Having written a blog for over a dozen years, I should be used to the fact that there's no gauging what might set some people off like Roman candles. Yet, I'm constantly surprised by the small sparks that light a flame.
I received more than one angry email from folks who thought it was outrageous...OUTRAGEOUS I TELL 'YA!...that the NCUA paid a couple of law firm's enough money to allow them to run for the U.S. presidency if they were so inclined and didn't mind millions of people second-guessing their groping of private parts or cavalier handling of sensitive email. However, let's "parse the nuances," shall we, before we stoke that anger?
The NCUA sued the favorite whipping boys of Princess Fauxcahontas, i.e., the nation's big banks, over putrid mortgage-backed securities that those banks had palmed off on corporate credit unions that later failed (thanks, in no small part, to losses suffered on those MBSs). The cases involved complicated legal issues, the defendants were all well-heeled and willing to put up a game fight (including burying their opponent under Redwood forests worth of dead trees-turned-motions, pleadings, and discovery), and it's not like the NCUA is staffed to handle once-in-a-generation, bet-the-farm litigation. Therefore, the NCUA found a couple of litigation law firms with the necessary expertise and gunslingers-on-call, and who were also willing to do something that many blue-stocking firms are loathe to do: get paid only if they actually win. They took the litigation on a contingency fee basis.
How well did that arrangement work out for the NCUA? According to Housing Wire's Ben Lane, pretty damned good.
The total amount recovered for the failed credit unions in those settlements is more than $4 billion, but this week, for the first time, the NCUA revealed just how much it cost to reach those settlements.
NCUA’s price tag for recovering $4.3 billion for the failed credit unions? Just over $1 billion, paid out to lawyers.
According to NCUA Board Chairman Rick Metsger, this was a good deal for both the NCUA and the firm's involved.
“We were the first federal financial institutions regulator to sue these firms, and we were going up against some of the world’s most powerful institutions,” Metsger said.
“The outcome was far from certain, but we engaged expert outside counsel, and our team has been very successful,” Metsger said. “To date, we’ve obtained $4.3 billion in recoveries, significantly reducing potential assessments for credit unions.”
Metsger said that the attorneys involved took the NCUA’s cases under contingency fee arrangements, meaning the law firms would have received far less than $1 billion if the NCUA lost the respective cases.
“Net recoveries have repaid some of the claims on the estates of the five failed corporates, including those of the Temporary Corporate Credit Union Stabilization Fund,” Metsger said.
“While earlier cases in which billions of dollars were at stake were pending, NCUA did not disclose attorney fee arrangements to protect our litigation position and ensure maximum returns,” Metsger said. “Now that most of the securities cases have been resolved, NCUA can state that, to date, legal fees to our two lead law firms come to approximately 23.2% of our total recoveries, or $1,003,029,479.”
Metsger said if the lawyers involved hadn’t agreed to the contingency agreements, which “insulated” the NCUA from the high costs of litigating unsuccessful cases, there would have been no money recovered. Instead, the NCUA recovered $4.3 billion.
“Without this fee arrangement, which shifted most of the risk of these legal actions to outside counsel, there would have been no legal investigation of potential claims, no litigation, and no legal recoveries,” Metsger said.
I agree with Mr. Metsger. Many large law firms would have been happy to perform the same work for the NCUA on an hourly basis, dumping boatloads of associates and paralegals into a whirling dervish of a billing cyclone that would have ensured the firm's partners that their kids could continue to attend Ivy League universities and their spousal units could afford those Jaguars in the driveways. As long as they didn't commit malpractice, whether they won or lost was not an economic risk to them.
Actually, 23.2% as a contingency fee seems to me to be a pretty fair percentage, although when you're talking about applying that percentage to $4.3 billion, 20% might also have justified the risk. On the other hand, no one knew how much moola the big banks would cough up, and, moreover, what's a measly $137.6 million among friends?
It's certainly a good fee for the two law firms involved, even taking into account the litigation risk and the fact that, except for out-of-pocket expenses (which, I assume, the NCUA was covering), I assume that the firms "carried the cost" of the litigation for three years out of their own pockets. However, I don't think it's unreasonable, nor do I think that the NCUA was somehow "screwed." It netted $3.3 billion (so far) and had relatively little downside risk.
Now that everyone has the benefit of hindsight, and knows that you can squeeze blood out of Wall Street for selling lousy mortgage-backed bonds to banks and credit unions that later crater, the NCUA may not use the same arrangement in the future. Of course, the "future" will not likely involve the sale of such securities, so that is a moot point. The next time a cause of action surfaces for which there is not a lot of precedent, dusting off the same arrangement with hired guns may make sense. If it does, I expect that the NCUA will consider it.