By Ray Birch
MUSKEGO, Wis.—Chris Felton doesn’t like to think about what happened 10 years ago, and how competition for investments among the corporates, combined with the eventual mortgage meltdown, pushed the corporate system close to collapsing.
“We saw U.S. Central fall,” recalled Felton, now CEO of Corporate Central CU, referring to the conservatorship in February of 2009 by NCUA of the so-called corporates’ corporate. The agency conserved San Dimas, Calif.-based WesCorp at the same time, and then in 2010 also seized three more corporates: $10-billion Members United, $7.5-billion Southwest Corporate, and $1.3-billion Constitution Corporate. Eventually, all were shuttered or merged. The conservatorship of WesCorp and U.S. Central represented $ 61.3 billion in combined assets.
“We knew right then that the U.S. Central tier was gone and would never return again. So our next question was what would happen to the second tier? Would it go too, and would we just have natural person credit unions?”
Felton’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.
A Moment to Step Back
For Felton, once it became clear NCUA was not seeking to eliminate corporate credit unions and instead was instead seeking to simultaneously ensure their longevity while also implementing a new regulatory scheme, it became time to step back, take a deep breath and begin thinking about the future.
“It obviously was a very painful time to go through,” recalled Felton, who was EVP in 2008. He became interim CEO in 2015 and then CEO in 2016.
Felton said Corporate Central survived the crisis because it made a clear decision well before the mortgage meltdown not to become involved in the risky, but high yielding, mortgage-backed securities that helped contribute to the country’s financial crisis and ultimately make for the demise of some of the largest corporate CUs in the U.S.
‘This is Going to Be Bad’
Felton said it came down to the CU “believing what it was seeing.”
“Corporate Central has always been conservative,” he said. “We have a long history of being a very reliable source of liquidity for our members. Knowing that we have to be a reliable liquidity source, I think we looked at things a little differently than some others 10 to 15 years ago. We looked at the mortgage-backed securities, and the yields were certainly enticing, but we did not like the risk/return. In our ALCO meetings we analyzed that market six ways to Sunday and determined it was a little too frothy for us.”
Felton recalled how Corporate Central’s CFO returned from a meeting in California prior to the economic crisis in which he learned the price for small starter homes in many markets in the Golden State was nearly $750,000.
“He came back and said ‘This is going to go bad’,” recalled Felton. “That was just one more indication, upon a heap of evidence, there was a mortgage bubble ready to burst. So we steered clear of that.”
‘An Enormous Hit’
But even the extra caution and avoidance of MBS did not totally protect Corporate Central.
“We took an enormous hit from the collapse of U.S. Central,” said Felton. “We were fortunate to have enough retained earnings to absorb (the U.S. Central capital) loss, so we did not have to impact any of our members’ capital. We we’re very glad that we did not have to ask our members to put more capital into Corporate Central; we just had to recategorize some of the capital we had to permanent capital, which we did not have before the crisis. So it was essentially moving our members’ money from one bucket into another, and they voted overwhelmingly to do that and we appreciated that. They could have voted to liquidate us, but they didn’t.”
Felton emphasized that Corporate Central never held out hope that Overland Park, Kan.-based U.S. Central’s write-downs, mounting every quarter leading up to its eventual conservatorship and then closing in 2010, were going to slow or possibly end.
“When U.S. Central had that first $150-million write-down, on our books we wrote off our capital there at once. We knew things were bad in the mortgage market. We were not going to continually play the game of asking how much capital do we have left in U.S. Central. We said it’s gone, rip it off like a band-aid, and move on.”
It was a strategy adopted not just by Corporate Central but many of the other smaller corporates, as well.
A Better Place
Looking back Felton believes corporates are in a better place today.
“I think there is a blessing that has come from all of this,” Felton told CUToday.info. “There is much less competition among the 11 remaining corporates today and much more collaboration. For example, we have formed an alliance group where corporates meet quarterly with NCUA and we all talk about how we can work together.”
Felton acknowledged that corporates still occasionally butt heads.
“But there is no longer this heavy competition for credit union investments and people telling others to give up your corporate and come to this corporate,” he said.
As a result of regulations promulgated by NCUA in the wake of the crisis, Felton said corporates have had to change their business model, placing less emphasis on investments than they did 10 years ago and offering natural-person CUs services beyond just overnights and investments.
“That, too, has led to corporates collaborating with each other,” said Felton. “For instance, Corporate Central has a health insurance CUSO that we partner with another corporate to run…Working together we are stronger.”
Could It Happen Again?
Felton does not believe a scenario similar to that of a decade ago is likely to happen again among the corporates, but he also acknowledged, “anything is possible. I guess if anyone again gets the attitude of wanting to conquer the world, and we could have another bubble in the mortgage market…But the regulators have done a lot of good things to prevent any future problems—plus I think there is much more of collaboration between corporates today than there is competition.”