As you can probably tell from my lack of creative content, the industriousness at Magnus Enterprises has fallen to critically low levels.
A bunch of corporate CEO's head to Alexandria to lobby the NCUA for the right to return capital to members if the investment losses are less than anticipated? Meh. This story is more about retail corporates wanting to retain some notional ownership of U.S. Central than it is about natural person credit unions' interests. And even if Southeast publicizes the improvement in its portfolio, let's not forget that U.S. Central's book keeps getting worse and worse. They've actually recorded more impairments in three-quarters of 2009 ($1.33 billion) than they did in all of 2008 ($1.23 billion). There's a greater chance that a leprechaun bearing a pot o' gold knocks on the door in Lenexa than U.S. Central's eventual losses come in at less than their former capital position. Congrats to Debbie Matz for seeing through the spin and dismissing the corporates earlier today.
Constitution Corporate is busted? Whoop-de-do, told you so, etc. Aside from the logical inconsistency that an institution with capital (U.S. Central) is in conservatorship while a bankrupt institution (Constitution) isn't, this isn't especially interesting. Either of Constitution's geographic neighbors, Members United or EasCorp, would be a good fit for a merger partner, yet the odds of this actually happening seem, to me, to be extraordinarily low. This could be a microcosm of the broader corporate network, and I still harbor hopes that NCUA will take a more activist approach when it comes to forcing consolidation on the corporates.
Anyway, if I can't summon the interest to write at length about these topics, what chance do I have to cover Moody's forecasting more private-label MBS losses, or corporate merger speculation, or whatever? Damn little chance, I'd say.
My next post, a comment letter to NCUA on the proposed corporate rules, will be my last post.
Trust me, this wasn't a hasty decision. I've agonized over the past two months about whether I should continue to write half-assedly, or maybe scale back to two good posts a month, and I finally realized that the sensible move was to close up shop. I am at ease with this decision.
This was never a news site. I don't have the readership that the trades do, and God help you if you're relying on me as a source of timely information. This was never a rumor site. Although the comments were often rife with speculation, I tried to stick to the facts as much as I could and my biggest failures were when I went off-script with conspiracy theories.
Instead, what this site purported to do was analyze the numbers (and call bullshit when the powerful were misrepresenting those numbers). You read here first how expensive the corporate problem was going to be. You read here first that WesCorp was significantly underreporting its losses and was a much bigger threat to the system than U.S. Central. You read here first how U.S. Central's losses would trickle down across the industry. I'm comfortable with declaring victory on the analysis front and moving on.
Given the corporate saga is almost all over but the cryin', there isn't much of a market left for my style of analysis. Once the new corporate rules kick in, who really cares what some pipe-smoking comic book character thinks? My opportunity to influence the debate has faded, and I need to stop before I make a mockery of my good intentions.
I'll still be around. The unrealizedlosses@gmail.com email address will live on, and the blog has opened new avenues through which I can contribute to our industry. Unrealized Losses will soon go dark, but you haven't seen the last of Will Magnus.
Monday, November 16, 2009
Sunday, November 1, 2009
Applying U.S. Central's Loss Across the Retail Corporates
What better way to mark my 100th post than with an update to my favorite table ever, the one that shows the expected impairments of MCS and PIC across the corporate network.
This table needs updating by virtue of U.S. Central's announcement of a $308 million loss for Q3, the result of an additional $320 million in writedowns on its ailing book of private-label mortgage securities. Here are the results. As always click on the image to enlarge.
(Note that I've eliminated the columns where I showed capital ratios for the various institutions. It didn't add a lot of value, and it was tedious to calculate given the ratios' reliance on daily average net asset values.)
The highlights:
There used to be seven corporates with reserves. Now there are just five. This latest round of U.S. Central losses will require Eascorp and CenCorp to begin depleting members' capital. None of the five with retained earnings (Corporate One, Corporate Central, Corporate America, VolCorp and Iowa) would see their reserves depleted even if U.S. Central ends up completely impairing its MCS.
