Crossing Red Lines

“We crossed a lot of red lines.” That is how Federal Reserve Chairman Jerome Powell described the host of actions by the central bank responding to the COVID economic shutdown.

Actions included lowering interest rates to near zero, conducting unlimited bond purchases, implementing emergency lending programs to business, state and large city governments.

There are more steps planned, novel in scope and speed. These include the main street credit program to make at-risk loans to medium-sized businesses, buying corporate bonds and the debt of states and large cities.

The purchase of non-investment grade debt held by Exchange Traded funds was perhaps the most controversial. Included in the initial $1.3 billion purchases were bonds issued by Hertz, J.C. Penny, Neiman Marcus and Whiting Petroleum all of which have filed for bankruptcy. The US Treasury has been allocated up to $75 billion to cover potential losses on these non-bank, lending initiatives.

The Opportunity of a Crisis

But THE red line crossed that preceded all of these central bank actions was changing the internal mind set of the Federal bureaucracy. “We don’t do this. Where is the authority? We’ve never done this before. How will it work? What if we fail?”

With over one in four workers laid off, unemployment is expected to exceed 20% for May. Powell justified his innovative approach partly by the fact that the burdens of job loss are falling on those least able to afford it. They are lower paid service workers whose ranks are disproportionately women and minorities.

But changing long standing, institutional economic realities is hard. All governmental leaders find bureaucracies reluctant to move in innovative ways or at the pace of events. The easiest thing is keep doing what you have always done. The result, no real change occurs. The status quo remains.

The opportunities for transformational change can be fleeting. Public moods move quickly. Political and vested interests rise up. New approaches can be lost if not seized “in the moment” as Chairman Powell did.

He courageously decided to “cross all the institutional red lines.” Without taking that risk, the whole recovery momentum would be much more difficult.

NCUA’s Withdrawal from the Cooperative System

This crisis is an opportunity for NCUA to reverse the past decade’s pattern of unilateral, isolated and often self-serving regulatory responses in its relationships with credit unions.

Among all financial institutions, the cooperative model uniquely depends on collaboration. It is not just the basis for initial chartering, but also a singular operational advantage.

All elements of the system have a mutual responsibility for safety and soundness. Since the NCUA’s 2009 takeover of the corporate network followed by liquidation of four of the five largest corporates, it has failed to seek solutions cooperatively with credit unions and in members’ best interests.

The disruptions to financial performance by the crisis should be a turning point in this relationship. No regulatory rule or waiver, or congressional legislation, can “de-risk” the consequences of the financial toxicity caused by the pandemic and national economic shutdown.

The regulatory impulse to get rid of problems through mergers and selling member-owners to someone else when the going gets tough is a slow-moving death spiral for the industry.

Cooperative workouts are not presumed to be fast, especially when relying on retained earnings. They take time – sometimes years. They are messy. Each is unique, personal in the details. They require sweat equity and occasionally, 208/NCUSIF assistance.

The purpose of the 1% NCUSIF redesign was to keep credit unions and the system whole. Since the 2009 crisis NCUA has used the resources of this unique cooperative fund to broker problems away and avoid leadership accountability.

Crossing Red Lines to Avoid Red Ink

Jerome Powell has acted fast to help troubled industries, individual business, states and cities work their way through catastrophic revenue shortfalls and unknowable future trends. To keep the cooperative system whole while transitioning this crisis, NCUA must do the same.

The Board should establish an expectation that no credit union charter should be lost because of the current pandemic. Credit unions who work with their member-owners in this transition should expect no less than 100% support from their regulator.

This is not a legal, but a commonsense judgment. Similar to the Fed, the full range of credit union resources should be available whether this be 208 waivers and/or direct NCUSIF capital contributions.

This is a moment for NCUA to highlight the cooperative model in all its member focused uniqueness. It will require NCUA staff to grasp the opportunity for innovation by working with credit union leaders in the trenches. If that bureaucratic “red line” or mindset can be crossed, then the outcome should be a lot less red ink when this is over.