The corporate credit union formerly known as WesCorp is trying to move past its troubled recent history, even as its former directors fight a billion-dollar lawsuit.
The San Dimas institution, which failed in 2009 and was reconstituted as Western Bridge Corporate Federal Credit Union, has installed a new seven-member board of directors, regulators said. The board, comprising credit union executives from across the West, will help lead the institution as it seeks a charter for a credit union that will replace Western Bridge, an interim institution.
The credit union, which suffered more than $7 billion in losses during the financial crisis, has been without an independent board for more than two years as it remained under conservatorship of the industry’s regulatory agency, the National Credit Union Administration.
Meanwhile, regulators are seeking to recover more than $1 billion from 16 of the credit union’s former directors and officers for allegedly pursuing overly risky investments that led to WesCorp’s collapse.
Lawyers for the defendants, who include former California Credit Union League Chief Executive Bill Cheney, have filed motions to have the charges thrown out. A hearing on the motions is scheduled for June 9 in Los Angeles federal court.
Matt Davidson, who was elected to Western Bridge’s board, had some reservations about the appointment given the troubles facing the former directors, but he said the importance of reconstituting the credit union outweighed his concerns.
“It’s impossible to say I didn’t think about it, but it was really a minor issue to me,” said Davidson, who is the chief financial officer of Kern Schools Federal Credit Union in Bakersfield. “When you create any new business, there are risks.”
Corporate credit unions number only about two dozen nationwide and provide services to retail credit union members, including liquidity, check-clearing and ATM transaction services, which would be too expensive for credit unions to handle individually.
Traditionally, corporate institutions also have invested their members’ surplus cash, which was a problem during the financial crisis. WesCorp placed increasingly large bets on risky investments, including mortgage-backed securities, which led to large losses.
Davidson noted that regulators have since changed the rules governing corporate credit unions, which make it unlikely that the surviving entity will get into similar trouble. Among the changes, corporate credit unions must now hold more capital, and are prohibited from investing in mortgage securities and other risky asset classes.
Davidson said the board has submitted a business plan for the new entity that “has us providing settlement services and basic liquidity, but not providing long-term investment services like WesCorp did.”
He said it should receive word on the proposal within a couple of weeks.
While the new institution is expected to be up and running by October, it remains to be seen whether the credit union industry will embrace it. WesCorp’s failure resulted in losses for most of its 1,100 members, and those same retail institutions will have a choice whether to join the newly created corporate credit union. Instead, they could turn to other corporate credit unions, or even to the Federal Reserve for liquidity services.
“There’s some caution, sure, because a lot of credit unions, including (mine), lost money,” Davidson said. “I hope they all come back, but some will leave and some will join other corporate credit unions. The new corporate credit union will be smaller.”
