Friday, May 31, 2013

NCUA Derivatives Risk: Opt-Out?

"Notionally", I'm a sheep....
So, yesterday we took a look at the fact that there are several ways for credit unions booking "risky assets" to mitigate those risks without the use of derivatives.  

Requiring "risky credit unions" to directly and "on balance sheet" reflect the actual level of risks being taken with insured member savings deposits enhances transparency - and, at least with NCUA, transparency has and always will be of paramount importance.  

"Off balance sheet",  notational capital immediately raises the legitimate concern of  "moral hazard"- whereby a "risky credit union" can play "heads we win, tails you lose" with the NCUSIF.  When the NCUSIF loses, your members lose.  

Housing Finance:
 Fan/Fred style...
If you would like a recent example of how the moral hazard game is played in earnest, take a glance over at Fannie Mae and Freddie Mac, which are currently bankrupt wards of the federal government - don't you enjoy owning these "assets" as a taxpayer? 

Which, of course, leads us back to the fact that the "risky assets" which need to be "derived away" by risky credit unions are most often 30-year fixed rate mortgages.  And, why would NCUA want to help keep the undeniably riskiest financial
product on the planet - which was the core source of the recent financial collapse and subsequent Great Recession - alive by putting the entire credit union movement "in play"? 

Rather than having "risky credit unions" opt-in for derivatives,  is there any way for the "other 95%" of credit unions to opt-out?     

Thursday, May 30, 2013

NCUA Derivatives Rule Invites New Capital Partners Into The Credit Union Fold

Know you were hoping that we would not discuss the topic of derivatives again, but there doesn't appear to be any escape, so let's take it in pieces - slowly.

Now a Moving Force
in derivatives negotiations...
First the really good news is that CUNA has finally sprung into action on this issue - although the CU pilot programs have now been running for 15 years and despite 3 past inconclusive efforts by NCUA at derivatives rule making - and hopes to have a position soon.  

The policy wonking and derivatives detailing has been assigned to the CUNA Examination and Supervision Subcommittee, an august group of 18 CU leaders.  The key leadership "negotiating roles" have been given to Wisconsin League president Brett Thompson and Virginia League president Rick Pillow - both nice people.  Not aware of their background in derivatives, but do know that Rick is close with the folks at Navy FCU - one of the lead pilot programs - which should help immensely with the "negotiations"....

Wednesday, May 29, 2013

Unite For Kumbayah !

Last night was up in Maggie Valley, a scenic retreat in the mountains of North Carolina, for a meeting of the Western N.C. Chapter of credit unions.  As with most chapter meetings, the food was great, the camaraderie was wonderful, and the speaker was terrible - one of those rambling pontificators, if you know what I mean.  Most folks were texting two minutes in...

But during the Q&A, the discussion veered
Is there life after hawg?
around to the issue of taxation, which seems once again to be on the minds of many credit union folks. Personally, have never been much concerned with the threat of a "profits" (income) tax on a "not-for-profit" credit union and have actually taken some joy in imagining that taxing credit unions would mean that Keith Leggett and the ABA would either have 'to get a life" or go out of business.  But, then again the one thing the Country doesn't need right now is yet another banker on Federal welfare...

Tuesday, May 28, 2013

Unite For Ambiguity

CUte !!??

Another quick quiz to start your new week off right.  This one is on imaging, branding, marketing to wit:

Name the one entity which is uniquely described and defined by the following national, organizational strategic goals?

  1. "Remove Barriers by actively participating in grassroots activities and the political process."
  2. "Create Awareness by expanding outreach and image in the community."
  3. "Foster Service Excellence by offering a complete set of forward looking and constantly improving services to people of all backgrounds and life stages." 

Know the answer is crystal clear, but here are a few hints:  1) "This is the first time the organization has identified a strategic vision";  2) "... to bring us together, guide us, and help us achieve shared goals"; and 3) " Americans are craving the good that will come..." from all this...

Sunday, May 26, 2013

Ruminations: On the lamb...

(B)A-h-h, to be young

As we grow older, it is sometimes too easy to forget how difficult it was to be young.

(..and the older you get, the easier it is to forget.)

