A Modest Proposal for Secondary Capital

NCUA’s June delay in implementing a new risk based capital (RBC) rule was in part explained by the need to examine whether a secondary capital option should be part of the new capital model.

Cooperative design and history suggest there is an immediate and straightforward additional capital option. This solution can be implemented regardless of the outcome of the RBC discussions.

The 1934 Federal Credit Union Act mandated that the par value “shall be $5 per share,” an amount in the law based on twenty five years of state-chartered credit union practice.

Credit unions had no share insurance funds, state or federal, until the 1970s.  Prior to that all member shares were at risk, that is equity for the institution.   An ongoing consequence of this financial structure, even in the era of deregulation, is that credit union shares are second in payment priority in event of liquidation to all other liabilities. This means that third party lenders to credit unions, such as the FHLB system or banks, know that equity is more than a credit union’s retained earnings. In the event of failure, the insurance fund must pay lenders’ outstanding loans ahead of shares.

The $5 Par Share Value Today

The historical par value of  $5 was often purchased on an installment plan, for example,  25 cents a week. This par value, now a variable amount, was the foundation for all funding and was at risk should the credit union not succeed.  Virtually all FCUs and state charters still active today, were financed with this membership shares-at-risk model. This shared fate meant that the cooperative model was indeed based on common values and purpose.

The value of the $5 initial member share purchase requirement today depends on which index one uses to analyze changes in economic value.   There are at least seven choices from the consumer price index to various efforts that track the cost of labor, to nominal GDP per capita. The range of results from these various indexes shows that the value of the $5 share in 1934 would range from $62.70 (CPI) to $373 (GDP per capita) in 2019.

Reengaging Members in the Cooperative Model

The option to ask members to purchase one at risk (uninsured) capital share with specified minimum par value would provide additional equity but more importantly signify once again the uniqueness of the cooperative model. It would be available only to members, limited in individual amounts, and subject to terms and conditions set by the boards.

There is no need to invent multiple plans for secondary capital sold to third parties creating a potential conflict with member’s returns. Instead the original design that successfully launched tens of thousands of charters could become today’s solution for capital flexibility when that is in the members’ best interest.

My Favorite Summer Movie Experience: Shining Night

Summer movies can provide escape, inspire, provoke and entertain.

All of these qualities are in the documentary Shining Night about American Composer Morten Lauridsen. I sought out the movie following a week of learning to sing Lux Aeterna, (a contemporary requiem composed on Lauridsen’s mother’s death), at a Richmond, VA choral workshop organized by Berkshire Choral International.

A Composer’s Thoughts

Born in 1943, three of his compositions are the most popular choral sheet music ever sold: Lux Alterna, O Magnum Mysterium, and Dirait-On.

The movie is a biography of the composer, and more importantly conversations about his creative motivations. Lauridsen is a mystic who translates both older Christian scriptures and contemporary poetry (“time tested words”) into musical expressions.

His descriptions of the these efforts are insightful. He is inspired by the belief that “There is something bigger than us out there. We must tap into that.”

He talks about “an absolute desire” to create because you have been sparked by something that makes you “feel whole” and provides inner peace.

An Inner Song

For Lauridsen, his way of finding meaning was writing music to share “this inner song.”

Very few are blessed with the genius of combining words and music to express one’s purpose. He acknowledges that sharing an “inner song” is no easy task, but that doing so “will change lives.”

That is the creative contribution we too often take for granted. But that is the light or to use his Latin word, Lux, that helps each of us believe each day is indeed worth living.

I hope an experience that enlightens will also be part of your summer.

The Cooperative Model’s Longevity Advantage

Creative destruction has been a characteristic of capitalistic markets especially in the last 100 years of public markets and plentiful financial takeover funds.

The result is that the average lifetime of a Fortune 500 company becomes shorter and shorter. According to one study, the 33-year average tenure of companies on the S&P 500 in 1964 narrowed to 24 years by 2016, and is forecast to shrink to just 12 years by 2027. (https://www.innosight.com/insight/creative-destruction/)

But good news for mutual and cooperative design just came from an updated list of the 500 largest insurance mutual and coops.

