NCUA ‘s Billion Dollar Legal Investment Was Worth The Price
In mid-October, NCUA announced that it had made over $1 billion in contingency fee payments to compensate the law firms that it retained to recover losses incurred by the failed corporates as a result of their purchases of mortgage-backed securities. The large sum of the payout, representing approximately 25% of the $4.3 billion in settlements that the agency has reached has understandably raised some eyebrows and provided ammunition to the agency’s critics. Credit Union gadfly and frequent reader of this blog Keith Leggett posted that South Carolina Congressman Mick Mulvaney has asked NCUA to answer these three questions:
- Why did the agency pursue these cases under contingency fee arrangements?
- What was the original analysis of why this was the better approach? And,
- Has there been a post-settlement analysis to see if this was actually the best approach, financially, given the outcome?
These are all very legitimate questions given the amount of money involved. But at the end of the day, let’s not demagogue NCUA’s actions. It has made a worthwhile investment that has already helped the credit union industry recoup billions of dollars.
Let’s look at the facts.
Most importantly, there was absolutely no guarantee that NCUA was going to win any money as a result of taking on the largest financial institutions in the world. The litigation was risky, both because there were novel legal issues involving statutes of limitations and the disclosure obligations of investment banks that bundle and sell complicated mortgage securities. NCUA not only had to prove that the securities tumbled in value, but that the companies that sold these products knowingly failed to disclose material information. Both of these were aggressive legal arguments. Without a contingency fee arrangement, NCUA would have had to choose between risking hundreds of millions of dollars of credit union money, or forgoing the litigation all together. Had it chosen the later course, your credit union would most likely still be paying special assessments.
You don’t bring a knife to a gun fight. Given the complexity of the litigation and the reputational and financial risk to the institutions that NCUA was suing, it was going to go up against the best lawyers. It needed to do the same thing. The best lawyers cost a lot of money. A first year Associate at a top New York law firm – typically, a bright 25 year old right out of law school – is making a base salary in excess of $170,000 a year before her bonus. In addition, top partners are now demanding in excess of $ 1,000 an hour. Is this an excessive amount of money? Perhaps, but this is the marketplace with which NCUA had to deal. Look at the quality of the work NCUA got in return for its contingency fee arrangements: both on the trial and appellate level, it won important decisions that put NCUA in the position to demand substantial settlements.
Finally, when people question the cost of this litigation, such concern should be weighed against its benefits, not only to the bottom line of credit unions but to the public at large. NCUA’s litigation has an established precedent that will make it easier for financial institutions that engage in similar conduct in the future. Credit unions and the public got their money’s worth.