By Ray Birch
ALEXANDRIA, Va.—Assessing what led to the corporate credit union crisis 10 years ago, Michael Fryzel said mismanagement and total disregard for fiduciary responsibility was “rampant” among credit unions’ credit unions.
But the former NCUA chairman also said he realizes everyone involved with the corporates, including NCUA, must take some responsibility for those corporate CUs that suffered deep losses after they chased higher yields in what had become a highly competitive environment—all at a time when the home mortgage market was crashing. That eventually led to the conservatorship of five of the institutions and a consolidation of the corporate system over time.
“I eventually concluded there was enough blame to go around for everyone to take part of it,” said Fryzel, who was NCUA chairman from August 2008 to August of 2009. “But at this point, despite the fact so many were quick to point fingers, I decided finger pointing was the last thing that was needed. My job as chairman was to somehow find a solution. I didn’t sleep much during that time, but the energy came in knowing we had a job to do and the future of a consumer-owned industry was at stake.”
Fryzel’s observations are being shared as part of a series in CUToday.info looking back on the corporate credit union crisis a decade after it took place. The series is exploring the views, opinions and analysis of some of the prominent figures who experienced the challenges of those difficult days.
Five Corporates Conserved
With that future at stake NCUA had to make some difficult decisions, perhaps the toughest of which occurred in March of 2009, when U.S. Central CU in Lenexa, Kan. and Western Corporate FCU (WesCorp) in San Dimas, Calif. were seized by the agency when Fryzel was chairman. In September 2010, with Debbie Matz now chairing the board, the agency seized three more corporates: $10-billion Members United in Naperville, Ill., $7.5-billion Southwest Corporate in Plano, Texas, and $1.3-billion Constitution Corporate in Wallingford, Conn. Eventually, all were shuttered or merged following the formation of so-called “bridge corporates” in some cases. The conservatorship of WesCorp and U.S. Central represented $ 61.3 billion in combined assets.
Fryzel, now a lawyer in a private practice in Chicago, said dealing with the corporate credit union crisis was the most challenging event of his professional career.
Pales in Comparison
“When I was at the Illinois Department of Financial Institutions I had to make the decision to seize and conserve over 30 single-owner check cashing businesses located in Chicago,” explained Fryzel. “The operation took place at all the locations at the same time with assistance of dozens of state examiners, state police and state attorneys. It was a significant, front-page and local television event, but it paled in comparison to the potential impact of the failure of the corporate credit union system.”
Fryzel said when he took over as chairman it was a time he’ll never forget.
“That month my mother, with whom I was very close, passed away. My dad died nine years earlier, also in August. That same month I was told by an NCUA senior staff member that ‘we may have a problem,’” Fryzel recalled. “I was in my office on the seventh floor of NCUA headquarters. Then Executive Director Len Skiles, a former Marine and longtime employee, came in to inform me of a potentially critical problem with our two largest corporate credit unions.”
Billions in Potential Losses
Fryzel said when Skiles informed him there could be billions in unrealized losses from investments in mortgage-backed securities among the corporates, he asked the executive director to immediately assemble all key staff.
“I knew we needed to have as much information as possible so we could determine how serious the problem was and how we needed to deal with it,” said Fryzel. “I told the staff we had an unprecedented situation to deal with and needed to do whatever was necessary to correct the problem.”
Fryzel said the team at NCUA responded immediately, and for the next 12 months it went from being a 9-5 government agency to a 24/7 think tank.
“My initial reaction to the situation was one of disbelief. I could not understand how such a huge problem like that could develop and be allowed to go undetected,” said Fryzel.
And many in the credit union community, at the time, felt the same way, asking where were the regulators. NCUA had examiners on-site on a full-time basis at WesCorp, for instance.
“Everyone from NCUA, to the board and management of the corporates, to the trades, to individual credit unions had interaction with the corporate operations and yet no one saw anything,” said Fryzel.
The Action Plan
Once the depth and severity of the problem was determined, Fryzel said NCUA developed an action plan.
“It was a plan we would discuss for countless hours and move forward with decisively,” he recalled. “We requested, and Congress granted us, the authority to use the full $41.5 billion Central Liquidity Facility borrowing authority, which had been capped at $1.5 billion. As a result we were able to infuse $20 billion in liquidity assistance into the corporate system.”
A series of broad corporate reforms were eventually put into place to address investment authority, risk calculation and corporate governance. A temporary corporate credit union liquidity guarantee program was established to facilitate essential market funding in the stressed corporate credit unions, noted Fryzel. NCUA created the Credit Union Investment Program and the Credit Union Homeowner Affordability Program, which combined provided almost $5 billion in liquidity, he noted.
In addition, to retain deposits in the corporates, NCUA put in place the Temporary Corporate Credit Union Share Guaranty program and infused a $1-billion note into U.S. Central.
A New Model
“I asked (Director of Examination and Insurance) Larry Fazio to see if he could develop a good bank/bad bank model to separate the toxic assets from the non-toxic assets of the corporates,” said Fryzel. “I had heard of the concept but was not familiar with its technical aspects. Larry did and it resulted into the creation of separate entities leading to the successful NCUA Guaranteed Notes (NGN) program.”
NCUA then asked Congress to approve the Temporary Corporate Credit Union Stabilization Fund.
“Which they did, and President Obama signed it into law. The cooperation we received from Congress and the Obama Administration for everything we felt was needed was gratifying,” said Fryzel. “Every congressman and senator I met with listened and understood what we were up against. Everyone said ‘tell me what you need.’”
NCUA asked its then legal counsel, Bob Fenner, to research and prepare to file whatever action was necessary to recover as much money as possible from those responsible for the losses credit unions would suffer.
Problem! What Problem?
“As the problem became known in the credit union industry, it was interesting to watch the officers and board members of the corporates act as if there was no problem and they had everything under control,” recalled Fryzel. “The trade associations, believing what the corporates were telling them, defended the corporates up until the day they were conserved. Certain individuals even withheld support of our actions in Congress until they saw their influence was not only negligible but they looked foolish.”
Fryzel said watching certain credit union leaders continue to defend the management and boards of the corporates was “disheartening.”
“They believed everything the corporates told them, but at NCUA we knew the truth and when we tried to tell them what was going on they blamed us. Mismanagement and total disregard for their fiduciary responsibility was rampant among some of the leaders of the corporates,” Fryzel stated.
Many credit unions, having made substantial profits on their corporate investments, could not grasp the problem or understand what was happening, asserted Fryzel.
“I recall one credit union CEO saying the corporates could never fail,” Fryzel said.
A ‘Little Known Fact’
Fryzel said a “little known fact” was that NCUA prepared action plans for numerous scenarios for the NCUA board to consider.
“One included conserving the entire corporate system, and another for the five corporates eventually conserved,” he said, echoing a comment made by former NCUA Chairman Debbie Matz here. “The final decision was to conserve the two biggest and work to keep the others afloat as long as possible.”
The decision by the NCUA board to proceed with conserving U.S. Central and WesCorp was not easy, said Fryzel in looking back on that tough period for credit unions.
“There was no alternative, knowing the dire financial stress they were in,” he said. “We knew it would have a profound impact on the credit union system, but that it was the right decision to make. Without it, thousands of natural-person credit unions could have failed. That was unacceptable.”
Fryzel said the crisis revealed there were too many corporates and NCUA needed to encourage mergers by developing new standards for operation.
“As a result of those efforts we now have a smaller, stronger corporate system,” he said.
Deserving of Kudos
Fryzel said he will never forget the efforts of the entire NCUA leadership team during that time, particularly Skiles, Fenner, Larry Fazio, his Chief of Staff Sarah Vega (now chief of staff to Chairman J. Mark McWatters), Special Assistant Matt Biliouris, and administrative assistants Linda Queen and Katie Supples.
“I want to also acknowledge the hard work, dedication and support of board members Rodney Hood and Gigi Hyland,” he said.
“They all worked diligently during my year as chairman,” he said. “From early morning until late at night they were there to develop and redevelop ideas, plans, regulations and courses of actions. Nothing was off the table and every suggestion was discussed. There was no time off and everyone was on call at any hour. It was an effort never seen before at NCUA and hopefully never needed again.”
Fryzel acknowledged the difficult challenges of 2008-2009 required hard, and at times unpopular, decisions.
“It’s a year in my life I will never forget and I would never give up. It was an honor and privilege to be the chairman of NCUA during that time. Did our actions work?” asked Fryzel, speaking to all the steps the agency took, including the NGN program that proved to be successful and eventually led to rebates to credit unions last year. “I think so.”
More in this series: