Tuesday’s virtual oversight financial hearing before the Senate Banking Committee will be a dramatic way to demonstrate the credit union difference.  

For NCUA Chairman Rodney Hood represents all the cooperative system’s regulatory and supervisory roles as a single witness. It takes three bank representatives to cover the same responsibility for that industry.

These three are:

1. Randal Quarles Vice Chairman for Supervision at the Federal Reserve Board-Liquidity
2. Joseph Otting, Comptroller of the Currency-Chartering and Supervision
3. Jelena Williams, Chairman of the FDIC-Insurance

Cooperative Design’s Simplicity

The credit union system built its federal regulatory structure over five decades (1934-1984). As credit unions evolved, their supervisory system followed the same cooperative principles. The NCUSIF is a collaborative fund where each member contributes 1 cent of every share dollar as a capitalization pool. The CLF is a mixed ownership corporation whose credit union funding is the basis for liquidity borrowings from the federal financing bank.

The advantages of an integrated, collaborative based regulator which covers all three functions are obvious. Greater efficiency, coordination, and single point of policy and oversight at the federal level.

The Drawbacks

But the potential downside of one organization is that there is no check and balance from other expert agencies. The effectiveness of the single regulator’s role depends on one board with the Chairman as spokesperson.  

If the board’s leadership  is not familiar with cooperative design and credit union differences, there will be the temptation to look to their bigger regulatory kin, who have a longer, different history and a lot more resources. When that approach is used to justify an action, NCUA can get off track.

What to Watch for in the Hearing

Because the hearing is virtual, the side by side visual of one versus three may not be as dramatic were the hearing in person.

I’m listening to see if Chairman Hood presents the credit union role from a cooperative point of view. Are there reports of the unique initiatives credit unions have taken to assist members? Or will the ever-present temptation of “bank envy” characterize his comments?  

Credit unions were not meant to be banks. Level playing field arguments or changes because the banks can do it, are not the reason the cooperative option exists.  

Hopefully the Chairman will show the difference not just in the 1 vs 3 setting,  but also by presenting the member focused accomplishments the industry has achieved in this crisis.

One CUSO Board’s Decision on PPP Participation

In response to my Revealing Character blog, I received the following comment, used with permission.

Chip, just read your blog entry today about credit unions and government assistance. This is what I shared with my board a month ago. They unanimously agreed we did not want or need the money. Excerpts follow:

Board Members:

I am sure some of you are already aware of the governments $349 billion Payroll Protection Program (PPP) that was part of the CARES Act. The spirit of the new SBA loan program is to support struggling small businesses retain their staff and maintain ongoing operations over the coming weeks. For companies that do not materially change their payroll after 8 weeks, the loans will be forgiven. Essentially, the loan becomes a federal government grant for small businesses.

Based on analysis, the CUSO is likely eligible for the program and would be able to apply for nearly $XX mm in loans – equating to a little less than a third of budgeted 2020 net income. Given this would be a material sum, I feel it is important to engage the board on this decision and would appreciate your perspectives.

I have researched the program, consulted with those familiar with SBA lending, and contemplated this over the last few days. For mainly philosophical reasons, I currently do not feel we should pursue this program but recognize that this is a board-level decision. While we technically would qualify based on the very broad program definitions and limited documentation required, I do not feel this would be in the spirit of the SBA program — to support struggling small businesses that are contemplating staff layoffs/furloughs and in many cases their own continued existence.

This is a complicated and challenging decision. Nearly every business has had operations and plans affected in some manner by the pandemic and the future remains uncertain. Like your organizations, our CUSO has been impacted – but given our continued positive net income outlook across 2020 and broader balance sheet strengths, I feel confident we will weather this storm and there is no need to contemplate staff layoffs or furloughs in the foreseeable future. Additionally, while I have been told it is unlikely the SBA would publicly disclose the names of the companies that borrow, this is not the kind of headline I’d want to see in the trade press or used in anti-CU platforms.

Without a doubt, the money could be used for many purposes to support the business or further shore up our stability. For example, if we used the $XX mm loan to cover payroll for a period of time, we could choose to use the money we would have spent on payroll to create a fund to help struggling borrowers. But, then again, don’t we already have the capital resources available to deploy to go after $XX mm sized pressing needs or opportunities?

There are several different lenses one can look through to evaluate this decision. Another lens might be what our owners and other stakeholders might expect us to do (or not do)? While credit unions are apparently exempt from the PPP themselves, would they take the money if they were able to? I assume the answer is not binary across the industry, but it is interesting to think about in light of the decision we have to make.

 Thank you in advance for your consideration and counsel on this matter.

A Stunning Confession of an Agency’s Leadership Shortcomings

What does it say about a federal government agency whose leadership collectively confesses to the inability to tell right from wrong, legal from illegal, good behavior from disreputable? Especially in the middle of a national crisis.

That was the stunning admission revealed by the NCUA last week as it announced a new personnel decision made at its March 19 closed board meeting.

