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Saturday, April 11, 2009

Corporate Credit Union Portfolio: From AAA to Junk

by Calculated Risk on 4/11/2009 01:56:00 PM

National Credit Union Administration (NCUA) released an update on the two corporate credit unions seized three weeks ago. (ht August)

First, on the size of the two seized corporate credit unions:

U.S. Central has approximately $34 billion in assets and 26 retail corporate credit union members. WesCorp has $23 billion in assets and approximately 1,100 retail credit union members.
These "corporate credit unions" don't serve the general public, and all "natural person" credit union money held at these corporate credit unions was guaranteed earlier this year.

From NCUA Chairman Fryzel in yesterday's Media Advisory:
The outline released today of the portfolios of WesCorp and U.S. Central, and NCUA’s associated summary analysis, provides a concise synopsis of the respective portfolios and enables informed parties to appreciate the scope and severity of the stress on these investments. Though virtually all of the securities purchased by these two corporate credit unions were AAA or AA rated at the time of purchase, the summary clearly demonstrates how the nature of the securities and the deterioration in the economy have resulted in significant expected credit losses.
Here is the corporate stabilization program.

And the following is from the analysis of the portfolios held at WesCorp and U.S. United.
The securities purchased by corporate credit unions ... were all permissible under NCUA’s Rules and Regulations. Almost all had very high ratings (AAA and AA) as assigned by the nationally recognized statistical rating organizations (NRSROs). NRSRO ratings were the norm in the financial markets for determining the quality of a security. However, NRSROs relied primarily on historical data of the performance of a security’s underlying assets in making rating determinations. No reliable historical data existed relating to the performance of the sub-prime and other types of loans that were originated in a period of rapid home price increases and relaxed underwriting criteria. As such, NRSRO ratings did not prove to be a reliable means of determining the quality of these securities. Since late-2007, analysis of these securities has been based on actual performance of the underlying assets and projected future performance. This has led to very significant downgrades in the NRSRO ratings of many of the securities held by corporate credit unions. The downgrades had the most severe impact on the portfolios of WesCorp and U.S. Central.
emphasis added
And the following table shows the ratings at the time of purchase and the most recent ratings.

Corporate Credit Union Portfolios Click on graph for larger image in new window.

There is much more in the document on these portfolios. As an example, WesCorp bought a significant amount of AAA rated mezzanine securities back by Alt-A and Option ARMs - and those securities have taken substantial losses since they absorb losses before more senior securities.

Sadly most of the problem securities were bought in 2006 and 2007 - after the housing bust had already started.