Sunday, December 04, 2016

The NCUA Budget: Easy Money... Part 2

So, let's tip-toe forward on the examination of NCUA's "management" of the $13 billion share insurance fund - the NCUSIF. Keep in mind as we move forward Chair Metsger's firm, committed declaration that the NCUA Board has a fiduciary responsibility to manage the NCUSIF prudently - with "the highest standard of care".

"What the... FED"?!
Yesterday we noted that in the face of 99+% certainly of immediately rising market rates, the investment gurus at NCUA have purchased $800 million in long-term Treasury bonds in the last 90 days (... and $1.4+ billion total in 2016). [So much for their self-proclaimed interest rate risk (IRR) "expertise" - heh!]

Of course, it's easy to have 20-20 hindsight, but investing $800 million in long-term treasuries in the last 90 days does not meet even an amateur's definition of "the highest standard of care", i.e. fiduciary responsibility.

But clearly, given 1) the FED's "loud proclamation" of imminent rate increases, 2) the results of the November election, and 3) the confirmation provided by economic data of a surging U.S. economy; you at least wouldn't ...

Saturday, December 03, 2016

The NCUA Budget: Easy Money... Part 1

Hope you noted that Mr. Larry Fazio, the NCUA
(... not really!)
Director of Examination and Insurance, recently forecast the possibility (see story at CUToday - here) of a 3 to 6 basis points (bps) share insurance assessment on credit unions in 2017. 

The assessment charged to your credit union would be used to increase the NCUSIF fund ratio - which has fallen to 1.27% - back to the currently targeted reserve level of 1.30%. With insured shares at credit unions now totaling approximately $1 trillion, a 3 bps assessment would cost credit unions and their members a cool $300 million.

Jarring revelation!
Despite what Mr. Fazio would lead one to believe, the decline in the NCUSIF ratio is greatly aggravated by two fundamental problems 1) the excessive draw downs of NCUSIF investment earnings (the "OTR" sleight of hand) to fund NCUA's "expansive" operating budget and 2) by the lack of thoughtful, professional management of the actual $13 billion fund balance.

Let's take this analysis in small bites, since we'd all rather be doing something on a weekend other than "turning over rocks" on NCUA management to see what's underneath. Here are your test questions:

#1) Do you think interest rates are poised to...
a) Move up? 
b) Move down?
c) Stay the same?

#2) Regardless of your answer in #1, when has the FED "indicated" it will raise rates...
a) by the end of the year?
b) by the end of the quarter?
c) by the end of the month?
d) before Christmas?
e) after next week?

Go long, baby!

Having answered #1 & #2 correctly, would you have been buying 10 year, long-term treasury bonds as an investment anytime lately?

Friday, December 02, 2016

The Real Reasons For InACTion at the NCUA...???

Why isn't the NCUA senior staff ever "ahead of the game" in the financial regulatory world? 

Why are they always the last - if ever - to finalize those rules which truly are important and critical to the safety and soundness - and long term viability - of the credit union movement?

Well, have you ever heard of the Microcosmographia Academica? (here's the link) (Yeah, I thought not... See what you can "learn" reading a blog!)  

The MA was a pamphlet published by F.M. Cornford in 1908 to explain academic politics to new, ambitious young professors. Several of the MA axioms most definitely apply to certain unnamed, senior, independent federal "agencieers"!

For example:

Thursday, December 01, 2016

Transition Sanity...

Well, it looks like it really is Chicago's year after all and every knowledgeable credit union "player" is about to become a Cubs fan! 

Because of the amazing World Series performance? No, because President-elect Donald Trump has selected Mike Fryzel for his credit union transition team - in the starting line-up!

Mr. Fryzel
Mike Fryzel has been a credit union major leaguer for almost ten years and was named MVP and national player of the year for his performance during the 2009 season (the "real bottom of the ninth" for credit unions!) as Chair of NCUA.  With NCUA "at the crossroads" and "everything potentially on the line", we're lucky to have Mr. Fryzel back in the bullpen again (check this link if you want to know why.) 

Was really getting worried having read in the

Financial Times (11/29/16) of  "... the appointment of Curtis Dubay, a tax expert from the American Bankers Association, to Mr. Trump's Treasury transition team." Mr. Dubay is also a Fellow at The Heritage Foundation and if you are not familiar with his views on taxation and government interference in financial markets - [well, just take a look here.]

It's potentially going to be a tough "first 100 days" for credit unions and the NCUA. What do you think about our line-up and bench strength at the trades, at NCUA, among credit union "sluggers" and fans?

The NCUA Board and Mr. Fryzel can't do it alone.

Hey "CU Casey", you're no longer in the on deck circle...

Wednesday, November 30, 2016

Want To Save A Quick $5 to $25 Million+...?

Not much help...
If you read the comments that were proposed on the NCUA budget, then you know that the Board found little that was instructive or helpful.  But, it was a great, positive transparency move by Chair Metsger to offer the opportunity! Thank you!