Paid-in capital at Southeast, SunCorp, First Carolina, First Corp, Kentucky and Kansas is now fully depleted because of U.S. Central's Q3 losses. These six corporates' PIC was partially depleted as of the end of Q2, but it's all gone now.
The three retail corporates most at risk for insolvency remain, in order (and in my opinion) Constitution, Members United and Southwest.
Constitution has $13.3 million in capital, $2 million in remaining capital at risk at U.S. Central, and its next round of OTTI will likely produce a loss of roughly $10 million. I have a hard time imagining this ending happily for Constitution.
Members United has $233 million in capital with $23 million in exposure to U.S. Central. Its next OTTI should be much less than $200 million (my guess is somewhere between $50 and $75 million), but with a few more quarters of similar investment impairments, insolvency would be on the horizon.
The same is true for Southwest, which has $200 million in capital and $19 million in remaining exposure to U.S. Central. Its next round of OTTI will likely also be a quarter to a third of its remaining capital, which means--like Members United--Southwest has less than a year of solvency at the current burn rate.
This table needs updating by virtue of U.S. Central's announcement of a $308 million loss for Q3, the result of an additional $320 million in writedowns on its ailing book of private-label mortgage securities. Here are the results. As always click on the image to enlarge.
(Note that I've eliminated the columns where I showed capital ratios for the various institutions. It didn't add a lot of value, and it was tedious to calculate given the ratios' reliance on daily average net asset values.)
The highlights:
There used to be seven corporates with reserves. Now there are just five. This latest round of U.S. Central losses will require Eascorp and CenCorp to begin depleting members' capital. None of the five with retained earnings (Corporate One, Corporate Central, Corporate America, VolCorp and Iowa) would see their reserves depleted even if U.S. Central ends up completely impairing its MCS.
Paid-in capital at Southeast, SunCorp, First Carolina, First Corp, Kentucky and Kansas is now fully depleted because of U.S. Central's Q3 losses. These six corporates' PIC was partially depleted as of the end of Q2, but it's all gone now.
The three retail corporates most at risk for insolvency remain, in order (and in my opinion) Constitution, Members United and Southwest.
Constitution has $13.3 million in capital, $2 million in remaining capital at risk at U.S. Central, and its next round of OTTI will likely produce a loss of roughly $10 million. I have a hard time imagining this ending happily for Constitution.
Members United has $233 million in capital with $23 million in exposure to U.S. Central. Its next OTTI should be much less than $200 million (my guess is somewhere between $50 and $75 million), but with a few more quarters of similar investment impairments, insolvency would be on the horizon.
The same is true for Southwest, which has $200 million in capital and $19 million in remaining exposure to U.S. Central. Its next round of OTTI will likely also be a quarter to a third of its remaining capital, which means--like Members United--Southwest has less than a year of solvency at the current burn rate.
Wednesday, October 28, 2009
WesCorp's Excellent Adventure in the Capital Market
Given that I post about every two weeks these days, it's probably not difficult to recall the theme of my last effort. Namely, that U.S. Central's debt issuance illustrated the uncompetitive rates being paid to natural person credit union's on their NCUA-guaranteed corporate certificates.
I suggested--crudely--based on a survey of corporate CD offerings, that corporates were underpaying their members by about 10 bps.
It turns out this was only partially accurate. Based on today's sale of $1.5 billion in three-year notes by WesCorp, it appears that corporates are in fact paying a decent market rate on their certificates but that U.S. Central got taken to the cleaners by its new bondholders, to the tune of a 10 basis point gift.
How so? First, it's not quite accurate to compare the yield on the U.S. Central three-year note (1.92%) to the yield on today's WesCorp offering (1.79%) and say that U.S. Central overpaid by 13 bps. The underlying level of interest rates changed over the last two weeks. Instead, the appropriate basis of comparison is to look at the spreads of the two offerings, either to the Treasury curve or to the swap curve.
The U.S. Central three-year note was priced at +47 bps to Treasuries and +5 bps to swaps. The WesCorp note today priced at +35.9 bps to Treasuries and, supposedly, at -5 bps to swaps, although it appears that it priced at a lower yield than this, like swaps less 6 or 7 bps. The exact spread isn't especially important--we have enough information to conclude that the WesCorp members got a deal some 10 to 12 bps better than the U.S. Central members did. This is pretty clear evidence that the U.S. Central offering of two weeks ago was underpriced (i.e. offered too much yield) by almost the same amount I contended the corporates were underpaying their members.
Why does any of this matter? Well, I will concede that the most compelling argument when it comes to defending corporates paying low rates on CD's is the idea of a 'zero-sum game.' The fundamental notion behind this argument is that natural person credit unions are paying the entire bill for this debacle anyway. If corporates pay high CD rates, the final price tag for the stabilization will be higher (since the corporates are less capable of earning their way out of the hole). Similarly, by paying low rates, the corporates might be able to make extra income which lowers the stabilization expense. The total cost to the industry is fixed irrespective of CD rates.
This is a solid argument, and the only real complaint I have with it is that the NCUA should offer an incentive other than fear to get natural person credit unions to invest in the corporates. If that means paying higher CD rates, then at least the NPCU's who funded the corporates through this turmoil come out relatively better off than those NPCU's who have forsaken the corporates. Paying low CD rates implicitly favors those who invest outside of the corporates. The extra yield these credit unions earn on their investments more than offsets the fractionally higher stabilization expense they'll face.
However, the 'zero-sum game' argument breaks down terribly when, in fact, corporates are paying their members a fair rate while U.S. Central is paying its external investors abnormally high yields. Now it's the worst of both worlds. Not only is the final stabilization bill higher (due to U.S. Central's higher funding costs relative to CD's), but the extra investment income is accruing to entities outside of the credit union industry.
(One other common argument made on this topic is that it is inappropriate to compare U.S. Central note rates to retail corporate CD rates. A better comparison would be to know the wholesale CD rate, i.e. what a retail corporate earns when it buys a CD from U.S. Central. This is true, but it also illustrates an important point that this spread between the the wholesale and retail corporate CD rates is a deadweight loss. If we rid ourselves of the two-tiered corporate market, this extra yield would go where it belongs, to the natural person credit unions.
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One last thought: why did the WesCorp offering come at a 10-12 bps premium (lower yield) to the U.S. Central offering of two weeks ago? The most logical argument is that investors were now familiar with the NCUA-guaranteed bonds. Where they might have shied away from the U.S. Central bonds (indeed, the U.S. Central 3-year note reportedly had mediocre interest while the WesCorp offering was 2.5 times oversubscribed), investors now understand the TCCULGP and are willing to accept a fairer yield.
But what if the NCUA got the message that the sweetheart yields available to investors outside of the credit union industry were an outrage? Could NCUA have dictated that this bond had to be priced at a spread more comparable to where guaranteed corporate CD's are offered? Probably not, but it's good grist for the conspiracy theorists' mills.
I suggested--crudely--based on a survey of corporate CD offerings, that corporates were underpaying their members by about 10 bps.
It turns out this was only partially accurate. Based on today's sale of $1.5 billion in three-year notes by WesCorp, it appears that corporates are in fact paying a decent market rate on their certificates but that U.S. Central got taken to the cleaners by its new bondholders, to the tune of a 10 basis point gift.
How so? First, it's not quite accurate to compare the yield on the U.S. Central three-year note (1.92%) to the yield on today's WesCorp offering (1.79%) and say that U.S. Central overpaid by 13 bps. The underlying level of interest rates changed over the last two weeks. Instead, the appropriate basis of comparison is to look at the spreads of the two offerings, either to the Treasury curve or to the swap curve.