Saturday, May 25, 2013

From the Field

Thank You for Speaking:

"Thank you so much
for coming this afternoon..."

"The program drew quite a large crowd! Thanks for your remarks to our gathering; I assure you they had an effect on the several hindered people in attendance."

(... obviously a smashed hit!)

Friday, May 24, 2013

NCUA: "The Empirical's New Clothes"... Derivatives: Part V - "Cause and Counterparty"

It can really get
your goat... can't it!!

Certain you would like to move on and talk about something more interesting and fun than derivatives. If we're honest; most of us would prefer to "take a walk", when confronted by a difficult problem, by controversy and confrontation, or by an insular, indifferent bureaucracy - whether by structure governmental or trade.    Asking to be heard is hard work; arrogance is not required to listen to reason.

Builder or Architect?

As you head into the long weekend, would like to give you just a couple of simple questions to ponder while you're out there on your riding lawn mower, getting those tomato plants in the ground, or just swigging on that third "PBR".

Here 'ya go...

Thursday, May 23, 2013

NCUA: "The Empirical's New Clothes" ... Derivatives: Part IV- "The Magic Risk Fairy"

Definition: A derivative is a financial transaction which transfers risk between two parties, usually for a fee. 

There are hundreds of definitions for derivatives, but this one is particularly instructive on one of the key, rock-solid, basic truths of financial derivatives  That core, immutable truth is that a derivative "transfers" risk - it does not eliminate risk! 

Don't Worry! I won't bite you
... but once !
When a credit union does an interest rate "swap" or "cap" transaction, the CU contracts to transfer some internal risk exposure to a "counterparty" - usually to a Wall Street bank.  The five counterparties which dominate the derivatives market are: Citigroup, Morgan Stanley, BofA, Chase, and Goldman Sachs.

Wednesday, May 22, 2013

NCUA: "The Empirical's New Clothes"... Derivatives: Part III - "Just Plain Vanilla"

"Can You Mitigate This Risk ?"

Here's the key idea underlying the NCUA Board's proposal to permit large credit unions to trade in derivatives (NCUA Board Action Bulletin - 5/13/2013):

"Credit unions applying for the authority must demonstrate how derivatives will be part of an overall interest-rate risk mitigation plan."

So, let's parse that a bit; the sentence has three basic assumptions:

1) Too much interest rate risk (IRR) can be bad for a credit union.
2) Credit unions with too much IRR should try to reduce ("to mitigate") excessive interest rate risk.
3) Derivatives are the answer... at least for some credit unions; but only if they are large, and only if they are.... and are... and also are... and, and, and...

A severe problem arises with the third general assumption that derivatives are a safe, empirical ("'ya just can't miss"),  "answer-to-all-prayers" solution to the issue of CU interest rate risk.  It just ain't true !!

A Capital Markets Group?
But, the worst problem is that "The Deciders" at NCUA have evidently been sprinkled with analytical pixie dust and agreed to drink the derivatives Kool-Aid - as we say in the South - "Whole Hawg"! And,"The Deciders" are reassuring in their assertion that these are simple, no-risk derivative transactions.

But let's look at the actual record to see how deep NCUA's self-assurance really is... you'll see some real-world, bureaucratic "hedging", kind of an "accountability cap", a "responsibility swap"... 

Tuesday, May 21, 2013

NCUA: "The Empirical's New Clothes"... Derivatives: Part II - Increasing Risks To The NCUSIF

Well, according to the NCUA Board
Unanimous in our full
understanding of derivatives...
Action Bulletin
dated May 16, 2013, the NCUA Board was almost breathless with excitement in its unanimous approval (... in this case a "democracy of two") of a derivatives proposal which appears to substantially increase the financial risks to the National Credit Union Share Insurance Fund (NCUSIF).

You should recall, although the NCUA continually forgets, that the NCUSIF belongs to credit unions and is funded by credit unions.  That's why its called the National Credit Union Share Insurance Fund, not Pooh Bear's "Honey Pot".  

The new risks added to your credit union come as a result of the Board's decision to permit large credit unions to trade in derivatives - a reversal of the current, long-held prohibition. What does permitting such an increase in the overall risks to the NCUSIF mean? It simply means that as the principal funder of the deposit insurance pool your risks and those of your members have just increased, also. 

