Month: January 2024

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“Some things we must do”

Martin Luther King, Jr made many memorable speeches.

One I find most compelling is from December 5, 1957.  In this long address (later transcribed) to the Second Annual Institute on Nonviolence and Social Change at Holt Street Baptist Church, in Montgomery, Alabama are the seeds of much of his later actions and rhetoric.

He combines humor with logic in addressing the assembly.

“I’m grateful to these ministers of the gospel. I look about here and I see them. They are not Baptists; they are not Methodists; they are not Presbyterians; they are not Episcopalians; they are not Lutherans—they are Christians first, and Baptists, Lutherans, Presbyterians and all of that second.

They realize that we are all one in this struggle for freedom, and we have been able to come together and forget about our denominations. You see, these things can so easily divide us. And the thing I like about the God that we worship is that He isn’t a Baptist; I like that about Him. I would be confused if God was a Baptist. I’m happy that God isn’t a Methodist. He would be arguing over whether you should be sprinkled or immersed. I’m glad of that. And we have come to see in our own struggle here, that there is a unity, there is a oneness.”

It Will Be Long

“I don’t want to talk too long tonight, but I want to talk to you about something very practical, nothing profound. . . Don’t look at your watch there, Brother Binion; we’re just getting started. He’s looking at his  watch. I’m just getting started. Give me, give me a little break.”

After more humor describing reactions to other speeches, he goes to his purpose this evening, which I summarize as a primer on self-help:

“This evening, I’m not going to say anything about the role of the church; I’m not going to discuss the role of the federal government; I’m not going to discuss the role of white liberals, North and South. I just want to talk with you about some things that we must do, as Negroes. We must realize that there is something that we can do to bring this new order into being.”

Using Economic Resources Cooperatively

He proceeds for 30-40 paragraphs with concrete examples and explicit statements for what Negroes, or any American, must do to achieve equality.  At one point he talks about money and economic power:

“The average Negro wage earner today makes four times more than the average Negro wage earner of 1940. The annual income of the Negro is now at about seventeen billion dollars a year, more than the annual income of Canada, and more than all of the exports of the United States. We’ve come a long, long way.

“Now, what are we going to do with this? That’s the question. What are we going to spend this money for? Are we going to pool it in cooperative enterprises that will make for economic security for the race? Or are we going to waste it with meaningless things? That’s the question.”

On Leadership

King challenges with words, instances and rhetoric that resonate today.   He closes with what it means to be a leader of a movement.  His description is  relevant to all in current positions of responsibility.

“we must develop intelligent, courageous and dedicated leadership. This is no day for the rabble rouser, whether he be Negro or white. We are grappling now with one of the most pressing and weighty social problems of the generation, and in the midst of such a weighty social problem, there is no place for misguided emotionalism. We must avoid the extremes of hotheadedness and Uncle Tomism, and somewhere develop the type of leadership to see the issues and that will move on calmly in the midst of strife-torn situations.

Leaders are needed all over this South, in every community, all over this nation: intelligent, courageous, dedicated leadership. Not leaders in love with money, but in love with justice. Not leaders in love with publicity, but in love with humanity.

I know if you’re a leader, you’re going to have to have money to live like everybody else. If you’re a leader and you are in a situation that has the spotlight of the world, you will inevitably get some publicity. But these things must be incidental to the greater end. We must have in this hour leaders who are dedicated to the cause of freedom and justice, who have the love of humanity in their hearts.”

This was in 1957.  Many of his ideas are presented with rhetorical phrases we often identify with later and more public occasions.

King’s vision for America was formed by many personal experiences and study.  His gift was presenting it in a way that is both timeless and timely.  That is what leaders do.  It is needed now more than ever.

 

 

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Credit Union Shareholders Receive $16 Million; NCUA Receives Judge’s Reckoning

Yesterday the Dakota Credit Union Association announced that NCUA had agreed to pay more than $11.9 million to the former credit union members of Midwest Corporate Credit Union.  Their pro rata share of US Central’s capital, along with a similar recovery by Iowa credit unions, will bring the total payments to over $16 million.

This outcome culminates efforts commenced in 2021 by the two Leagues and their members.  Ultimately legal suits were filed when NCUA rejected the credit unions’ repeated recovery efforts.

In his October 2023 ruling the Chief Judge of the US District Court District hearing the case wrote: “simple logic and hornbook property law support construing the FCUA as including automatic transfer of assets.  In general, assets do not simply evaporate when the owner is unable to collect; rather the property must go somewhere.

Consequently, a credit union’s asset likewise do not cease to exist come the last day of a wind-up.  Instead, the most logical conclusion is that the assets vest in the credit union’s shareholders.”

A Three-Year Bureaucratic Slog

According to an August 29, 2022 statement by the Dakota League challenging NCUA “To Do the Right Thing”, the Agency had actually been ready to release checks in 2021. NCUA changed its mind when informed that the (federally chartered) corporate had been voluntarily liquidated years earlier.

North Dakota’s two Senators wrote NCUA Chair Harper concerning the nonpayment. He replied on September 2, 2022 that “After careful review and legal consideration, the liquidation agent determined that because Midwest no longer exists no distribution can be made to Midwest or its former shareholders.”

The League tried the administrative claims process. Again NCUA denied the request.   President Olson’s response to this final effort in February 2023 showed his frustration: “This is a clear case of obstruction through bureaucratic hurdles and complicated language where the process is the punishment, and does not provide justice.”

The North Dakota League filed its lawsuit in April 2023.  This was followed in June when 63 of Iowa’s 75 credit unions sued the NCUA for $4.2 million to recover their U.S. Central claims. Joining in the lawsuit was the Iowa Credit Union League, its foundation, political action committee and an employee benefits company.

A Lesson in Bureaucratic Obstinacy and Blindness

These years long efforts included all three branches of government.  The Dakota league attempted to play NCUA’s administrative game in which it learned that “the process was the punishment.” It requested and received support from North Dakota’s  two senators.  Chairman Harper stonewalled the appeal from the legislature.

The last remedy was the judiciary. The judge explicitly rejected NCUA’s logic.  “The fund’s vest in the credit union’s shareholders.”

It is not a comforting example of regulatory judgment when common sense or “doing the right thing” apparently had little role in NCUA’s decision.  When dozens of staff lawyers and three “independent” board members see only one position, this raises concerns about the agency’s deliberative processes and/or the competency of the advice being given.

CooperatIve Action in the Members’ Interest

The good news is that cooperative efforts, especially at the league level, persistence and advocacy did prevail.  It is hard for an individual credit union to counter an NCUA position.  Collective action is a credit union advantage even in regulatory judgments.

The credit union shareholders, the members of Midwest and Iowa corporate, have received their just due.  And that standard, what is in the members’ best interest, should  be the determining one.

Thank you to the cooperative leaders in these two states that stood by their members.

(Editor’s Note:  I first wrote about the situation in February 2023, urging NCUA to do the right thing.

 

 

 

 

 

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“Apres Le Deluge”

You’ve undoubtedly read about the northeaster which dropped a winter rainstorm on our area two days ago.

My trusty high-tech rain gage said it left between 5 and 6 inches in 12 hours.

And so we had to build barriers to keep the garage dry.   It worked, mostly.  Towels recovering outside today.

But the flowers think it is just an early spring rain, especially the daffodils.

The miniature Nandina (heavenly bamboo) continues to produce its bright red winter berries.

And the Scottish heather thinks winter is over and is beginning to bloom.

Just another scene from the global warming play.

Pictures from Brian Fogg, CEO, Credit Union of Vermont of their experience.

“Sailors take warning.”

A foot of white snow later turned to slush.

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Poetic Empathy

In this poem published in 1927,  author A. A. Milne’s words create that special feeling of a child’s trust.

Furry Bear

If I were a bear,
   And a big bear too,
I shouldn’t much care
   If it froze or snew;
I shouldn’t much mind
   If it snowed or friz—
I’d be all fur-lined
   With a coat like his!

For I’d have fur boots and a brown fur wrap,
And brown fur knickers and a big fur cap.
I’d have a fur muffle-ruff to cover my jaws,
And brown fur mittens on my big brown paws.
With a big brown furry-down up to my head,
I’d sleep all the winter in a big fur bed.

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The Learning Process for an NCUA Newcomer

Yesterday Tanya Otsuka became the 25th  NCUA board member since its establishment in 1978.

Her professional resume includes serving on Senator Sherrod Brown’s banking committee  and as a staff attorney at the FDIC.

Her direct experience with the credit union community is limited.

Onboarding is a critical process for anyone new to cooperative system leadership.  She has significant responsibility in overseeing and managing NCUA’s relationships with credit unions.

What Makes for Effective Onboarding?

Newcomers to important credit union leadership roles are becoming more frequent.

One example is BECU’s  CEO Beverly Anderson. Her professional background was in banking.  She provided an extended CU Times interview describing her transition as a first time coop CEO:

“What’s exciting about this role is, one I’m a first-time CEO, two I’m in the credit union movement for the first time, and three it’s my first time at BECU and here in the Pacific Northwest.  . .

“The first six, seven months or so have really been about listening and learning. I did 30-plus deep dives with the organization, used that time to get to know the team and have them get to know me, and learned a lot about the business.

“The second thing I did was begin to understand the movement. It was very clear when I started using language like ‘profitability’ and ‘ROA,’ and people very quickly suggested I use some different language.

“It’s helped me to understand that the movement is in fact very, very different. Our return is around return to member, not necessarily return on assets, and that was a very big shift and pivot, but one that I quite relished.

“The third thing was getting to know my board – I have a new kind of boss and leader, a board. . .they are encouraging, engaging, experienced in their own right, and they have a lot of support and commitment for this organization.”

 Onboarding An NCUA Board Member

Immediate board items and credit union events in 2024 will provide examples of Otsuka’s approach in her new role.

The following are questions on areas vital to credit unions as she undertakes her responsibilities.  

What is her understanding of the role of the non-profit, tax exempt, member-owned cooperative system in the American economy? 

Who does she turn to for advice? 

How does she learn from the credit union constituencies she is serving?  

Does her response to credit union issues enhance the member-owners’ role?   

What is her availability and openness with the public? (e.g. Anderson’s interview above)

The First 100 Days

Credit union press accounts presume Otsuka will become Chairman Harper’s policy doppelgänger.  That is, her democratic credentials mean her role is simply a reliable second vote for him to assert his regulatory and spending views on the industry.

Or, as an outsider might she bring a new generation’s fresh hope and enthusiasm for credit unions unique opportunities?  Are credit union priorities for NCUA a question of party labels?

My hope is that her unfamiliarity with cooperatives and NCUA result in an enlightened voice supporting innovation with a passion for credit unions.

When one reads BECU Beverly Anderson’s learning process, there is a sense of confidence, commitment, and positive leadership energy.

That learning spirit is especially needed in this moment of credit union challenges and NCUA’s increasing peripherality.

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January 1985: An Historic Turning Point for Credit Unions

For forty years, the NCUSIF has maintained  not only its own financial integrity but more importantly, the trust and confidence of the credit union system’s members. This record of stability began in 1985 and continues unabated through 2023.

Over the same four decades the FSLIC, the separate S&L fund, failed and merged into the FDIC.  The FDIC has had negative net equity on several occasions requiring an explicit government guarantee.  It has constantly modified  its premium model to accommodate numerous industry crisis.  These  include multiple premium levels, risk based pricing, an expanded assessment base for premiums, differential pricing according to institution size and other financial or accounting maneuvers. It’s equity to insured deposits has fluctuated from negative to 1.1% at June 30, 2023.

During this same period of national economic and interest rate cycles, the NCUSIF’s unique cooperative design allowed it to remain strong. The fund’s yearend equity level  of 1.2-1.3% of insured shares has always been met.  Premiums have been necessary only four times in this four decades.

“D” For Deposit Day

This fundamental  redesign was a two-year industry wide effort.

This priority came to fruition in January 1985 when the first 1% credit union deposit underwritings for the new insurance model were delivered to NCUA.  The event was pictured in NCUA’s 1985 Annual Report (pg 21):

(caption:  NCUA Staff Member Wayne Robb accepts a hand-delivered capitalization deposit in the unheated Washington lobby of the NCUA.)

The Chicago Tribune described this historic change in an article later that year:

“The solitary messenger clutched a plain brown envelope as he picked his way carefully across a deserted, icy sidewalk near the White House.  In- side was a check for $13 million.

“It was inauguration Day, 1985, a morning most memorable for the raw cold that forced cancellation of a parade and drove President Reagan inside to take his second oath of office.

“But for the messenger, and for the trio huddled around an electric space heater waiting for the check, it was also the deadline for credit unions to deliver payments to the new-look federal insurance fund that backs the deposits of 51 million credit union members.

“The $13 million check, the largest single payment, was from the huge Navy Federal Credit Union in Washington.

“The little-noticed transaction–one of more than 7,000 totaling $480 million that frosty January weekend–illustrates how the nation’s 15,000 federally insured credit unions have quietly put their house in order.

“Edgar  F. Callahan Chairman of the National Credit Union Administration said credit union’s willingness to embrace a new approach to shoring up their insurance fund was just one example of how the industry has recovered from the hard times of 1981.  

The challenge for his successor, Callahan said, is to keep Congress and other policy-makers aware that credit unions are unique.