The U.S. Central three-year note was priced at +47 bps to Treasuries and +5 bps to swaps. The WesCorp note today priced at +35.9 bps to Treasuries and, supposedly, at -5 bps to swaps, although it appears that it priced at a lower yield than this, like swaps less 6 or 7 bps. The exact spread isn't especially important--we have enough information to conclude that the WesCorp members got a deal some 10 to 12 bps better than the U.S. Central members did. This is pretty clear evidence that the U.S. Central offering of two weeks ago was underpriced (i.e. offered too much yield) by almost the same amount I contended the corporates were underpaying their members.
Why does any of this matter? Well, I will concede that the most compelling argument when it comes to defending corporates paying low rates on CD's is the idea of a 'zero-sum game.' The fundamental notion behind this argument is that natural person credit unions are paying the entire bill for this debacle anyway. If corporates pay high CD rates, the final price tag for the stabilization will be higher (since the corporates are less capable of earning their way out of the hole). Similarly, by paying low rates, the corporates might be able to make extra income which lowers the stabilization expense. The total cost to the industry is fixed irrespective of CD rates.
This is a solid argument, and the only real complaint I have with it is that the NCUA should offer an incentive other than fear to get natural person credit unions to invest in the corporates. If that means paying higher CD rates, then at least the NPCU's who funded the corporates through this turmoil come out relatively better off than those NPCU's who have forsaken the corporates. Paying low CD rates implicitly favors those who invest outside of the corporates. The extra yield these credit unions earn on their investments more than offsets the fractionally higher stabilization expense they'll face.
However, the 'zero-sum game' argument breaks down terribly when, in fact, corporates are paying their members a fair rate while U.S. Central is paying its external investors abnormally high yields. Now it's the worst of both worlds. Not only is the final stabilization bill higher (due to U.S. Central's higher funding costs relative to CD's), but the extra investment income is accruing to entities outside of the credit union industry.
(One other common argument made on this topic is that it is inappropriate to compare U.S. Central note rates to retail corporate CD rates. A better comparison would be to know the wholesale CD rate, i.e. what a retail corporate earns when it buys a CD from U.S. Central. This is true, but it also illustrates an important point that this spread between the the wholesale and retail corporate CD rates is a deadweight loss. If we rid ourselves of the two-tiered corporate market, this extra yield would go where it belongs, to the natural person credit unions.
==================================================
One last thought: why did the WesCorp offering come at a 10-12 bps premium (lower yield) to the U.S. Central offering of two weeks ago? The most logical argument is that investors were now familiar with the NCUA-guaranteed bonds. Where they might have shied away from the U.S. Central bonds (indeed, the U.S. Central 3-year note reportedly had mediocre interest while the WesCorp offering was 2.5 times oversubscribed), investors now understand the TCCULGP and are willing to accept a fairer yield.
But what if the NCUA got the message that the sweetheart yields available to investors outside of the credit union industry were an outrage? Could NCUA have dictated that this bond had to be priced at a spread more comparable to where guaranteed corporate CD's are offered? Probably not, but it's good grist for the conspiracy theorists' mills.
Thursday, October 15, 2009
U.S. Central Issues Debt, Extent of Corporates' Lowball CD Rates Revealed
First, let me say that it's absolutely shameful that neither U.S. Central nor the NCUA would publicize the issuance of $4 billion in debt by an institution that we all own. (Alright, we don't completely own U.S. Central yet since it still has a tiny amount of MCS, but give it a couple more quarters and it'll officially be a ward of the industry....) I learned about the bond issuance from one of my readers who learned about it from Bank of America-Merrill Lynch. When news about the corporate credit union network is coming from the investment banks, you know we've entered bizarro world.
Moreover, what little communication that did come from U.S. Central and NCUA (a letter from U.S. Central CEO Francois Henriquez to corporate CEO's and a note from the NCUA to the trade publications) offered a rather cryptic explanation of the yields on the newly-issued debt. Specifically, these letters said that U.S. Central issued $500 million of a two-year floating rate note at 3-month LIBOR flat, $1.5 billion of a 2-year fixed rate note at swaps + 0 bps, and $2 billion of a 3-year fixed rate note a swaps + 5 bps. Clear as mud, right?
