A portfolio weighted too heavily with non-agency mortgage-backed securities led to the failure of Western Corporate Federal Credit Union. In a complaint filed in District Court for the central district of California, the National Credit Union Administration Board alleges WesCorp departed from its traditional business model of providing liquidity for credit unions and “began an aggressive campaign to increase the size of the organization” around 2002. WesCorp fueled this growth through borrowing and then investing “heavily in private-label [MBS],” according to the complaint. This lead to WesCorp reporting total assets of $32.5 billion at the end of 2007, more than 50% higher than five years earlier. But the credit union’s exposure to private-label adjustable-rate MBS was $22 billion, or about 95% of its total investment portfolio, at the end of 2007. During the five years between 2002 and 2007, WesCorp’s borrowings rose more than 2000% to higher than $10 billion. Then the bottom dropped out of MBS, and WesCorp reported a 2009 loss of $6.8 billion in its investment portfolio, effectively rendering the credit union insolvent, according to the complaint. The NCUA said most of the losses were related to MBS with about $4.7 billion stemming from option ARM MBS alone. “If WesCorp’s officers and directors had imposed prudent concentration limits on its private label MBS, including its option-ARM MBS, almost all of this loss would have been avoided,” the NCUA claims. The complaint alleges WesCorp officers and directors “were grossly negligent and breached their fiduciary duties…by not imposing meaningful concentration limits” on MBS holdings. The complaint also alleges breach of fiduciary duty and fraud against two former WesCorp officers, and unjust enrichment by one former officer in connection with irregular payments from the credit union’s supplemental executive retention plans. The NCUA seeks more than $1 billion in damages from the WesCorp officers and directors. Calls to attorneys representing multiple defendants weren’t returned before publication. Write to Jason Philyaw.
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