After the Bay of Pigs fiasco in which a CIA backed Cuban exile group landed in Cuba to overthrow Castro and were defeated within days, President Kennedy took full responsibility with the observation “Victory has a thousand fathers, but defeat is an orphan.”
Unfortunately that is not true in real life. Whenever a problem shows up, especially one that results in real loss and tragedy, there are plenty of persons willing to point out those responsible for the defeat. It is called the “blame game.” Its purpose is to shift responsibility away from those responsible for resolving problems to those who caused the “defeat.”
The whole taxi medallion crisis, centered in New York City, is a case in point.
The New York Times ran a series of three articles two weeks ago showing the harm caused to almost 1,000 individual medallions owners by the dramatic declines in value since 2014. This three-part series was just converted to a video broadcast in a 30-minute Hulu special in The Weekly.
The fingers of blame are pointed everywhere: at the taxi-limousine commission, the New York city council, the medallion brokers, the multiple bank and credit union lenders, the regulators. And of course the external-event-defense: Uber and Lyft’s ride sharing economic disruption. NCUA in its public statements has blamed the credit unions, boards, disruption and even admitted its oversight of “concentration risk” was not as diligent as it should have been. But no matter, NCUA just took over $1.0 billion in cash and paid off the shareholders, gave the loan medallion portfolios to external servicers, and washed its hands of the problem.
And that is the real problem. Credit unions were formed to walk toward members and their difficulties especially in times of trouble. Instead of encouraging and helping the medallion borrowers at the time of greatest need, NCUA cut and ran. Most of the taxi medallion credit unions had fully reserved for the potential losses as values fell to cash only sales of around $200,000. In one case a merged credit union had not only written down the values, but still had loss reserves of over 50% for the amounts still on the books. But the examiners prohibited the credit union from rewriting loans or making other accommodations that were in everyone’s best interest. As one CEO said, the examiner’s goal was to put the credit union out of business.
The billion dollar cash outlay for the liquidations of LOMTO and Melrose locks in losses at the time of lowest value. And therefore the greatest loss. No upside potential is possible. In the NY Times Hulu video story, an advocate for the medallion owners states that the income from a taxi license would support a loan of $400,000; but that value can only be realized if someone is using it to generate income. Meanwhile hedge funds are paying cash at foreclosures because lenders and regulators have shut off any financing possibilities for medallion user-owners.
An economic valuation cycle is thus turned into multiple personal crises for credit union borrowers because the institutions set up to serve them, denied help when the members were most in need.
Disasters happen. Some are caused by internal failures, some by external events over which an institution may have no control. This is why there is a regulatory system. And why as part of this “system” credit unions have an “insurance pool” funded by 1% of every shareholders savings. This is the critical source of financing when necessary to transition from problem to solution. But resolutions get aborted when the fund is used to expense away current difficulties. That is not why cooperatives were created. That is not why the NCUSIF was funded with members’ savings.
The inability of NCUA leaders to acknowledge their responsibility for resolving problems, not liquidate them, only leads to the next set of problems. In this case it is the destitution of over 700 medallion owners who have declared bankruptcy and for many others burdened with debt they cannot see a way out of. The expensing of member funds to make problems go away ultimately leads to greater and greater problems down the road. The self-help and self-financing capability of the cooperative model is compromised any time a problem just becomes a liquidation event. Mergers just transfer the responsibility to somewhere else in the system. The crucial resilience and patience that cooperative design allows is fatally neglected for instant resolutions.
The problem of relations with Cuba that JFK thought he was resolving is still unfinished business today. When NCUA plays the blame game versus acknowledging the responsibility to transform problems into turnaround stories, there will never be any victories for which to claim success. Only an ever mounting, open ended expenditure of member funds to sweep mistakes under the rug. This corruption of the system’s cooperative model could in the end destroy it.
There is a lot going on in the blog, but the one thing that worries me the most is that CUs are to ride high and low with their members through think and thin times. But when this market took a dive, dip, or entered a death spiral (depends on your perspective and time on the job), the NCUA cut them off and the knees, ruined good CUs, and pushed the members out into the cold. That does not sound like our industry seeing EVERYONE as real members.
It sounds like some skittish regulators (and government types who loved expensive medallions somewhere along the way) clearing an ugly mess from their desks, with other peoples money, and some real members dreams discounted. Workouts have turned into, shoot them in the head and move. Dig into what Chip is saying here a bit. And remember, some of the markets, members, and your business members is the future will have there moments too.
Example upon example of NCUA overreach. In my 45 years in credit unions the agency never seems to learn that what they consider a regulator crisis needs to be treated as a MEMBER/OWNER problem and they need to continue oversight while letting us owners of the individual credit unions and the network of credit unions solve and fix our own problems. This is what happens when you have an agency full of executives who have never managed a cooperative organization and a board that is usually devoid of any individual skills and experience that would exercise wiser judgement. Since 2008 the NCUA board has generally proven to be poor stewards of credit union capital in resolving the issues of the corporate centrals, in pushing a false narrative and justifying the contraction of our smaller credit unions and in the self serving illegal hijack of TCCUSF funds.
Will we never get them to understand that they are not a bank regulator? Continuing down this path will assure us all that credit unions will be regulated out of existence.