How so?....

Monday, May 20, 2013

NCUA: "The Empirical's New Clothes"... Derivatives: Part I - Ignoring A Scandal

The Major Forces Behind
 NCUA's Derivatives Rule...
A reasonable person can - and should - have several concerns about the latest round of proposed rule-making on derivatives from the NCUA.  But, three concerns should cause great alarm for all federally-insured credit unions:  

1) NCUA's "explanation and reasoning" as to the need for derivatives is facile, light-weight, and does not holdup to even the most superficial scrutiny or analysis - which will probably cause you and your members a financial loss in the future; 
2) NCUA, in promoting the use of derivatives, appears to be defaulting on its fiduciary duty as the administrator of the NCUSIF - which will probably cause you and your members a financial loss in the future; and 
3) Your "trade association", which ever one that might be, will, if recent history is instructive, once again fail the "backbone test" when asked to honestly and openly discuss and advocate on the derivatives issue - which will probably cause you and your members a financial loss in the future.

As we all eagerly await the actual publication of the proposed rule, it's hard to know where to wade in (just way too many "opportunities"!), but...

Sunday, May 19, 2013

Derivatives... A Two Party Transaction

Definition:  A derivative is a contract between two parties which specifies the circumstances under which the parties will exchange payments.

Cold-blooded and of forked tongue !!!

One party is an astute, experienced,  highly-commissioned, profit-above-all-else, heartless Wall Street dealer.

The other party is....

Saturday, May 18, 2013

From The Field...

"We had a tragic loss of an oppossum in the parking lot this month.  The...."

( ... will just let you use your imagination
 for what comes next! )

Friday, May 17, 2013

Derivatives: Next Steps From Alexandria..... SWAPS & "SWAG" !

Below, graphically displayed, is an overview of the NCUA's new proposed rule on derivatives.  

"Up The Down Staircase...."
With the new rule the Agency, once again, calls out to you to:

 "Reduce your risk, follow us !"  

(... perhaps, or is it just another misstep, yet another regulatory "trip and fall"?)

Thursday, May 16, 2013

Derivatives.....Passing the Buck..

Duke Street, Alexandria !!!
Well, y'know it really did come as somewhat of a surprise to many of us that you, one of the committed, hardcore, fearless, philosophical leaders in the warm and fuzzy, not-for-profit credit union movement, had decided to become a "wheeler and dealer" in Wall Street derivatives.  And that, you had been aggressively pushing the folks at NCUA to let you "get in the game"

Credit unions represent a huge new opportunity for "derivative dealers"; just imagine, potentially 7,000 new, sophisticated CU "derivative traders" ready "to play"


Nothing like a "sure thang", a "sure bet" to get those investment juices flowing is there !!! And, we've all taken the course and signed the pledge acknowledging our full, "over-21", fully liable, willing-to-go-to-jail understanding that a derivative is a contract between two parties - a buyer and a seller - seeking their individual best, self-interest in terms of RISK.  That both parties are placing risk bets based on a very uncertain future - right?


So here are the 3 key features of the new NCUA proposed rule:

Wednesday, May 15, 2013

Your Kodak Moment.... The Counterparty

Whoa ! Wait a Moment....
Mentioned yesterday that Thursday's NCUA Board meeting could set the stage for a Kodak Moment for the credit union movement. Most folks quickly guessed that the Kodak Moment issue is the proposed NCUA expansion of derivatives investment powers for credit unions.

Now we can save a lot of time at this point, if we'll all just stop a second and answer this one very personal question:

"Do I, (state your name, understand what "derivatives investment powers" means?"

If your answer was "yes" then read on; if your answer was "no" then log-off right now and call your Congressman.  Ask your Representative the same question; if his/her answer is "no"... then scream bloody murder !!!

Because you and I (and your Congressman!) are not alone in our ignorance of derivatives...

Sunday, May 12, 2013


"I understand, I understand...
and will never do that again."


*(....we couldn't have done it without you!)

Friday, May 10, 2013

Sun Tzu....

So everybody has had a shot at "The Art of War" by Sun Tzu (500 B.C.) as an interesting source for strategic planning.  If not, you ought to give it a go; easy read, short, contemplatively provoking.  Ranks right up there with Machiavelli...

But here's the synopsis if you're short on time:

  1. The Enlightened Deliberate
  2. Pursue The Indirect Approach
  3. Do The Unexpected
  4. Strike Where He Has Taken No Precaution
  5. Numbers Alone Confer No Advantage
  6. Pretend Inferiority, Encourage His Arrogance

Couple of thoughts:

Thursday, May 09, 2013

Monday, May 06, 2013

The U.S. Mortgage Market... Changing The Status Quo

A New American Framework...
Thought we all needed a little break from that often obscure discussion of the U.S. mortgage market, Fannie Mae/Freddie Mac, and the 30-year fixed rate mortgage loan ( see posts - 4/22-26/2013, May 1), but we probably need to go at least one more round.  Why? 

"Wasn't Watt the one who told Marquis
where to ... Like that kind of honesty."
Because Representative Mel Watt from North Carolina has just been nominated to head the Federal Housing Finance Administration (FHFA), the oversight body which is in charge of the conservatorship of Fannie and Freddie.

"Competence? Can't you
 give me a better reason?"
Mr. Watt is a long-time member of the House Financial Services Committee, Yale-trained lawyer, intelligent, balanced, unquestionably capable. And, of course, with those kind of credentials you know his appointment will be controversial in today's bitter, Washington atmosphere, where dead-headed dogma frequently is seen to trump competence.

If you'd like a little foreshadowing of what's ahead, take a look at these excerpts on the Watt nomination from the WSJ (Nick Timiraos, 5/4/2013): 

" But rather than speed a decision on the future shape of housing finance, the appointment shows the mortgage status quo is likely to prevail."

"In some ways the appointment shouldn't be too surprising, few in Washington are eager to make the hard decisions that would accompany a mortgage market overhaul. Pushing any proposal, for example, that may threaten the existence of the fixed, 30-year mortgage product is a political loser..."

Sunday, May 05, 2013

From The Field....

From a monthly report:

"Got the chance to attend a Federal Reserve sponsored symposium on housing and mortgage lending last month. While these researchers are still trying to prove beyond doubt that the decline in the housing market has affected the consumer, we are busy trying to see what we can do to help consumers get back on their feet. That is what makes us "People Helping People" and not "People Doing Research".....

(Yep ! Really ! ... Just Do It!) 

Saturday, May 04, 2013

Driving Beyond The Speed Limit...

Yeah... Yeah... Yeah !!
"When I get older, losing my hair, many years from now,
Will you still be sending me a valentine, birthday greetings, bottle of wine?
If I'd been out till a quarter-to-three, would you lock the door?

Will you still need me, will you still feed me,when I'm....

Thursday, May 02, 2013

More Rants And Raves....

Back on April 16, 2013, introduced you to "Rants and Raves" which is an exercise in local , editorial "opinionship" published in the "Mitchell News-Journal" - a hometown newspaper which gives voice to the folks in several North Carolina counties in the Great Smokies.

Here's an update on the community's latest concerns:

  • "To the person who asked why we need guns since one of the Ten Commandments is "Thou shalt not kill" . The bad guys don't read the Bible."
  • "It is sad when parents let one child rule the whole roost." 
  • "Guess now that we know the bombs in Boston were made from pressure cookers, some politician in Washington will want to ban pressure cookers."
  • "It seems like the better you treat your husband, the worse he treats you.  It's hard to love a person you have lost your respect for them."

And my absolute, hands-down two favorites...

Wednesday, May 01, 2013

The Un-Standardized, Politically Incorrect Mortgage...

Father Uncle
Knows Best...!
Referenced on Monday a 4/24/2013 NYTimes article ("Down Payment Debate At Heart Of Mortgage Debate") which discussed one key component of the political fist fight over mortgage lending which is currently raging in D.C. 

Want to show you a little more detail on the North Carolina based mortgage project which was referenced in the article.  As you will note from the range of comments on these mortgage posts, "the best way" to make a mortgage loan is not "uncontroversial"! Want to point out why many commenters are being misled into trying to formulate intelligent answers to idiotic questions!

But before we take a look at that, take a look at this: