Thursday, September 8, 2011

Material Loss Review Issued on Constitution Corporate FCU

NCUA's Office of the Inspector General (IG) issued its report on the failure of Constitution Corporate FCU. NCUA estimated as of July 2011 that the failure of Constitution Corporate FCU resulted in a loss of $145 million to the Temporary Corporate Credit Union Stabilization Fund.

This IG report is similar to the other IG reports that examined the failures of other corporate credit unions.

The Material Loss Review cites that management and Board failed to identify and manage their risk exposure to the mortgage-backed securities (MBS) prior to the market dislocation in mid 2007. At that time, Constitution Corporate had significant holdings of private label MBS including Alt-A and subprime paper.

Constitution Corporate's decision to expand its investments into private label MBS was driven by the need to be rate competitive with other corporate credit unions that were actively soliciting Constitution Corporate's members.

The IG report notes that:

1. there was an over-reliance on credit ratings by management when purchasing securities and monitoring credit risk in the investment portfolio;

2. management did not set prudent sector concentration limits;

3. management did not properly identify and monitor credit risk exposure in the underlying mortgage loan collateral of MBS held in the investment portfolio; and

4. management did not recognize the risk they were undertaking with significant investments in complex MBS, with a substantial portion of these securities backed by subprime assets.

The report also criticizes NCUA for failing to assess or timely identifying key risks associated with Constitution Corporate FCU's investment portfolio, until it was too late.

Read the report.

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