“You’re in an industry this often grouped with banks and S&L’s and there’s a tendency to get painted with the same brush,” he said.  

“There is a danger to getting sucked into that atmosphere.  My successor will need to maintain that credit unions have been ahead of the problem curve and need not be grouped with other financial institutions.”

The Workup for Change

The NCUSIF was created in 1970, with no government-provided startup capital.  The Fund’s design mimicked the premium base of both the FDIC and FSLIC each which had a 35-year head start accumulating retained earnings.  But from 1979 onward the premium approach, even with doubling assessments,  did not prevent the Fund’s equity ratio from decline.

In April 1983 the NCUA presented a Report to Congress on the Credit Union Insurance Fund.  The Report was over 130 pages in seven chapters responding to specific Congressional questions and making four recommendations:

  1. All credit unions, federal or state, should have a choice of insurer;
  2. Capitalize the NCUSIF with a 1% deposit of insured shares;
  3. Authorized at least one uninsured share per member as capital;
  4. Keep the  insurance fund independent from FDIC/FSLIC due to the unique nature and role of credit unions.

The Report included direct quotes from leagues, private cooperative insurers, credit unions along with a history of credit union stabilization options prior to NCUA insurance.

Following the publication of this Report, NCUA and credit unions working in partnership developed an alternative to the traditional premium model describing it as, A Better Way.  It drew upon the two decade experiences of private insurer alternatives.  It rested on the fundamental cooperative concept that members should own their own fund.

The financial logic and analysis was summarized in a video sent to all credit unions and interested parties on the NCUA’s Video Network.  The following is an excerpt from this longer analysis,  A Better Way:

(https://www.youtube.com/watch?v=IlqxLeFkuLY&t=30s)

This redesign was achieved by challenging long time conventional governmental practice.  The alternative was drawn from cooperative experience and principles.

Trust in the Fund was not due to more regulation or open ended premium assessments.  It was constructed on mutual commitments including frequent and audited financial transparency, accountability for expenses and legislative guardrails.

This capacity to “imagine differently” resulted from collaboration and open communication at every step.  The historical financial analysis (above) and future forecasts were public, for all to review and refine.

The effort was not a sudden epiphany. Rather it resulted from hard work, shared viewpoints, a desire to create something better and courage to change.

The First Year’s Bottom Line

At the end of fiscal 1985, the fund held $883 million in 1% deposits.  Earlier in the year each credit union received a pro-rata equity distribution (in excess of the Fund’s .3% equity) of $80 million to meet the January 1% funding obligation followed by a $30 million cash dividend at yearend.

This 12.5% return on the 1% capital deposits was on top of fact that this was the first year since the Fund opened in 1970 that no premium was charged. (page 5, 1985 NCUSIF Annual Report)

In future blogs I will present how the fund  navigated specific economic and industry challenges.

Continued success does not rest on design alone.  Credit unions must also exercise continuous oversight of NCUA’s vital  responsibilities for fund management and supervisory oversight.

 

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The Person of the Year-One View

Scott Galloway is professor of marketing at NYU’s Stern School of Business.  He is a prolific writer, commentator and provocative analyst  of America’s economic successes and failures.

The following is an excerpt from a much longer December essay on current trends titled Prof G Person of the Year:

The real Person of the Year in 2023? A:  Money. 

I’ve experienced this firsthand, watching as faculty who can’t teach or pen relevant research create a weapon of mass distraction from their mediocrity: DEI. But that’s not what this post is about.

America is becoming more like itself every day: Money is the arbiter of … everything.

There’s a view that the rise of money is a good thing. Or at least not all bad. Human society has never been fair, and as long as people are status-seeking, competitive animals in a world of scarce resources, it won’t ever be. Historically, many of the lines that divided society traced innate characteristics like race or sex, were based on inheritance, or were determined by the exertion of physical strength.

Money doesn’t care about any of these things, and it has washed away barriers in ways that potentially make institutions more accessible. There are now nine Black American billionaires. Good news — and their rise is correlated to an increase in civil rights.

What stops this from being a Hallmark channel version of capitalism is that money, when not reinvested/redistributed (pick your word) quickly pools and concentrates, and innovation and competition decline. “Competition is for losers,” is how Peter Thiel puts it. And he’s following through, buying Senate seats (his protégé, J.D. Vance, is leading the charge to defund Ukraine) to secure the influence of his money.

We aren’t going to end the power of money any time soon. In an economy increasingly run on financialization, with so much wealth in circulation, our objective should be to ensure that it keeps circulating. Money = power, and power should be distributed as widely as possible. . .

