Why increasing the normal operating level from 1.3% to 1.39% is questionable at best
I took statistics a long time ago; slide rules were still the common tool for large number calculations and Texas Instruments was just coming out with its initial hand calculators. My extremely wise professor would allow the use of calculators in an exam, if you could afford one, but he always prefaced the test with the admonishment, “Remember, if you press wrong number, you get wrong answer.” The current plan to close the TCCUSF is long overdue and a bold move by the board, but I think the action steps are based on an overreliance on “sophisticated models” which have been shown over the last 6 years to consistently and considerably underestimate the value of the assets taken and overestimate the losses. Obviously, more than a few wrong numbers have been pressed, to get these kinds of modeling errors.
The great news is that NCUA has told us that closing the Stabilization Fund this year could result in a distribution of between $600 and $800 million of credit union capital in 2018. The bad news is that the distribution is keyed to a questionable increase of the normal operating level (NOL) from 1.30 to 1.39. By closing the TCCUSF and transferring those funds to NCUSIF the equity ratio of the NCUSIF would be between 1.45% and 1.47%. That’s an additional $1B to protect us from ourselves! Based on what horrible example from our past or unforeseen attack in the future?
Obviously, by maintaining the normal operating level at 1.30% the agency would be required by statute to make a distribution of 15bps to 17bps, right? Not so fast there buddy! What about all of that extra risk from the legacy assets of TCCUSF that now rest within the NCUSIF? According to the agency, they need to elevate the NOL and retain 9 basis points of the distribution to fulfill the economic projections based on the FRB scenarios and Black Rock modeling. That’s why if the closing transfer to the NCUSIF is $1.9B (as projected by NCUA) the agency keeps over half of it to cover the risk that their Black Rock Model projects in a recessionary economy.
They sure lean on their high tech and expensive modeling consultants. Is that the same kind of modeling that back in 2011 projected Legacy Asset defaults to be between $13.2 and $16.4 billion and which today are projected to be between $10 and $10.4 billion, or between 30% to 60% overstated? Is that the kind of statistical accuracy one can expect from a world-wide firm like PWC, who incidentally was paid over $9M between 2010 and 2014 by the NCUA? Can we expect that the current projections by Black Rock, which was paid $5.5M between 2013 and this year, to be any more accurate? After all, we’re talking about over an additional $1 billion dollars being placed under the control of the NCUSIF as long as the board accepts the staff recommendation to increase the NOL. That means the agency would now have the earning power of over the $15B in the NCUSIF to hit up for an OTR that, even if reduced to 50%, supports an NCUA operating budget which continues to be projected to grow at 4.5% per year and which continues to look to the NCUSIF as the cash cow that means as much to the sustainability of an overweight and wasteful budget at NCUA as it means to the credit unions who have funded their own insurance fund with their members capital.
So, what we have is the typical quid pro quo that the agency so often foists on us, on one hand giving us some of our money back while on the other placing an additional burden on us by increasing the normal operating level to 1.39%. Gee guys, if the NOL was last increased to 1.3% in 2007, before the great recession, and we seemed to survive that okay, why do you need 1.39% today? Even if we agree that 1.39% is a good number today why don’t you at least guarantee us that the NOL will sunset after one year, so you can transparently prove to us to remain at that level, increase it, or heaven forbid, actually decrease it.
Good intentions indeed, but forgive me if I also want to look beyond and beneath the “good news.” Remember, you only have two weeks to get your comments into NCUA. Tell me why I’m wrong!