NCUA on Derivatives: "Play It Again, Sam" ..... circa 2007

Derivatives for Credit Unions:
A Dynamite Idea!

In 2007 only one type of credit union was authorized by the NCUA to transact in derivatives. The NCUA permitted dealing in derivatives only to corporate credit unions; and then, only to those corporate credit unions which the experts at NCUA had closely scrutinized and deemed fully competent and capable.

NCUA approval for the use of derivatives was

"Well, look anyone can have
an off decade..."

not a haphazard, hit-or-miss process. Authorization came only after written application by the corporate and only upon receipt of a formal, written approval letter from the NCUA.  There were several levels of derivatives authority depending upon NCUA's exacting evaluation of the investment expertise of the applying corporate.  In 2007 the biggest, NCUA-approved user of derivatives, with the highest level of derivative authority, was Wescorp.

The NCUA assured all comers that the derivatives authorization they had given to corporates was a "safe and sound" practice and "actually reduced the risk" on corporate balance sheets to the benefit of the entire credit union industry.

You know the rest of the story; that Wescorp imploded, triggered and then compounded by its derivatives portfolio positions (see CUJournal, "Inside the Failure of Wescorp", 7/8/2013). The cost of that failure to all CUs is about $6 billion.

So what?  What I would ask you to consider is that Wescorp had a partner in dealing in derivatives.  That partner, that enabler, that monitor and authorizer was the NCUA. And, of course, NCUA has never acknowledged that role as enabler; but even that is not the current concern...

Your current concern should be four things:

1. The current proposed derivatives rule establishes the same process for authorization.
2. The current proposed derivatives rule hinges on the same assumption that NCUA will (this time around) have the expertise to authorize, monitor, and control the new dealers in derivatives.
3. The current proposed derivatives rule uses the same robust logic that the use of "virtual" investments by CUs will mitigate risk by reducing the need for real capital at risky CUs.
4. And, the current proposed derivatives rule will be administered by the same people at NCUA who proved so profoundly in-astute with the corporates.  Check out who was "in charge", who was on the corporate team in 2007 (they have dropped that embarrassing corporate indiscretion from their "resumes", but you can look 'em up in the archived NCUA annual reports). Same old faces with the same old attitudes.

Same process, same assumptions, same logic, same people...

SAME RESULTS?

("Round up the usual suspects." - Casablanca, 1942)