regulate" (see related story, CU Journal July 9).

Perlitsh does not disagree, especially since NCUA was on site at WesCorp for 15 years. "It's a little disingenuous for NCUA to say something terrible happened at WesCorp and that it has to then conserve them. NCUA knew what was going on all along, that risky investments were being made. They were in-house at WesCorp, at every board meeting and ALM meeting. They were in bed with WesCorp when the economy was perking along."

Due Diligence Lacking

Some of those CEOs pointing fingers at WesCorp and NCUA, agree a number of sources, should turn those fingers around. Natural-person CU CEOs, were culpable too, happily taking advantage of the higher investment returns and cheap services WesCorp was offering. That lulled the credit union community into not paying close enough attention to WesCorp's investment activities until it was too late, some suggest.

Wirz told Credit Union Journal that he is among the guilty. "All of us, all of the WesCorp member credit union leaders, failed to keep our eye on the ball."

For example, Wirz said one need not look any further than the open ALCO meetings WesCorp regularly held. "Any member credit union could have a seat at the table. As time went on, fewer and fewer credit unions availed themselves of the opportunity to go down and see what was going on. We all became complacent. Things were running well. We were not hearing anything negative from regulators, and CPA firms were giving clean opinions."

Former WesCorp spokesperson Laskos agrees, saying the good job WesCorp had been doing for natural-person CUs-high-paying investments, an abundance of services at low costs, and great service-created such a high level of trust that no one thought to question WesCorp's investment strategies. "The member-owners, I believe, became disengaged. I helped to build that relationship with credit unions, how we are perceived, as a corporate that takes care of things for you so you can focus on your members."

Former WesCorp CEO Dick Johnson said he had worked to create a highly efficient corporate, and believes that goal was achieved. But he also believes it came back to haunt WesCorp in the end. "We functioned so well that credit unions didn't have to think about us. In fact, many board members never understood what drove our success. How many people really reflect on something that does not cause a concern, like the light that comes on with a flip of a switch? This complacency resulted in a problem."

The Final Chapter

The final chapter of WesCorp's story is being written as its business is parceled out, NCUA awarding its remnants, including computer systems and member accounts, to Catalyst Corporate FCU. All that is left is for former WesCorp credit unions to choose whether to sign on with Catalyst, choose another corporate, or work directly with the Fed and third-party investment companies.

Matt Davidson, EVP at Kern Schools Federal Credit Union in Bakersfield, Calif., who led the now-aborted attempt to create and capitalize United Resources Credit Union out of Western Bridge, pointed out that those decisions are landing credit unions in the Western U.S. with corporates in Texas, Illinois, Alabama, and Ohio, among other states.

Davidson is not certain about the long-term impact for former WesCorp members. "NCUA had to take action, I know that. But that still does not lessen the need for a corporate in the western states, one that understands the unique needs of western credit unions, especially the small ones."

Former WesCorp Board Chair Robert Harvey told Credit Union Journal that western CUs will "never again see an organization provide them the kind of benefical, customized services at a low cost that WesCorp delivered."

But 1st Valley's Stockdale countered by stating that WesCorp's demise has had no impact on western CUs, nor will it. "Better or worse off today with WesCorp gone? No difference whatsoever. NCUA has the corporates so hogtied there is not 10 cents of difference between them other than their capitalization plans," said Stockdale, whose $35-million CU has had no issues clearing items directly with the Fed.

'And Now It's Gone'

Former WesCorp CEO Johnson sees things differently, and he thinks others eventually will, too, adding that the final days at WesCorp were like a "morgue," with about 100 people left with not much to do. The Western Bridge main office operator shared that the building was filled with packing boxes. "I am told that the parking lot that used to be absolutely jammed full of cars, now looks like a ghost town," said Johnson in June.

When Western Bridge was finally wound down and the doors closed in July, the former CEO said he was "crestfallen. I think credit unions in the west are not realizing what they let go."

Laskos has a similar feeling in looking back over his shoulder. "It's almost surreal. So many people worked for so many years to build a reputation for WesCorp that was at the top of the corporates. That was much of my job when I was at WesCorp, building our reputation. When you had that kind of image and suddenly the carpet is pulled out... When I think about all those folks being let go, and I gave 10 years of my life to the organization...and now it's all gone. Wow."

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