The Problem We All Share Part III: Addressing the Problem

A Solution: Open Up Market Participation and Transparency

I believe more open competitive forces must be added to a Board’s decision to give up their charter. All merger intentions should be announced in a public notice so that any interested party is able to participate when a board decides to end its independence.

For example, why should Post Office in Madison or Sperry Employees in Long Island negotiate their members’ future in secrecy and then announce their decision without other area credit unions able to “bid” for these long-standing, local, well-capitalized ”franchises?”

Why not give members a real choice of a convenient and familiar credit union as well as one that is remote, digital only, and with no connections to the community?

Bringing more market forces could add better options for members. If two large billion-dollar credit unions want to merge locally, why shouldn’t a large credit union from outside the market be able to participate and preserve a real choice for members?

If the members are informed by an open process, they are more likely to support the board’s recommendation. Now they are forced into a combination they know nothing about and where the results are approved by only a very tiny minority of members returning the requested mail ballot.

Mergers that Enhance Safety and Soundness

Opening up the merger process would make the credit union system more transparent, responsive and relevant for members and their communities. Facts and plans would have to be laid out, not merely bland marketing assurances of “ a better future.”

Credit union safety and soundness would be enhanced because members can make an informed choice. Interested credit unions must take their time to present a relevant option. Token payouts of members’ equity to achieve a positive vote could be replaced by considered bids for the credit union’s real value, including good well.

As presented in Part I, PenFed’s five-year performance has not been enhanced by its merger-growth efforts. Its asset growth rate is half that of its peers; expenses are rising and there are no obvious economies of scale. Asset quality challenges have heightened. There is no evidence members see better value. Member relationships are declining. PenFed’s ROA and asset growth increasingly depends on acquiring other credit union’s net worth. Mergers are disguising its underperformance and slowing internal growth.

Even more pernicious is that PenFed’s mergers have eliminated 20 credit union boards of directors, CEOs and senior management teams. Twenty seeds of future innovation are gone. Multiple long-term relationships with local communities are broken. Members’ loyalty is discarded. None of these outcomes enhances the cooperative system’s financial diversity or soundness.

Transferring the financial equity from generations of members to a board and senior management with no connections to the community’s surplus further removes members from their cooperative creation.

Directors’ view of their responsibility changes in mergers. Instead of acting as stewards of a legacy they inherited, they become deal makers. They routinely ratify payoffs to other credit union’s directors and employees as just the “the art of the deal.” Values be damned.

In the end, the current secret negotiations corrupt both credit union buyers and sellers. And in so doing, the cooperative model.

The Problem We All Have

The current merger practice promotes the privatizing of members’ common wealth and the degrading of credit unions’ role in their communities. Because participation in voting is so minimal, members are left with the feeling they were not informed, or maybe even tricked. The experience is no different than when a bank is sold. Instead of being the alternative to for-profit capitalism, the industry is becoming that which it was supposed to replace.

There are two traditional approaches to system problems. The first is, let the “free” market work it all out. Give the forces of competition loose rein so the magic of the invisible hand can create the best outcome. In the end, all will be right. Winners take all.

The second is that government must step up to regulate abuses, enact better rules and enhance its supervision of the current practice of routine signoff.

But I recommend a third solution built on cooperative principles. Let the members decide. One person, one vote. Put their interests truly front and center.

There are multiple current merger practices that would give member owners the information to have a real choice about the future of their credit union. Working with the industry, regulators should design a truly “cooperative” process that enhances members’ involvement and in so doing, their commitment to the outcome.

The revitalized process would seek traditional financial and operational proposals combined with the important qualitative values credit unions promote: community connections, local focus, giving back to members, and demonstrated track records.

For many Americans, the lack of trust of those in authority is based on their perception that leaders place their interests above their own and the community’s broader shared values. PenFed is a prime example of an outside organization hollowing out local communities by cashing out its leaders.

The social trust on which the cooperative model exists is enhanced by a more visible and transparent process. The public support for the industry’s tax exemption is upheld. The movement will be guided by the shared set of norms and values that created it.

Going from Spectators to Engaged Co-op Citizens

With over 99% of credit unions in NCUA’s lowest risk CAMEL ratings, it is easy to lose sight of the interdependence and cooperation on which the cooperative movement is established. The common good slowly recedes to second place versus individual institutional success.

Market forces are not motivated by the common good or subject to moral limits. Credit unions were to be a counterexample to Mark Twain’s assessment of human motivation:

“Some men worship rank, some worship heroes, some worship power, some worship God and over these ideals they dispute and cannot unite–but they all worship money.”