Let's dig a little deeper into the two fixed rate issues. (Thanks to the reader that sent the Bloomberg info my way...)
USCENT 1.25 10-19-11 was issued at an original price of 99.949, which gives a yield of 1.276%. This yield is equivalent to the two-year swap rate, so the NCUA / U.S. Central explanation makes sense. U.S. Central sold $1.5 billion of this issue, which was fully backed by the NCUSIF, and I hear that this issue was quite popular and oversubscribed. U.S. Central must pay the NCUA an additional 10 bps for guaranteeing this note.
The second fixed-rate note was USCENT 1.90 10-19-12, which settled at a price of 99.936 or a yield of 1.922%. This was indeed equivalent to the three-year swap rate plus 5 basis points. This was a $2 billion issue that apparently wasn't quite as oversubscribed as the 2-year note but still sold fairly well. U.S. Central must pay NCUA 15 bps for the guarantee on this one.
Want to know why U.S. Central and NCUA quote the yields on these things versus swaps instead of coming right out and telling us what they yielded? Because they offered significantly better yields to investors than what corporates are paying to natural person credit unions on guaranteed CD's.
The investors that bought the two-year note (presumably banks and/or big money managers--I haven't heard from any credit union that they had the opportunity to buy these notes as new issues) got a yield of 1.276%. Here's a sampling of what some of the larger corporates are paying on 2-year CD's (which have the same credit rating, but poorer secondary liquidity so theoretically should have a slightly higher yield than the notes).
(I'll analyze some of the positive benefits of having non-credit union funding in the system over the weekend. I'm not opposed to the idea of inducing external money into the system, but I am opposed to corporate credit unions taking advantage of their members.)
I'll close tonight with an anecdote from the San Diego NCUA town hall (which is available online here). OCCU director Scott Hunt told a story about credit unions who have come to him and said that (I paraphrase) we can earn extra yield by investing outside the corporate network, to which Hunt replies, yes you can, but recognize the higher cost that the system faces if NCUA is forced to liquidate troubled investments due to a lack of systemic liquidity. Hunt makes it sound like there are two choices, either accept what the corporates are paying you, or withdraw your money and prepare to meet your maker via a systemwide collapse. He doesn't mention a third way: ask the corporates to pay you a fair rate for your investment.
Moreover, what little communication that did come from U.S. Central and NCUA (a letter from U.S. Central CEO Francois Henriquez to corporate CEO's and a note from the NCUA to the trade publications) offered a rather cryptic explanation of the yields on the newly-issued debt. Specifically, these letters said that U.S. Central issued $500 million of a two-year floating rate note at 3-month LIBOR flat, $1.5 billion of a 2-year fixed rate note at swaps + 0 bps, and $2 billion of a 3-year fixed rate note a swaps + 5 bps. Clear as mud, right?
Let's dig a little deeper into the two fixed rate issues. (Thanks to the reader that sent the Bloomberg info my way...)
USCENT 1.25 10-19-11 was issued at an original price of 99.949, which gives a yield of 1.276%. This yield is equivalent to the two-year swap rate, so the NCUA / U.S. Central explanation makes sense. U.S. Central sold $1.5 billion of this issue, which was fully backed by the NCUSIF, and I hear that this issue was quite popular and oversubscribed. U.S. Central must pay the NCUA an additional 10 bps for guaranteeing this note.
The second fixed-rate note was USCENT 1.90 10-19-12, which settled at a price of 99.936 or a yield of 1.922%. This was indeed equivalent to the three-year swap rate plus 5 basis points. This was a $2 billion issue that apparently wasn't quite as oversubscribed as the 2-year note but still sold fairly well. U.S. Central must pay NCUA 15 bps for the guarantee on this one.
Want to know why U.S. Central and NCUA quote the yields on these things versus swaps instead of coming right out and telling us what they yielded? Because they offered significantly better yields to investors than what corporates are paying to natural person credit unions on guaranteed CD's.
The investors that bought the two-year note (presumably banks and/or big money managers--I haven't heard from any credit union that they had the opportunity to buy these notes as new issues) got a yield of 1.276%. Here's a sampling of what some of the larger corporates are paying on 2-year CD's (which have the same credit rating, but poorer secondary liquidity so theoretically should have a slightly higher yield than the notes).
- WesCorp - 1.26%
- Members United - 1.23%
- SWCorp - 1.23%
- First Carolina - 1.19%
- Mid-Atlantic - 1.15%
- SE Corp - 1.13%
- CenCorp - 1.13%
(I'll analyze some of the positive benefits of having non-credit union funding in the system over the weekend. I'm not opposed to the idea of inducing external money into the system, but I am opposed to corporate credit unions taking advantage of their members.)
I'll close tonight with an anecdote from the San Diego NCUA town hall (which is available online here). OCCU director Scott Hunt told a story about credit unions who have come to him and said that (I paraphrase) we can earn extra yield by investing outside the corporate network, to which Hunt replies, yes you can, but recognize the higher cost that the system faces if NCUA is forced to liquidate troubled investments due to a lack of systemic liquidity. Hunt makes it sound like there are two choices, either accept what the corporates are paying you, or withdraw your money and prepare to meet your maker via a systemwide collapse. He doesn't mention a third way: ask the corporates to pay you a fair rate for your investment.
Tuesday, October 13, 2009
A Town Hall Retrospective
Now that the three NCUA townhalls are in the books, it's worth reviewing the highlights of the meetings. It appears the most fireworks happened at the San Diego meeting last Monday, where, according to reports from the CU Times (links here, here, here and here) and readers' feedback, four interesting developments occurred:
1. The proposed NCUA regulations on reforming the corporates (formally, Part 704 of the Rules and Regs) will be released on November 19th. The proposal may require the corporates to ask members for paid-in capital before providing services to members. Moreover, the proposed regs may seriously handcuff the corporates' portfolio managers from adding as much interest rate risk to their books. The sources of excess spread for a corporate investment portfolio are (generally) interest rate risk (including buying securities with embedded options), liquidity risk (buying securities with less actively traded secondary markets) and credit risk. If anything, the one risk you'd like to leave them is interest rate risk. It's the easiest to manage (CapCorp notwithstanding--we've all gotten a lot smarter since then) with derivative overlays, and you have to give the corporates some ability to earn excess spread. If they can't earn reasonable yields on their investments, they won't be able to offer competitive deposit rates, and they'll be forced to increase fees on other services.
2. NCUA predicts the failures of large credit unions in 2010. This is not surprising in itself, but it's interesting that the NCUA would discuss this in a public forum. The failures in 2009 have generally been of small to midsized institutions, but failures are increasingly likely to affect larger institutions in 2010. Chairman Debbie Matz indicated a strong positive relationship between failures and exposure to business and indirect lending. (I haven't written about too many non-corporate issues on this blog, but I feel the trade groups' push for relaxed business lending caps will have the unintended consequence of giving credit unions more rope with which to hang themselves. Yes, some credit unions can profitably and responsibly make business loans. Many--most?--others can't, and charge-offs can pile up a lot faster in a book of business loans than with typical CU lending activity. But I digress....)
3. Scott Hunt, the director of the NCUA's Office of Corporate Credit Unions, told San Diego attendees that WesCorp will almost certainly record large additional other-than-temporary impairments (OTTI) when they close the books on Q3. This isn't surprising--the collateral backing WesCorp investments grows more troubled every day and recent months have seen the realization that loss severities on option-ARM loans will be staggering. According to CU Times, Hunt characterized the chances of WesCorp's investments performing better than currently estimated as "highly unlikely," I'm not sure if this is simply Hunt's opinion or if this notion is backed by other external analysis, but it certainly reflects poorly on the Clayton valuation process. If the investments were properly valued and impaired, the likelihood of over- or underperforming credit loss estimates would be about 50/50. Hunt apparently believes that the Clayton estimates are way too optimistic.