Appointing a Chief Ethics Counsel

On April 22, NCUA announced the Board’s decision to hire a “chief ethics counsel.” Supervised by the chairman, the press release stated: “The Office of Ethics Counsel will certify the agency’s compliance with relevant federal ethics laws and regulations, promote accountability and ethical conduct, and help ensure the success of the NCUA’s ethics programs.” This had been a role of the General Counsel.

Senior federal executive appointments are traditionally selected based on candidates’ experience, convictions and proven character. Ethical obligations and moral behavior are presumed. This Presidentially appointed, Senate-confirmed NCUA board trio has now conceded the Agency is failing in this basic discernment ability.

So, in addition to three board members, their personal policy advisors, senior staff including an executive director and deputy, a general counsel and deputy, and the full organizational capabilities of human resources department, the agency is unable to make ethical decisions.

It makes the story of the Greek philosopher and cynic Diogenes’ quest for an honest and truthful person more than prophetic.

A Partial Record of Agency Leadership Failings

The litany of disastrous and self-serving actions by senior agency personnel in just the past three years is lengthy.

  1. A March 2020 IG report: Misuse of Official Time, Illegal Drug Use, Time and Attendance Fraud) It described how NCUA General Counsel Michael McKenna (appointed 2011) and his deputy, Lara Daly-Sims, had visited strip clubs, consumed alcohol and possibly marijuana, while on government time.
  2. The betrayal of 4,500 credit union borrowers’ whose loans were sold to a hedge fund in February 2020 in a secret bidding process.
  3. The January 2019 release of a 25-page investigation by NCUA’s OIG of then Chairman McWatters and Chief of Staff Sarah Vega’s excessive travel expenditures.
  4. The May 11, 2018 Washington Post report of Chairman McWatters overseeing the NCUA from his home in Dallas: “almost unheard of for an agency leader, to routinely work from home.”
  5. The seizure of $3.0 billions of TCCUSF surplus due credit unions via merger with the NCUSIF.
  6. The lack of transparency in the management and expenditures of billions in liquidations of the five corporates.
  7. The operating loss reported in the December 2017 NCUSIF audit, the first since the fund was created in 1971.

Compounding Error with Folly: A Self Promotion Campaign Paused

As if this admission of collective moral bankruptcy was not itself damning, the agency on April 24 further proved its leadership vacuum.

On that day the credit union press reported NCUA’s contracts with three public relation firms’ for more than $500,000 to assess, compare and then rebrand the agency signage and logo. Deliverables also included responding to agency media requests and preparing testimony.

When the December 2019 contracts became public on April 24 through FOIA requests, the agency immediately said it would postpone, not cancel, the contracts.

The agency’s operational hold of this four-month effort was explained by the need “to spend more time addressing the coronavirus crisis.” This covering story fabrication is underscored by the fact that the President declared the coronavirus national emergency six weeks earlier on March 13.

Serving Members: We’re In This Alone

NCUA’s actions, putting its interests first, accumulating greater and greater credit union resources, and making unilateral decisions, erupted in the 2008-2009 financial crisis. And the tide never reversed.

In this crisis, the lesson for credit unions serving members tirelessly under the slogan “We’re in this together,” is that they are also in this alone.

The most important authority of any government leader is moral, not rules and regs. Without this “compass,” the regulatory instruments and collaborative resources at NCUA will not be directed to enhance credit unions’ fundamental values or purpose.

Instead, NCUA’s pattern of actions betray the basic values that make credit unions different. Cooperative success relies on self-help, mutuality, burden sharing and community well-being. These values, more than unique processes and services, make credit unions who they are.

The Challenge

Daily, credit unions are carrying out this cooperative philosophy and their “essential service” designation for millions of members—many laid off, most uncertain about their future, and everyone anxious for their personal safety.

The good news is that we have been here before, and the collective changes undertaken in 1980-1984 for example, served a whole generation that followed. How will this generation of credit union leaders fulfill its destiny?

Presenting the Right Message About Credit Unions in Today’s Crisis

The doomsayers are already at work. Commentators use the March 31 data to prove their theory that an economic Armageddon is just around the corner. The end of everything we value. Unless of course we adopt their solution: more government, reopen faster, etc.

This pandemic is a health and an economic crisis. However, the greatest danger may be a loss of confidence in the spirit of who we are. Anyone who understands what made America today and why credit unions were created, knows that we will persevere and sustain.

Avoiding Self-Fulling Prophecy

But we must be careful not to project ourselves into a self-fulfilling prophecy of demise. That occurs when short term numbers or the peak of a problem is assumed in models and presented as the “new normal.”

Persons with an agenda will use these scenarios to enhance their position, resources or reputations. This happened in the 2008-2009 crisis and we need to learn that lesson in this new one.

These kinds of forecasts are impossible to make with accuracy. For they ignore the capacity of leaders and organizations to change and create “new normals;” that is, their innovative capacity to change the core assumptions models employ.

The First Quarter Numbers: A Case in Point

The first quarter numbers for most credit unions will show declines in the traditional measures of financial performance. ROAs will fall or even be negative, loan loss reserves will go up. Growth may slow. Delinquencies will increase, but certainly not by as much as will be the case for the June 30 numbers.

