My tenure as NCUA Chairman came in the wake of the financial crisis ignited by faulty mortgage-backed securities. Shortly before I took office as Chairman, the NCUA Board placed two corporate credit unions into conservatorship because of the risks posed by greatly devalued mortgage-backed securities. Ultimately, the Board took the necessary step of placing three additional corporate credit unions into conservatorship and subsequently placing all five into liquidation.
The enormous losses resulting from the corporate credit union failures imperiled the entire credit union system. Because of the cooperative nature of the credit union system, NCUA had to make the difficult decision to assess all federally insured credit unions to pay for these losses. At the same time, NCUA took every reasonable measure within its power to investigate and pursue avenues for recovery from the parties that caused these losses. One key part of this effort was a contingency fee arrangement between the Conservator and later the Liquidating Agent for each of the failed corporate credit unions and two law firms that investigated and initiated multiple legal actions to offset the losses caused by mortgage-backed securities. At the time, the likelihood of prevailing seemed remote and NCUA did not have the resources to conduct this investigation in-house. During my tenure as Chairman, this decision yielded significant recoveries, $3.2 billion and counting. Had we not retained these law firms, there would have been no recoveries and all federally insured credit unions would have had to pay much more to resolve the corporate crisis.
As Chairman of the NCUA Board at the start of the corporate crisis, it was my responsibility to put in place the steps necessary to insure that the credit union industry would survive the anticipated financial impact. In addition, it was important for credit unions to know that every effort would be made to recover as much monies as possible from those whose actions contributed to the financial disaster. Early on, we began the process of determining who should be sued.
As a board member and after leaving NCUA, I continued to advocate for full recovery. I also sought full disclosure of the amounts recovered and the fees paid to the contracted attorneys who assisted in that recovery. It is encouraging that NCUA is today making both sets of numbers public.
For those who believe that the fees earned by the attorneys are high, they need to understand that is the way the legal system works. In a suit for damages, attorneys earn a percentage of what they recover. The more they get for a client, the more they earn for themselves. It is an incentive-based system that encourages a greater effort. Had they charged an hourly rate or the recovery was minimal, many would complain that NCUA wasted credit union funds.
The settlements to date have been good with more to come. The decision to pursue these lawsuits was the right one as was the contingency basis fee.
My service on the NCUA Board occurred during the heart of the financial crisis ignited by faulty mortgage-backed securities. I and my colleagues on the Board placed five corporate credit unions into conservatorship and ultimately into liquidation because of the risks to the entire credit union system posed by greatly devalued mortgage-backed securities.
The credit union system is by its nature cooperative and interdependent. To pay for the losses from these corporate credit union failures, NCUA had to make the difficult decision to assess all federally insured credit unions. Simultaneously, the NCUA Board and senior staff explored every reasonable option within its power to investigate and seek recovery from the parties that caused these losses. One aspect of this effort was a decision to enter into a contingency fee arrangement between the Conservator and later the Liquidating Agent for each of the failed corporate credit unions and two law firms that investigated and initiated multiple legal actions to offset the losses caused by mortgage-backed securities. The agency did not have the resources on its own to conduct such investigations.
The likelihood of success of that decision, at the time, appeared remote, but the NCUA Board believed it was imperative to investigate and pursue recovery of the losses. This decision ultimately was successful and yielded recoveries of $3.2 billion and counting. Had the NCUA Board not retained these law firms, there would have been no recoveries and all federally insured credit unions would have had to pay much more and for a longer term in annual special assessments to resolve the corporate crisis.
In March 2009, in the wake of the financial crisis, the NCUA Board placed U.S. Central and Western Corporate Federal Credit Unions into conservatorship because of the grave risks each institution faced as a result of the declining value of their mortgage-backed security investments. The Conservator stepped into the shoes of these corporate credit unions and had a duty to investigate possible causes of action arising from the mortgage-backed securities. After careful deliberation, NCUA decided that a contingency fee arrangement with the law firms would best enable the Conservator to fulfill this duty in light of the lack of available cash or valuable liquid assets to pay hourly fees, the uncertainty of recovery, the novelty of the potential actions, and the complexity and likely duration of matters involving some of the world’s largest banks. Without the contingency fee arrangement, it is hard to see how NCUA could have brought these cases at all.
Until now, NCUA has not released details of its contingency fee arrangement with the law firms. The agency realized from the outset that prematurely disclosing this information would have risked prejudicing the Conservator’s—and later, the Liquidating Agent’s—negotiating and litigating position in multiple high stakes cases against sophisticated banks with preeminent legal counsel. At the same time, the agency also recognized the benefits of public disclosure and transparency. When the cases were new and many, the balance appropriately favored delaying disclosure of the contingency fee arrangement. NCUA always recognized that it would be appropriate to disclose this information in the future, once the risk posed by disclosure had diminished sufficiently.
I understand that NCUA is now prepared to release details on its contingency fee arrangement. This disclosure signals that the recovery efforts have reached a stage where the interest in public disclosure outweighs the risk posed by disclosure. The decision is consistent with the agency’s reason for protecting the information from disclosure until now. This deliberate, considered approach has acknowledged the importance of public disclosure while preserving the Conservator’s and Liquidating Agent’s interests in recovery following the financial crisis.