4. Finally, Hunt seemed to slip up and indicate that some ring-fencing of WesCorp's troubled assets was in the works. One attendee told me that Hunt mentioned WesCorp issuing NCUSIF-backed bonds, and this was followed by Hunt refusing to provide any detail. Another person present at the meeting said Hunt mentioned splitting the bad assets from the corporates, perhaps sometime in Spring 2010. I am a big fan of the "good corporate / bad corporate" model, assuming you can find investors willing to finance the bad assets. And I think it makes a tremendous amount of sense to have WesCorp be the Bad Corporate. They are a basket case and so hopelessly undercapitalized that no one in his right mind believes them to be a going concern. If you are able to add a lot of debt financing to WesCorp's balance sheet (even if the NCUA has to guarantee it), you can strip WesCorp of depository authority and still not be in a position where you have to sell the bad assets. (Think of the proceeds of the external debt issuance being used to redeem member deposits at WesCorp, and then closing the book on WesCorp as a depository institution.)
There are still a few problems with this plan, including how you transfer the bad assets at U.S. Central and others to WesCorp without realizing the unrealized losses. And the demise of WesCorp would create a huge vacuum for natural person credit unions on the west coast. This second issue is probably easier to solve than the former, but if U.S. Central also goes away (or also becomes a Bad Corporate) as part of the corporate restructuring, then even the issue of transferring securities between institutions isn't a huge deal.
1. The proposed NCUA regulations on reforming the corporates (formally, Part 704 of the Rules and Regs) will be released on November 19th. The proposal may require the corporates to ask members for paid-in capital before providing services to members. Moreover, the proposed regs may seriously handcuff the corporates' portfolio managers from adding as much interest rate risk to their books. The sources of excess spread for a corporate investment portfolio are (generally) interest rate risk (including buying securities with embedded options), liquidity risk (buying securities with less actively traded secondary markets) and credit risk. If anything, the one risk you'd like to leave them is interest rate risk. It's the easiest to manage (CapCorp notwithstanding--we've all gotten a lot smarter since then) with derivative overlays, and you have to give the corporates some ability to earn excess spread. If they can't earn reasonable yields on their investments, they won't be able to offer competitive deposit rates, and they'll be forced to increase fees on other services.
2. NCUA predicts the failures of large credit unions in 2010. This is not surprising in itself, but it's interesting that the NCUA would discuss this in a public forum. The failures in 2009 have generally been of small to midsized institutions, but failures are increasingly likely to affect larger institutions in 2010. Chairman Debbie Matz indicated a strong positive relationship between failures and exposure to business and indirect lending. (I haven't written about too many non-corporate issues on this blog, but I feel the trade groups' push for relaxed business lending caps will have the unintended consequence of giving credit unions more rope with which to hang themselves. Yes, some credit unions can profitably and responsibly make business loans. Many--most?--others can't, and charge-offs can pile up a lot faster in a book of business loans than with typical CU lending activity. But I digress....)
3. Scott Hunt, the director of the NCUA's Office of Corporate Credit Unions, told San Diego attendees that WesCorp will almost certainly record large additional other-than-temporary impairments (OTTI) when they close the books on Q3. This isn't surprising--the collateral backing WesCorp investments grows more troubled every day and recent months have seen the realization that loss severities on option-ARM loans will be staggering. According to CU Times, Hunt characterized the chances of WesCorp's investments performing better than currently estimated as "highly unlikely," I'm not sure if this is simply Hunt's opinion or if this notion is backed by other external analysis, but it certainly reflects poorly on the Clayton valuation process. If the investments were properly valued and impaired, the likelihood of over- or underperforming credit loss estimates would be about 50/50. Hunt apparently believes that the Clayton estimates are way too optimistic.
