The NCUA Budget: Easy Money... Part 1

Hope you noted that Mr. Larry Fazio, the NCUA

Unavoidable...
(... 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?

Chair Metsger stated in his published remarks on the proposed 2017 NCUA budget (see here - third to last paragraph): "We [the NCUA Board] have a fiduciary responsibility to the share insurance fund, and to the U.S. taxpayers, and we will not abrogate that responsibility or turn it over to anyone else."

The NCUA staff made the following T-bill purchases during August, September and October, 2016 (check it out here by month):

August 2016: $450 million due in 2026 at rates ranging from 1.49% to 1.59%. (pg. 7)
September 2016: $100 million due in 2026 at a rate of 1.59%. (pg. 7)
October 2016: $250 million due in 11/2025 at rates from 1.73% to 1.76%. (pg. 7)

$800 million in 9 and10 year long-term bonds purchased in the last 90 days - with your NCUSIF deposits - by an NCUA staff who evidently believe they have more investment savvy than the FED!

ALL OF THE $800 MILLION IN BONDS ARE TODAY ALREADY "UNDERWATER"* -

WHICH MEANS THE MARKET VALUE OF THE BONDS IS SUBSTANTIALLY LESS THAN WHAT NCUA PAID FOR THEM! 

Then "ACT"...!

"We have a fiduciary responsibility..."

- Rick Metsger, 

NCUA Chair

ACCOUNTABILITY - COMPETENCY - TRANSPARENCY

[* the 10 yr. treasury rate was 2.40%! on 12/2/2016]