Current merger excesses are destroying the moral capital created by movement’s founders. Instead of active citizens we become spectators or voyeurs hoping the abuses will go away or maintaining that this is not my problem.

A Renewed Movement

However, movements are not simply a one-time past occurrence, but rather something we can all participate in our own time.

Individual economic isolation and the power of large monopolies which gave rise to the progressive movement at the turn of the 20th century is as pervasive today as 100 years ago.

Some label credit unions as an industry. They are no longer disrupters of the status quo, but a mature segment of financial services with resources, opportunities and influence to play like the big boys. Movements are a moment of history, not the current reality they argue.

Both views can be true, but when movement is left out, credit unions become identified with the status quo and its problems, versus innovators of trusted value to members.

In its finest expression, cooperative design is an ongoing experiment to address the shortcomings of unfettered capitalism. It takes only a few leaders to stand up for change to convert perverse merger activity to a more productive outcome for members. Who will have the foresight and courage to push this to the top of the movement’s agenda?

2 Replies to “The Problem We All Share Part III: Addressing the Problem”

  1. You ask: “Who will have the foresight and courage…”. No one. WHY?. The credit union movement is operating in a low testosterone environment. This explains why your rants receive no responsive commentary. Where was the movement outrage over the corporate credit union’s collapse, and the Forced Liquidation of same? Where was the movement outrage over the NCUA pennies on the dollar sale of taxi medallion loans? Where was the movement outrage over the super secret undisclosed sale of Telesis AutoLand CUSO? Why no NCUA prohibition orders issued against corporate credit union directors and management? Why are some of these same ‘leaders’ now running state trade associations or billion dollar credit unions? PenFed games the system with NCUA rubber stamp endorsements. At the NCUA size matters and all other stats are irrelevant PERIOD. PenFed is running a nation wide bank franchise while hiding behind and benefiting from the federal tax exempt charter. PenFed is placing the federal tax exempt charter at risk while playing Pac-Man gobbling up credit unions. The ABA should be all over this because the movement and the NCUA are both too complacent too act. PenFed should put on big boy pants and obtain a nationwide bank charter. Don’t hold your breath. WHY? The federal tax exemption is priceless. PenFed expenses would be through the roof if they had to pay taxes like a traditional bank. You previously mentioned peeing in the pool. PenFed getting a bank charter would be peeing against the wind. It ain’t gonna happen. So says this retired credit union CEO. Got testosterone?

  2. I am not completely against co-op or credit union mergers. In a few cases, they can be beneficial, such as when the result provides the scale needed to provide online banking services efficiently. It is nearly impossible to do this in an extremely small CU (e.g., a single branch CU).

    The problem arises when scaling has reached an optimal level such that members of the merged unions are all satisfied with the resulting efficiency and convenience, but yet the urge to merge continues, despite the then-absence of the conditions which had genuinely justified the initial acquisitions.

    Desert Schools CU in Arizona and MAX CU in Alabama are two examples of CU growth that got out of hand in my opinion. When I began with Desert Schools in the early 2000s, e.g., it was still a relatively friendly and member-oriented organization (others who were there previously may differ with my assessment, I admit). But by the time I left Arizona, DS had become a commercial bank, charging outrageous fees for everything from late fees to overdrafts, and treating customers like the share draft numbers on their accounts.

    MAX CU was closest to my home when I lived in Montgomery, so I used that. I overdrew my account a few times — oh, I am so sorry that I was poor, no need to forgive my sorry behind — and when I tried to pay off the negative share draft balance years later, instead of cheerfully offering me the amount due, I was subjected to the usual sort of face-slapping, intolerant behavior. The people I spoke to initially refused to even look for that amount… I had to nearly wrangle it out of them; they were doing me such favor! I mean, imagine. A CU member, trying to pay off a negative balance (which I thought was a GOOD thing, acting in the best good-faith tradition of cooperation, yada yada) asking for the amount required to settle the difference.

    Credit unions that are too small may not have the scale to justify and pay for the overheads required to maintain usable and reliable online systems, ATM networks, and shared branching. On the other hand, as I think I’ve pointed out (albeit somewhat anecdotally), credit unions wrought too large become competitive, ornery wild beasts which no longer resemble anything like the business form they were designed to be, with its spirit of cooperation between members, management, and community, and its emphasis on real shareholder value: Local investment in local people and businesses with the focus on community strength and integrity.

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