My Comment

Galloway’s critique is one of the reasons for cooperatives such as credit unions in a capitalist economy.   That is until the alternative begins to act like capitalists.

I believe the greatest challenge for credit unions is not external–competition, economic uncertainty or technology disruption–but rather internal.   That is, the loss of confidence in who we are and how we try to counter the inevitable goals of more and more money and power, not for  members, but for our personal and institutional ambition.

The greatest challenge is how do credit unions re-engage with members, not as mere customers, but as real owners in the “distribution of power” as Galloway describes it.

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The “Goldilocks” Interest Rate Curve

Yesterday the treasury market closed at these yields for the maturities listed:

Yield           Maturity

5.50%        Overnight

5.55%         One month

5.46%        Three month

5.24%        Six month

4,80%        One Year

4.33%        Two Year

3.95%       Ten year

This inverted yield curve, where short term rates exceed long term, can be an ideal time for asset management.

This is because return and liquidity are both optimized by staying short.   If an asset or investment  manager is matching with specific liabilities, the prospect of a duration gap between asset and liabilities can be minimized.

This is a Goldilocks ALM environment where return and liquidity are both optimized.   By going long now, an investment manager will have a lower return versus staying short.  That might seem like a surefire market bet as Chairman Powell has forecast several  rate reductions this year.   That is until inflation possibly comes back, and further reductions put on hold.

The Credit Union Opportunity

An additional advantage, besides reducing ALM mismatches,  is that it allows balance sheet management to remain agile.   Shorter maturities provide more opportunities to respond to market and/or liability changes.

A prime example is NCUA’s management of the $22 billion NCUSIF investment portfolio.  The fund continued its 7 year ladder as rates went to near zero in 2019-2021.   When the market turned, the entire portfolio was underwater, burdened with an average duration of almost three years.

Through October 2023, the year-to-date return on the Fund is 1.92% and the portfolio reports a $1.7 billion unrealized loss.

When looking at historical trends, a yield on the NCUSIF portfolio of just 2.5% would result in a breakeven, that is stable, equity ratio in almost all years.

Recognizing this liability target for asset returns, makes NCUSIF investment decisions easy in this rate environment.  By moving from overnight to maturities up to two years, the yields would be more than sufficient income to maintain the Fund’s equity ratio at or above 1.3% for any scenario.

Many investment managers were surprised by the Fed’s rate reversal to counter inflation.  Today’s interest rates provides a rare moment for stabilizing both liquidity and return for credit union portfolios and the NCUSIF.

 

 

 

 

 

 

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The New Year & “Auld Acquaintance”

The headline at the end of 2023 summarized the prior year outlooks:   “Market Forecasts Missed Mark in 2023.”   (WSJ December 31, 2023)

Most observers in 2023 thought a recession was inevitable.  The Fed’s rapid rise in rates to counter inflations was intended to slow consumer demand.  That reliable indicator, an inverted yield curve, had indicated negative growth was inevitable for almost six months entering the year.  The economy would slow, unemployment rise and the stock market falter as a result.

Yet two of the three major market indices hit all-time highs and the S&P 500 fell just basis points short of its peak. The economy recorded a higher than normal average GDP growth. The consumer is still spending.

This macro-forecast miss should be a cautionary note as we enter 2024.   Future forecasts, no matter the model used, are not facts.  They are guesses often  based on assumptions reflecting the users’ biases or their institution’s role in the economy.

What is Money for?

To justify an investment decision today by forecasting a hypothetical future can lead to poor outcomes.  A current  example is what will be the role of major head office complexes in an era of hybrid or remote work forces?  Or, what is the value of assets acquired in a low interest rate environment versus the rate reset now occurring in the economy?

For credit unions, the preliminary numbers indicate that 2023will record the lowest share growth in decades.  This balance sheet slowdown will influence many decisions about how and where to invest in the coming year.

Those investment decisions will reflect the values, not just priorities, of each credit union’s leadership team.  Will the institution spend to buy growth from external sources?   Will it invest in enhanced delivery capacity?  Staff skills?   Member education and well-being?

Each credit union has a different context and history in making this fundamental decision about how they will spend to enhance their role in the economy.   As in the case of individual choices, that spend will reflect how leadership understands the institution’s purpose.

The slow growth in 2023 may motivate us to find something new to get back on a normal expansion. But it may be just as wise to  identify what got the credit union to this point.  Are those values still the ones to guide investment priorities for this year?  That is, “don’t let be forgot the “auld acquaintance” of who you are and where you come from.”