4. Finally, Hunt seemed to slip up and indicate that some ring-fencing of WesCorp's troubled assets was in the works. One attendee told me that Hunt mentioned WesCorp issuing NCUSIF-backed bonds, and this was followed by Hunt refusing to provide any detail. Another person present at the meeting said Hunt mentioned splitting the bad assets from the corporates, perhaps sometime in Spring 2010. I am a big fan of the "good corporate / bad corporate" model, assuming you can find investors willing to finance the bad assets. And I think it makes a tremendous amount of sense to have WesCorp be the Bad Corporate. They are a basket case and so hopelessly undercapitalized that no one in his right mind believes them to be a going concern. If you are able to add a lot of debt financing to WesCorp's balance sheet (even if the NCUA has to guarantee it), you can strip WesCorp of depository authority and still not be in a position where you have to sell the bad assets. (Think of the proceeds of the external debt issuance being used to redeem member deposits at WesCorp, and then closing the book on WesCorp as a depository institution.)
There are still a few problems with this plan, including how you transfer the bad assets at U.S. Central and others to WesCorp without realizing the unrealized losses. And the demise of WesCorp would create a huge vacuum for natural person credit unions on the west coast. This second issue is probably easier to solve than the former, but if U.S. Central also goes away (or also becomes a Bad Corporate) as part of the corporate restructuring, then even the issue of transferring securities between institutions isn't a huge deal.
Thursday, October 1, 2009
The letter They don't want you to read...
Did you notice that U.S. Central has published a revised annual report where the letter from Jim Nance was simply removed? Didn't the Advisory Board of Directors sign off on the annual report before its release? Was what Nance wrote really so shocking that it had to be totally stricken from the record? If anything, I have a more sympathetic view of Nance simply because the NCUA saw fit to expunge his words.
Incidentally, the more I hear about Nance's exit, the more I think this was purely a personality issue. If his dismissal truly amounted to strategy differences, the likely conflict was that Nance was much more interested in selling securities out of U.S. Central's portfolio than were the on-site NCUA guys. Yes, it's plausible that this difference escalated to a fireable offense, but it's much easier to see a situation where the guys running the firm simply didn't get along.
Anyway, for those of us not down with U.S. Central's revisionist history, here is the text of Nance's original letter (click on each image to enlarge):
Incidentally, the more I hear about Nance's exit, the more I think this was purely a personality issue. If his dismissal truly amounted to strategy differences, the likely conflict was that Nance was much more interested in selling securities out of U.S. Central's portfolio than were the on-site NCUA guys. Yes, it's plausible that this difference escalated to a fireable offense, but it's much easier to see a situation where the guys running the firm simply didn't get along.
Anyway, for those of us not down with U.S. Central's revisionist history, here is the text of Nance's original letter (click on each image to enlarge):
Sunday, September 27, 2009
Sayonara, Nance
I don't really have anything to add on the topic of James Nance's firing--I've pretty much heard the exact same thing that the trades are reporting. But I did want to open up a new thread for any comments and announce a temporary detente in my war on journalism!
I will add one thing: regardless of whether it's Jim Nance, Francois Henriquez or a suit-to-be-named-later sitting in the big office at U.S. Central, the NCUA is the boss. "Divergent views about how to move U.S. Central forward" is the politically-correct way of saying that Nance wasn't onboard with the NCUA's plans for U.S Central.
We'll have to wait till we see the NCUA's prescription for the corporates to have a clearer idea of the conflict, but (speculation alert!) it wouldn't surprise me if the NCUA is preparing for life without U.S. Central while Nance expected to manage a going concern.
I will add one thing: regardless of whether it's Jim Nance, Francois Henriquez or a suit-to-be-named-later sitting in the big office at U.S. Central, the NCUA is the boss. "Divergent views about how to move U.S. Central forward" is the politically-correct way of saying that Nance wasn't onboard with the NCUA's plans for U.S Central.
We'll have to wait till we see the NCUA's prescription for the corporates to have a clearer idea of the conflict, but (speculation alert!) it wouldn't surprise me if the NCUA is preparing for life without U.S. Central while Nance expected to manage a going concern.
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