IG Report: WesCorp to Cost TCCUSF $5.59 Billion

NCUA's Inspector General (IG) released its report on the failure of Western Corporate (WesCorp) FCU. The expected loss to the Temporary Corporate Credit Union Stabilization Fund (TCCUSF) from the failure of WesCorp is $5.59 billion. The report finds ample blame to go around citing WesCorp's management, Board of Directors, and NCUA's Office of Corporate CU examiners (OCCU examiners).

The IG report criticizes WesCorp management and Board of Directors for an aggressive investment strategy that allowed for excessive investments in privately-issued residential mortgage backed securities (RMBS). So by December 31, 2008, nearly 70% ($15.8 billion) of WesCorp‘s $22.7 billion investment portfolio was comprised of privately-issued RMBS.

In addition, the IG report notes that most of the underlying mortgage collateral of WesCorp's investments were located in California. Between August 2004 and February 2008, the portion of the RMBS portfolio having collateral in California ranged between 45 percent and 67 pecent. Wescorp's investment policy provided that up to 75 percent of the underlying collateral of domestic mortgage-related securities in any one state was adequate geographic diversification.

The report also notes that the failed corporate credit union had a large concentration of RMBS with loans serviced or originated by Countrywide Home Loan, Inc.

Additionally, WesCorp's was overexposed in its investment portfolio to privately-issued securities in a higher risk subordinated classes.

Finally, WesCorp pursued a strategy of purchasing privately-issued RMBS collateralized by sub-prime and Alt-A residential mortgage loans. As of December 2008, its RMBS portfolio classified as Alt-A and sub-prime was $13.7 billion and accounted for 60 percent of the total $22.7 billion investment portfolio and 87 percent of the $15.8 million privately-issued RMBS.

But the IG report is also critical of OCCU examiners because they "did not adequately and aggressively address WesCorp‘s increasing concentration of privately-issued RMBS and the increasing exposure of WesCorp‘s balance sheet to credit, market, and liquidity risks."

The IG specificaly noted that "OCCU examiners did not critique or respond in a timely manner to WesCorp‘s growing concentrations of privately-issued RMBS in general and in particular RMBS: (1) backed by higher risk mortgage collateral; (2) concentrated in California; and (3) issued, originated, and serviced by Countrywide."

The evidence suggests that OCCU examiners did not require or even advise management to limit or reduce its concentration of privately-issued RMBS, or its concentration of RMBS backed by Alt-A and sub-prime mortgage collateral and collateral comprised of exotic adjustable rate mortgages until it was too late. In fact, OCCU examiners did not issue a finding or Document of Resolution (DOR) to address this concentration until February 2008, well after the credit and liquidity crisis surfaced.