We do all now know that the NCUA Board will have to confront and solve a riddle that includes five key elements: 1) a shrinking, consolidating industry, 2) a budget dominated by personnel costs, 3) a shift from "people-based" to technology-based regulatory monitoring/analysis, 4) an existing staff without the requisite skill sets for the future, and 5) a labor union which must work with the Board to redefine NCUA jobs for the future. A very tough challenge!

But in the short run, if the NCUA Board would like to save an easy $5 million+ bucks annually...  

Tuesday, November 29, 2016

Secondary Capital... Part 2

Wanted to repeat that I haven't found anyone yet who doesn't agree that another level of capital (in this instance "secondary capital") enhances the safety and soundness of both credit unions in general and the NCUSIF in particular.

Recent "small victories" aside, the long absence of access to secondary capital by credit unions is a glaring neglect of priorities by NCUA under the Federal Credit Union Act.

But here's the rub, Check this link out and you'll find the existing rules (from the NCUA Examiner's Guide, section 16-4) on secondary capital for low-income credit unions - been in place forever! Yet the NCUA "Secondary Capital Working Group" continues to study its navel "on what to do next"?!?  There is a serious accountability, competency, and transparency issue here - and an unnecessary risk to the American taxpayer created by the NCUA.

Yet, take a look at the secondary capital presentation [here's the link] made by NCUA senior staff to the NCUA Board at its October meeting. You'll note on page 29 that 2,297 credit unions (over one-half of all credit unions), holding over $325 billion in assets  (@ one third of all CU assets!) can issue secondary capital now under existing NCUA rules. 

$188 million in CU secondary capital is issued
No Clue...?
and outstanding in the marketplace.
Is NCUA senior staff admitting that they have no clue on how that secondary capital was issued? I just don't get why the NCUA staff continues to fail to deliver on this safety and soundness issue?

And, just to make matters worse...

Monday, November 28, 2016

NCUA: Secondary Capital...

Despite their critics (many of whom may be permanently irreconcilable after the last, disastrous six years), the current NCUA Board has made "large progress, in little ways", the latest example being the simple extension of time given CU's to file quarter-end 5300 Call Reports. 

A "Big Deal"? ABSOLUTELY YES! It signals an 180-degree change in attitude in NCUA Board leadership; which, if pursued, is destined to "reform" the thinking of the NCUA senior staff. The Board has stepped-up to the task,
now the NCUA senior staff has the classic choice; "Lead, follow, or get out of the way." Let's hope for lots of innovative senior leadership! (... or the necessary departures!)

"Large progress" may already be at hand. The NCUA Board has promised an advanced notice of public rule-making (ANPR) on secondary capital in January.  The glaring absence of this additional alternative to enhance credit union safety and soundness well-defines the concerns many share over senior staff accountability, competency, and transparency. 

All other federally-insured institutions have this authority. The legal framework, accounting rules, and risk management structures for secondary capital have long ago been worked out, implemented, and tested in the marketplace. Rule-making for NCUA secondary capital should be little more than "cut and paste", the "regulatory heavy lifting" has already been done by their highly-competent, federal regulatory peers. But then again that was also the case with the now infamous risk-based capital (RBC) rule...

BTW, would you like to see the NCUA's senior staff "Working Group" (tempted to snark, but it's too easy...) secondary capital website? [here 'ya go!] 

Do note the following...

Saturday, November 26, 2016

NCUA: An Agency at the Crossroads...

We have been talking over the last few days about
Change must start at the top....
change at NCUA.  If change is needed at the agency, think we all recognize significant, serious change must come "from the top" - from the NCUA Board. 

The NCUA Board approved the "new" five year  "Strategic Plan" for the agency in September.  

Look to see if you believe the new, proposed NCUA Strategic Plan is a serious document - for it is the Board's plan. [here's the link - page 12]

Thought you might like to also consider a few excerpts from a recent opinion piece in the American Banker Magazine. The writer is Richard J. Parsons, a former BOA exec:

"When a bank fails and the resulting loss to the FDIC crosses a certain threshold, regulators are required to write a material loss report (MLR), explaining why the bank in fact failed. Well over 100 such MLR's have been written in the past few years."

"... the banks' examiners almost without exception gave these institutions good to excellent CAMELS ratings nearly right up until the point of failure."

"Start all the way back at 1979 - the year the CAMELS system was developed - and the total number of bank and savings and loan failures is now north of 3,400 institutions, including 470 that have failed since 2008.  The evidence of more than 3,400 failed banks and the ratings these institutions received shortly before folding simply overwhelms any defense of the usefulness of CAMELS."

"This isn't a matter of implementation or execution. The problem is the system itself... 

The U.S. needs a new, 21st century model for identifying, monitoring and reporting risk. It should be transparent to bankers, depositors, and investors in bank equity and debt.  The new model should be based on objective measures."

But Mr. Parsons suggests a solution...