In addition to the announcement of a $1.4 billion settlement from JP Morgan, NCUA posted data in late November that shows the legacy asset investments taken from the five liquidated corporates have increased by $5.2 billion in total value in the past 18 months.
This improvement raises questions about potential credit union recoveries from the legacy workout:
- Why hasen’t NCUA reported the asset management estates’ financial condition quarterly so all receiver certificate holders can see the progress on recovery?
- How can NCUA post the market values for each legacy asset along with the book value to track whether “market dislocations” are still undercutting the value of these investments?
- How can NCUA make all the income and expense details incurred by the Asset Management Center available and not simply a periodic, combined net receivable total on the TCCUSF statements? For example, the recovery of more than $300 million does not show up as an individual revenue item in the TCCUSF financial updates.
- Can NCUA detail any additional losses once the five corporates were put into liquidation, beyond the balance sheet conditions posted just prior to NCUA’s seizures?
- Can NCUA show the remaining OTTI losses on investments still to be incurred of the $11.5 billion total expensed and deducted from capital by the five corporates?
The Increase In Legacy Asset Values
According to the NCUA Guaranteed Note (NGN) balance data updated by NCUA through June 30, 2013, the legacy assets have increased in value by $5.2 billion over the past year and a half.
NCUA’s information shows the market value of the assets plus cash was $19.8 billion at December 31, 2011. As of June 30, 2013, the ending market value was $19.375 billion; however, there has also been $5.6 billion of investment principal payments in the same 18 months. This brings the total increase in cash received plus current market value improvement to $5.2 billion over December 2011.
Source: NCUA NGN Summary
The June 30, 2013, market value of the remaining assets of $19.375 billion plus cash on hand of $600 million exceeds the remaining NGN note balances by more than $1 billion at midyear 2013. Moreover, this market value of $19.375 is much lower than the remaining legacy asset book balances of $24.5 billion, meaning the prospect of further recoveries from these investments is very real.
Source: NCUA NGN Summary
The JP Morgan Settlement Of $1.417 Billion Increases Refund Prospects
The Justice Department’s settlement of its legal action against J P Morgan provided credit unions $1.417 billion in addition to the June 30 legacy assets’ market value and cash of almost $20 billion.
There are several vital questions about how these funds will affect credit union recoveries.
- NCUA refers several times to the net proceeds of this settlement. The Justice Department and NCUA lawyers were said to have achieved this outcome, so there should be no contingency payments to outside lawyers. Are there any other costs that are to be taken from this amount or is the full value going to benefit credit unions?
- How will NCUA allocate the funds to the liquidation estates of the corporates? Since many credit unions and all corporates hold receivers certificates for recoveries, this is a crucial question. NCUA acknowledges this responsibility to allocate the JP Morgan funds to the individual estates in Question 5 of the FAQ’s posted with the NGN updated information.
For example, NCUA could allocate the JP Morgan settlement money to cover specific corporate losses from the securities of the three issuers: Bear Stearns, WAMU, and the bank itself. As shown in the attached table, as of November 30, 2013, securities from these three firms bought by US Central had an outstanding value of $1.7 billion. When NCUA took the legacy assets, their value was $4.3 billion. Losses on these securities as of November 2013 are $198 million and the remaining reduction is in principal payments. These calculations are from Coops4Change database of all the legacy assets. Click here to view.
NCUA could also allocate the JP Morgan recovery in proportion to each corporate’s estate as a total of all legacy assets taken at the time of NGN securitization. If it used this formula, US Central would recover 43% of the settlement, WesCorp 39%, etc., based on NCUA’s table of assets contributed by each management estate. Learn more.
In either event, the allocation of this and other settlements lead to material recoveries for all holders of receivers certificates.
Increases In Legacy Investment Values Show Importance Of Timely Data
In a July 25, 2013, article, I provided an analysis of the legacy assets taken from each corporate. This analysis showed that as of June 30, actual losses for none of the five corporates exceeded the OTTI write-downs NCUA had subtracted from their respective capital. Only in the WesCorp situation did actual losses exceed the value of membership capital and retained earnings.
The analysis identified $6.2 billion in realized losses at June 2013 versus total OTTI reserves of $11.6 billion as of June 2010. In three of the corporates, there was still positive equity when NCUA took the assets. NCUA’s statement that, “These cumulative losses [$7.0 billion in the NGN table] exceed the $5.6 billion of credit union member capital in the failed corporates, underscoring that those institutions were insolvent,” is inaccurate and misleading.
The majority of losses have occurred in WesCorp’s investments; for the other four corporates, actual losses have yet to exceed the reserves each corporate established for their individual investments. Click here to learn more.
Source: Co-Ops For Change
Assessments Now Tie Up Un-needed Funds Years Into Future
The $700 million TCCUSF assessment by NCUA in July 2013 was based on old data. NCUA’s new information suggests, once again, no assessment was necessary.
Moreover, statements NCUA provides in its recent FAQs for the assessment are not accurate. NCUA says the funds are needed to repay Treasury Borrowings necessary to “manage the costs of the corporate system resolution program. These costs are driven by losses on the legacy assets, expenses, interest on borrowings, expenses associated with monitoring the re-securitized legacy assets, and other liquidation costs.” Read more.
This description is incomplete. The primary reason for the borrowings was the shortfall between the payouts to credit union corporate shareholders who had funded these investments in the corporates and the NGN note financing in which there was a $12 billion haircut between their book value and the funds raised. This overcollateralization requirement when NCUA went to Wall Street meant the $28 billion in new funds collected were significantly less than the insured savings paid out to corporate shareholders.
The costs NCUA names above are a mere fraction of the $4.8 billion in TCCUSF assessments to date; the investment losses had already been taken and the investment values reduced by the corporates in their OTTI expensing. This funding shortfall when NCUA took the legacy investments from the corporates was to be covered from Treasury borrowings. The repayment of these borrowings comes from principal pay downs on legacy assets. Only when losses exceed the NGN balances should a TCCUSF assessment be necessary to repay borrowings. The Treasury line costs 0.157% for a one-year note. NCUA expenses credit unions in 2013 $700 million versus the cost of one year’s NCUA borrowing of $1.1 million on the same amount.
A cynic might say that credit unions can pay now or pay later, what’s the difference? First there might be no later, that is the losses do not exceed the NGN payments and there will be substantial residual value. NCUA’s latest data shows the difference is a positive $1 billion between remaining amounts due on NGN notes and the market value and cash on hand of the legacy assets.
But the other factor is timing. NCUA in its recent FAQs made the following statement: “Any residual value remaining from the legacy assets collateralizing the NGNs … will not be available until the NGNs mature.”
So there can be substantial cash buildup of value from the legacy assets that is not refundable until the final notes are paid off. This means NCUA and Treasury will be holding credit unions’ monies, fully refundable, from the July 2013 assessment more than eight years beyond what was necessary to pay for the program.
A Leadership Example For Emulation
NCUA was not the only insurance fund facing funding challenges during the crisis. The FDIC, which was officially reporting negative net worth, required its insured institutions to prepay premiums for five years to help with the FDIC’s funding needs at the peak of the crisis. In the FDIC’s second quarter banking profile, the following statement appeared: “At the end of June, the FDIC refunded $5.85 billion in remaining prepaid assessments to more than 5,600 institutions.”
The FDIC is nowhere near its new reserve ratio requirements of 2% of insured deposits (actual 0.63%) or 1% of the new assessment base (actual 0.30%), but it returned the funds anyway. It recognized the changed circumstances and adjusted its initial plan accordingly. Surely a member-owned insurer should be even more conscientious and return owners’ monies when the fund’s obligations are adequately covered?