Monday, May 7, 2012

Debt as Net Worth

If you have not read yesterday's Bank Lawyer's Blog, you should.

The blog takes aim at NCUA's Section 208 net worth assistance that is being used to keep insolvent credit unions open.

"Counting debt as net worth is a great trick. The FSLIC used it in connection with the Southwest Plan in the late 1980s, which allowed the FSLIC to hide the fact that it was technically insolvent, until Congress finally caught on and punished the FSLIC by merging it out of existence and transforming its operating head, the independent Federal Home Loan Bank Board, into the OTS (recently abolished by Dodd-Frank). Could the NCUA be following down FSLIC's weed-strewn road to perdition?"

Read the post.


  1. NCUA must be using FSLIC's playbook. They should read ahead and see how it worked out for FSLIC.

  2. The NCUA is being run into the ground. The Chairman has no idea what she is doing once again the crew is running the ship. We have many problems with credit unions all of which will come out.

  3. Keith - From your lips to God's ears - so it should be. The inmates are running the aslyum. The NCUA is out of control and may have the supreme distinction of being the most incompetent regulatory federal agency in the entire federal government. Kudos to the 3 village idiots for stepping up to the plate when it comes to being stuck on stupid. Is it possible a federal regulatory agency could consistently make mistakes with total absolute impunity and immunity? It could happen.

  4. "the hardest thing to kill is a federal program". Ronald Reagan.

    we may be witnessing the ugliest thing to see; a federal regulator killing itself.
    ccu losses due to lack of supervision.
    retail credit union losses due to lack of supervision.
    gao and IG reports.
    slandering anyone who opposes (north carolina, corporate america/louisiana corp merger.
    playing hide and go seek with losses.
    using the share insurance fund for losses at the corporate insurance fund.
    now 208.

  5. Separating the POST from the REPLIES regarding management practices:
    The problems at FSLIC, at the time and again recently at FDIC, the corresponding technical solvency issues in the 1980’s and early 1990s of the banks’ BIF and SAIF funds, had little to do with government accounting practices or counting debt as net worth.  It had everything to do with the bank regulators’ long history and pattern of poorly supervising bank practices.
    NCUA capital injections into salvageable institutions is a regulatory tool first used for banks by the Reconstruction Finance Corporation in the 1930s, and again with notable success under the TARP/CCP to resolve the nation’s banking crisis.  It pairs with liquidity lending assistance to smooth economic disruptions.  “208 Assistance” providing capital assistance by NCUA/NCUSIF has an equally long history of success.
    Extensive problems among insured institutions, not the funds themselves, is the root of regulatory fund failure.  Accordingly, it looks to be FDIC rather than NCUA that houses the problems.  The first US bank fund failed in 1837, another in 1842, and fund principals at the time attributed it to “Reckless banking”.  As was the case with the big New York bank safety fund in 1866.  More 1907, and eight additional bank guarantee funds died during the 1920’s.  The national bank fund FDIC has been in and out of solvency issues numerous times, recently had negative equity of over $20 billion and two weeks ago FDIC claimed it needs $65 billion more in premiums over the next 5 years to match its cashflows to known bank failures that have to be strung out over that period in a resolution pipeline management system – again from reckless banking and trickledown consequences from the 2008 US Banking Crisis.
    The Road to Perdition is a good book but it may be FDIC's story with institutions too big to fail and too big to effectively discipline.

    1. I don't know what your point is, but name three credit unions which have had 208 assistance that are still in existence today in the same form as prior to the assistance; i.e., merging into another credit union does not count. All government assistance does is delay the inevitable--total failure.

    2. David Green you may be very wrong in your assumptions. Antidotal information suggests quite a few CUs received beneficial 208 assistance including at least one now over $2 billion in assets and it appears many rumored recipients are very healthy. The data is hard to document, however, as earlier versions of call reports make it difficult to reverse-engineer the information, and NCUA would not list the recipients even under FOIA request. The Agency opined that decisions on assistance provided pursuant to Section 208 of the Federal Credit Union Act are based on examinations of credit unions, and cited that the courts have discerned it was okay to protect the security of financial institutions by withholding from the public reports that contain frank exam evaluations of a bank's (or CUs) stability.

      That changed in 1998 with the passage of CUMAA/HR1151. 208 assistance could no longer be counted toward net worth, and bankers and associations like ABA claimed a victory in this--as with fewer regulatory assistance options credit unions could possibly be made to fail faster.

      In January 2011, a housekeeping measure SB 4036 was signed into law and 208 assistance authorities were returned to NCUA. It has been used since, but the regulatory environment has changed at NCUA (as well as FDIC and Treasury) following the banking crisis. It is seemingly not uncommon for a regulator, government spokesperson, (the press or this blog) to seek to embarrass a financial institution by publicizing capital assistance, possibly as a repressionary tool, citing transparency—despite the previous position held universally by state and federal regulatory agencies on divulgence of examination based data.

    3. Look back to the 1980s and there was a large credit union in San Diego that received 208 assistance and is still operating today as an independent credit union free from direct NCUA examination authority.

  6. 208 is throwing good money after bad. History lessons aside, it is today a sign of pure desperation. Cant resolve the troubled credit union because there isn't enough funds in the fund!



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