Wednesday, December 14, 2016

The NCUA Budget: Easy Money... Part "Unlucky 13"


So, for the last several weeks you've had to suffer through a discussion of the "management" of the NCUSIF by "NCUA's finest". Even heard a proposal to NCUA Chair Metsger to help him increase earnings on the NCUSIF next year by $100 million+, but evidently he missed the message...

Rates are going up... "ACT"!
Yesterday, in Part 12 [here's the link], we went over how NCUA might improve earnings and reduce risks by repositioning the NCUSIF portfolio. Not that difficult to do with treasuries, which are fully liquid. Sell all of the portfolio and book the NCUSIF unrealized gain balance of $247million (the balance last reported on 10/31/2016) and immediately buy the identical securities back. Voila! you have increased the earnings by $247 million, increased the NCUSIF fund balance by $247 million, and you no longer need to assess credit unions next year for $300 million!

Only problem is NCUA has failed to "ACT" and this afternoon, the Federal Reserve Board is going to raise rates ( the FED has been "promising" to do since August!).  Let's take a look at what happens to an "unrealized gain" when rates go up...

As you know, when interest rates drop, the value of fixed rate bonds - in this case treasury bonds - goes up. Equally, when interest rates rise the value of treasury bonds declines. And, the longer the time to maturity for the treasury bond the greater the decline in value.

So let's review what we've learned about the NCUSIF investments: 1) balance @ $13 billion, 2) average yield 1.82%, 3) average maturity 5 years, and 4) at October 31, 2016 the portfolio had an unrealized gain of $247 million.

A one-quarter percent (.25% or 25 "basis points") increase in rates would reduce the value of a $13 billion, 5 year T-bond portfolio by -$147.9 million; a one-half percent (.50% or 50 bps) rate rise would cause a -$293.8 million decline in value; and a three-quarters percent (.75% or 75bps) increase in rates would decrease the value of the $13 billion portfolio by -$437.9 million. The declines in values would be "unrealized losses".  

The FED will increase rates by at least .25% (25 bps) this afternoon. At Oct. 31, 2016 the "unrealized gain" on the NCUSIF portfolio was $247 million - what do you think the "unrealized gain" on the NCUSIF portfolio will be at the end of today?

[Hint: You're probably going to miss this question!!!]



Anonymous said...

It might be zero.
Depends on how much the price of the 5 year treasury reacts to the fed fund change.
If the fed goes up 50bps and the 5 yr treasury does too yer st zero.

And that would mean the NCUA squandered $100s of millions in potential gains over the last few years while absconding $1BILLION from us in ILLEGAL contingent lawyer fees.

But don't tell bill brooks or CUNA or nafcu.
They're all too busy writing stupid letters that get us nowhere.

Thanks for your posts.
You're the only one who seems to care about what's right.
The F ACT is, there is no accountability. It's the flaw of the "movement".

"with the thoughts I've been thinkin I could be another Lincoln if I only had a brain".

Keith Leggett said...

The FDIC board yesterday approved a $2.18 billion agency operating budget for 2017, down 2.4 percent from the 2016 budget. The board also authorized a 2017 staffing level of 6,363 employees, a net reduction of 206 positions from the 2016 authorization of 6,569. This decrease marks the seventh consecutive reduction in the FDIC’s annual operating budget, FDIC Chairman Martin Gruenberg said. “These reductions are made possible by continuing steady improvement in the health of the U.S. banking industry. The FDIC remains focused on fulfilling its mission while prudently managing costs.”

Anonymous said...

Mr. Leggett,
How much contingency legal fees did FDIC pay for lawsuits?
Did FDIC borrow funds from the US Treasury as NCUA did during the credit crisis?

Keith Leggett said...

FDIC did not borrow funds from Treasury during the financial crisis. The banking industry pre-paid premiums to the FDIC avoid borrowing from the Treasury.

I don't know about legal fees associated with lawsuits.