Tuesday, March 29, 2011

Threatened Lawsuits Deflects Attention from NCUA's Regulatory Failures

NCUA is trying to deflect attention from its failure as a regulator by threatening to sue several investment banks over mortgage-backed securities they sold to five failed corporate credit unions.

We know that full-time on-site capital markets specialists from the Office of Corporate Credit Unions (OCCU) were assigned to both U.S. Central and Western Corporate (WesCorp) -- two of the five failed corporate credit unions.

Despite having a permanent presence at these two failed corporate credit unions, the NCUA's Inspector General (IG) reports on the failures of U.S. Central and WesCorp paint a picture of examiners who either did not recognize the risks or failed to take action with respect to potential risks associated with concentrations in privately-issued mortgage-backed securities at WesCorp and U.S. Central.

The Inspector General report on the failure of WesCorp found that OCCU examiners did not require or advise management to limit or reduce its concentration to private label mortgage-backed securities (MBS), despite observing WesCorp's growing concentration in these investments. Examiners also failed to limit WesCorp's exposure to Alt-A and sub-prime mortgage collateral and collateral comprised of exotic adjustable rate mortgages.

Also, NCUA during examinations between July 2003 and July 2006 never questioned the quality of the collateral backing up WesCorp's MBS portfolio and never warned WesCorp about the risk associated with such investments until April 2007.

Additionally, "OCCU examiners either did not recognize or did not take issue with the potential risk associated with WesCorp‘s geographic, issuer, originator, and servicer limits or concentrations early on. As a result, WesCorp‘s concentrations of RMBS with collateral in a single state – California – became excessive." Moreover, there is no evidence that NCUA examiners ever questioned WesCorp with regard to increases in issuer limits.

The IG reports make it clear that NCUA failed natural person credit unions. The agency's lax oversight of these corporate credit unions is the real story that needs to be pursued.

IG Report on WesCorp.

IG Report on U.S. Central.

2 comments:

  1. While the NCUA may have been asleep at the wheel, their actions do not excuse the gross negligence of packaging garbage loans and marketing them as AAA securities. I think this issue has more traction than you are willing to admit Keith and will probably lead to yet another taxpayer funded bailout of your precious banking system.

    Here is a recent article about just part of the liability JP Morgan Chase & Co faces.

    http://www.reuters.com/article/2011/03/28/jpmorgan-emc-ruling-idUSN2828991820110328

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  2. Did on-site examiners help keep Washington Mutual and Wachovia alive? No!! Did they keep Citibank healthy? No!! Sometimes the regulator and the agency are just stand-by participants in the process and cannot stop the downward slide the institution is on. So please stop it is just the NCUA with this problem. It was also the FRB, OCC and OTS asleep at the wheel.

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