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?     

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"....

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...

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...

Liberty And Freedom..... Still Worth The Fight.... And The Cost.

Ruminations: On the lamb...

(B)A-h-h, to be young
again..... 

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.)

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!)

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...

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.

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"...