So what do the numbers mean? The most important point is that credit unions are sharing the financial pain and uncertainty of their member owners. This is the basic fact that is creating these numbers.

Credit unions are stopping fees, lowering rates, offering skips pays, and many other efforts to help members transition the unanticipated immediate economic shutdown required to stop the COVID virus.

Unemployment will reach heights not seen since the Great Depression. On average over 16% of the labor force (over 30 million) lost work in just one month. Rent, auto and credit card payments will be slowed or missed.

The members don’t know what their future will be; neither does their credit union. The credit union goal is not to hit an ROA goal, but rather sustain member relationships.

A Transition in Thinking and in Financial Trends

Traditional financial performance can be a very imperfect measure for how credit unions are serving members. At this time the numbers that may be the most unusual could be those that show everything is OK using traditional measures. More relevant performance analysis should focus on how many members are being helped and in what ways. For the ultimate strength of any credit union is its members.

Today, leading credit unions are reimagining how their resources can be used for members whose financial circumstances changed outside their control. This requires patience, creativity and new ways to structure member relationships.

This crisis is more than pivoting to virtual distribution, remote delivery and zoom interviews; the most critical innovation may be in the way credit is conceived. Loan terms may be extended, rates reduced, or payments based on whatever income is available. Outstanding credit may be restructured into A and B payment “tranches” in which the subordinate B tranche is the write-down needed to keep the member in the home or auto. It is the tranche that could be forgiven if the member cannot find work at previous income levels.

Monitor, Not Forecasting

Periodic reporting of the facts is important to ensure the industry’s collective resources are sent to the areas of highest need. Some credit unions will be more threatened than others because of the circumstances of their member base or community. The NCUSIF was constructed so that capital could be used to help these firms recover.

The greatest danger is not from the crisis itself, but how we respond. In both credit unions and government, competence, expertise and leadership ability is crucial. There is no prior road map to a new normal. Those in positions of authority must act with intelligence, recognizing lessons from the past. Credit unions have never lacked resources in a crisis, What is more important is wise stewardship of these mutual resources.

Revealing Character

Many have observed, “crises do not create character; they reveal it.”

Recently a CEO asked if I had heard about PPF funding for credit union entities such as CUSO’s or foundations. Credit unions are not eligible. He heard reports that several entities had applied. That worried him. The concern was that such efforts compromised the claim that we take care of our own, the self-help basis of cooperative design.

I replied that if the economy continues to falter requiring hundreds of billions more of government grants, a much bigger challenge will confront the country and credit unions. Specifically, how will the government pay for all this additional spending and debt issuance. The answer is obvious: new taxes.

Therefore, credit unions must demonstrate and document our self-reliance, self-funding mutuality with members during this time. Did we use our tax-free net income and capital to benefit members, or did we just hoard it?

A Skeptical Take: Fake It Till the Fourth Quarter

Another view is that some will cry NCUA made them so dependent on “help from on high” that they could not stand alone with any integrity. Can this generation of credit union leaders rekindle the spirit of cooperative innovation and entrepreneurship? Or, will they be tempted to seek “paint by the numbers” handouts from bureaucrats who never met a payroll or face-to-face with members?

Is it possible to at least fake it until the fourth quarter and the clock runs out?

The Cooperative Way Forward

Credit unions’ purpose is to use each day as a day to do something better for members. It is reasonable to see the crisis as bigger than any one of us, as individual members or credit unions. But it is not bigger than all of us together.

That confidence arises from knowing we were created to do things that had not been done before. We do not shy away when that challenge comes again. That is why we are here.

A Not to Be Missed Shareholder Meeting Online

I have tried several news channels during this stay-at-home era. The news presented on CNBC, Bloomberg Radio and TV, and Yahoo Finance channels focus on business economics. The interviews are with leaders in the trenches sharing their first-hand experiences and plans. Commentators are nonpartisan, seeking multiple views of current events.

On Saturday there is the opportunity to witness a program not usually open to the public. Because of the pandemic, Berkshire Hathaway’s annual shareholder meeting will be broadcast online. Anyone can tune in unlike the traditional in-person meeting where attendees must be shareholders.

The 2020 meeting on Saturday, May 2, 2020, begins at 3:45 p.m. central time. It will be live on the Internet from Yahoo with a pre-meeting show beginning at 3:00 p.m. central time. The address:

Warren Buffett, Berkshire’s CEO, and Greg Abel, Berkshire’s Vice Chairman-Non-Insurance Operations, will be physically present at the meeting. In addition to the formal business agenda, they will respond to questions submitted to three journalists. The questions, submitted in advance, will be chosen by the journalists according to what they deem the most interesting and important. Mr. Buffett and Mr. Abel will have no prior knowledge of the questions, but “they will not discuss politics or specific investment holdings.”

I’m tuning in. This will be an opportunity to see the leader of one of the most successful enterprises in America reporting to his owners. There could be some useful takeaways for credit unions, many of whom are conducting their annual meetings online.