The average longevity (i.e. the age or number of years in business) of the world’s 500 largest mutual insurers companies is 97 years, supporting the theory that mutual and cooperative insurers are closely associated with sustainability, stability and long-termism. Notably, 235 (equivalent to 48%) of the Global 500 have been in operation for 100 years or more; 71 (or 14%) have been in business for 150 years or more; and 16 companies (3.3%) were over 200 years old.

Source: The world’s 500 largest mutual and cooperative insurance companies have once again been ranked by the International Cooperative and Mutual Insurance Federation (ICMIF) in the 2019 edition of its Global 500 report.

Why Closing a Newspaper is Like Merging a Healthy Credit Union

This July 7 article in the Washington Post described the impact on the community of the decision to close Youngstown, Ohio’s only local newspaper, the Vindicator, after 150 years of operations.

Some reactions and consequences described in the article were the following:

“Mere moments after the start of the hastily called community forum, the tears started to flow.

“Gobsmacked,” was how one Youngstown reader described her horrified reaction to the surprise announcement,

“The Vindy connects us all. A community without a strong, central newspaper is missing leadership — and a big part of its identity.”

With the Vindicator’s closing, Youngstown will become an unfortunate first: a good-size city with no daily newspaper of its own.

For Mark Brown, the Vindicator’s general manger, the loss is personal, devastating.

His family has owned and run the paper for 132 years. His mother, Betty Brown Jagnow, the publisher who is well into her 80s, still comes into the office regularly and has called the decision “gut-wrenching.”

“It’s all we’ve ever known and all we ever wanted to do,”

The Vindicator’s 44-member newsroom staff digs deep into local issues, and has won plenty of state awards for general excellence, for reporting and commentary, and for its website, which has no paywall.

“I’m scared for the community” the paper quoted Mark Brown.

What this means, said Joel Kaplan, associate dean of Syracuse University’s Newhouse School, “is that no one in that community will be covering, on a regular basis, school board meetings, city council meetings, the cops and the courts. Democracy, as we know it, is about to die in Youngstown.”

“Scared for the Community”

The facts of the Vindy’s demise are not unusual. Decades of declining circulation, $23 million in accumulated financial losses, and no local alternatives for the community to turn to.

Whenever a locally-focused, community-based organization is closed whether by merger, failure or sell out, the community’s future is undermined. Some may respond that there are multiple mass media and social news sources to keep the community informed. But that misses the point of local ownership and focus. Local ownership matters: leadership is responsible to local priorities, not a faraway corporate business model. Local employees bring expertise and commitment to success; a legacy of  pride, community well-being and knowledge is created and sustained.

While newspapers and credit unions have very different business models, the continued merging of strong, well-managed and long-serving credit unions into much larger organizations often hundreds of miles away or even out of state, sacrifices one of the most important leadership and economic factors underwriting the viability of local towns, subdivisions and even small cities.

The myth of “expanded services” used to justify management’s surrender of a charter and assets created over generations undermines cooperative principles critical to credit unions remaining the alternative to for profit financial firms. These “voluntary” mergers violate the fiduciary, democratic foundation of cooperative governance. They are little more than commercial transactions benefitting not members, but individual and or corporate ambitions.

Like the loss of a town newspaper, every time I read about the merger of well run, established and successful credit unions, I too become scared for the community: in this case the cooperative option.

P.s. added 8/2/19

Today’s press announced a merger of two credit unions 1,200 miles apart with no historical sponsor or other connection. The $754 million Vibrant Credit Union, chartered in 1935 to serve the employees of John Deere is located in Moline, IL. Infinity FCU ($333 million) is located in Westbrook, ME, and was founded in 1921 to serve telephone workers. Why would members in Maine want to use outlets or services in Illinois? How does having an East Coast hub in Maine benefit members in Illinois? The reasons for the combination raise the question: whose interests are being served by combining two well run, strong community charters with no common heritage or prior relationship, and literally time zones apart? This disclosure should make interesting reading for the members of Infinity who must vote to give up their 100 years of local control of policy, resources, and leadership in the state of Maine.