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?

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!


Then "ACT"...!

"We have a fiduciary responsibility..."
- Rick Metsger, 
NCUA Chair


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


Anonymous said...

The two words you are looking for here are "unconscious incompetent" -- or as we simple country folks say, "bless their hearts, they just don't know what they don't know." Bond Investing 101: NEVER go long during political uncertainty, especially that close to the election. Jim, is NCUA required to mark-to-market on those purchases for fund insurance calculations?

Anonymous said...

This is more than mismanagement and incompetence, this is negligence.

Jim Blaine said...

NCUA is not required to "mark-to-market on the portfolio, which is the proper accounting.

But you do foreshadow the next thought... stay tuned!

Anonymous said...

This, from an agency that routinely bludgeons credit unions for their long term asset ratio and the duration of the bond portfolio (which btw is too SHORT in many credit unions).

We now know something that rivals the CCU debacle, the looming medallion loan armeggedon and the 23% legal fees paid to the bff of Fenner...
...that, in the face of 8 years with fed funds at or near zero, this agency puts hundreds of millions into the 10 year sector.

Tell me again why you think this is a stand out board?

Waiting on Congress.
Hensarling and Shelby, quit talking and start chalkin.
Time to show us you're not all hot air.

Jim Blaine said...

I personally have confidence in the competency of the current Board... but it is time for the Board to step up forcibly - accountability - and visibly - transparency - and ACT!... in accordance with their fiduciary responsibility... we have reached "enuf is enuf time" after the last six years