A Tale Of Two (Spinning) Tops

A reader who toils in the credit union industry sent me an interesting juxtaposition in spin, one from the NCUA and one from a trade press publication. They both concern recent financial results announced by the NCUA for AEA Federal Credit Union, which was seized by the NCUA in December 2010 and placed into conservatorship. The NCUA injected a $20 million subordinated note that it allows AEA to count as capital. In a press release trumpeting how well AEA is turning things around, the NCUA sounds almost giddy.

AEA Federal Credit Union, which operates under the conservatorship of the National Credit Union Administration (NCUA), posted 2012 year-to-date net income of $839,096. Total assets at the end of the first quarter stood at $245.1 million, up from $230.6 million at year-end 2011. AEA Federal Credit Union’s net worth also improved by 18 basis points during the first three months of 2012, ending the first quarter at 2.85 percent.

[...]

Since Dec. 17, 2010, NCUA, the interim management team, and AEA Federal Credit Union’s employees have worked to dramatically improve the credit union’s financial condition and maintain services for the credit union’s 42,000 members. Deposits at AEA Federal Credit Union remain protected up to $250,000 through NCUA’s National Credit Union Share Insurance Fund.

Sounds like everything is just peachy at the formerly busted credit union, doesn't it?

Here's the take of the Credit Union Journal (paid subscription required) on the same financial results.

NCUA said this afternoon that AEA FCU, the one-time $410 million credit union which was victimized by a massive MBL fraud, continues to operate with zero capital, despite a $20 million emergency NCUA loan it is allowed to count as net worth.

AEA, whose former MBL director William Liddle is headed to jail as a result of the fraud, reported net income of $840,000 for the first quarter of 2012, but is still operating with negative $12 million of its own net worth. A new federal law allows such credit union and bank failures to count regulatory assistance, such as NCUA’s $20 million bailout loan, as regulatory net worth. As a result, NCUA says AEA actually has 2.85% net worth.

Are we talking about the same institution? Counting debt as net worth is a great trick. The FSLIC used it in connection with the Southwest Plan in the late 1980s, which allowed the FSLIC to hide the fact that it was technically insolvent, until Congress finally caught on and punished the FSLIC by merging it out of existence and transforming its operating head, the independent Federal Home Loan Bank Board, into the OTS (recently abolished by Dodd-Frank). Could the NCUA be following down FSLIC's weed-strewn road to perdition?

A couple of months ago, I sat through a presentation by a couple of "big guns" from our nation's capital, both lawyers who do a lot of credit union representation, and one who's a lobbyist for financial institutions. They told us that the NCUA was the reincarnation of the FSLIC and when the extent of its financial troubles came to light, the political fallout might be toxic. I have no idea whether or not this allegation is correct. However, using debt as equity and issuing a press release that trumpets an increase in "net worth" without noting that we're not talking about GAAP net worth, but the often-vilified "regulatory net worth," smacks of slathering not only lipstick, but eyeshadow and rouge, all over a rather corpulent porcine-like slab of flab.

Earlier this year, credit union industry pundits were raising questions about how big the losses might be at the NCUA and how the NCUA was publicly handling the disclosure of its potential problems. It looks like this is an issue that might gain some traction.

Ironically, although the NCUA is allowed to use debt instruments as equity infusions, a simple proposal to permit commercial banks to amortize commercial real estate loan losses over a ten-year period was killed by federal regulatory opposition because it would cause "regulatory accounting" to depart from GAAP and might permit banks to "mask" their "true" financial condition. The depth of cynicism in D.C. is beyond the comprehension of anyone other than professional politicians and members of organized criminal enterprises.