Author: Chip Filson

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Needed: A Coop Pulitzer Award for the Credit Union Press

In America the press is often called the “Fourth Estate.”  The term places the press’s role as critical as the three branches of government: legislative, executive and judicial. It signals the watchdog role of the press, so vital to a functioning democracy.

What is the state of press coverage of credit unions?  Especially now that coops are the second largest depository system in the economy, serving over 100 million members and managing $2.2 trillion assets.

A Brief Credit Union Press History

 

Today’s independent coverage of the credit union system evolved from newsletters that emerged in the 1970’s and 1980’s as the credit union system become more coherent with national ambitions and organizations.

These startups included CUIS, Report on Credit Unions, NCUA Watch.  These newsletters relied on subscriptions versus the free in-house updates from league and trade associations.

In 1986 ASI established the first printed newspaper format called Credit Union Week.  Shortly thereafter Mike Welsh, former CUES President, launched Credit Union Times offering original reporting and commentary.  In following years Credit Union News and Credit Union Journal were launched as competitors.   All used a combination of advertising and subscriptions to support their free-spirited reporting.

Today the independent credit union news media is largely virtual, publishing daily online summaries relying extensively on press releases from the industry.

More than Aggregators

With small staffs, limited budgets and daily posts, opportunities for original reporting or even investigative efforts are limited.

But there are periodic examples of the traditional press role of speaking “truth to power.”   Power refers both to the actions of NCUA and other government agencies, as well as events within credit unions and trade organizations.

Peter Strozniak of the Credit Union Times has a talent for tracking legal proceedings involving credit unions.  His articles have provided valuable insight into NCUA’s regulatory shortcomings, as revealed in court records.  A recent example is his story of a credit union’s suing NCUA for failure to prudently manage its interest in taxi loan participations.  The opening paragraph:

The $390 million Nassau Financial Federal Credit Union is suing the NCUA for nearly $1 million for allegedly breaching an agreement to settle defaulted taxi medallion loans for a mere fraction of what they were worth.

Many observers questioned NCUA’s disposition of the taxi medallion loans sold to a hedge fund in February 2020.  The agency refused multiple FOIA requests for details.  This example further adds to the impression of an NCUA coverup in its actions in the $750 million sale  of loan participations to a Wall Street hedge fund.

The Members’ Interests: Sunlight as a Disinfectant

CU Today has published a series of original articles about member’s efforts to participate more openly in their credit union’s governance.

One series discussed the efforts of four members of Virginia State Employees Credit Union to seek nomination for open board seats.  Their efforts were totally ignored. The credit union elected the board’s self-selected candidates including the current chair with no outside nominees permitted.

More recently CU Today has followed the efforts of former directors and  CEO to challenge the announcement of Vermont State Employees to merge their very successful credit union into the larger New England FCU.

CU today publisher Frank Diekmann editorialized about his goal of “pulling back the curtains.” He explained why reporting the merger information provided members when charters are ended and the payouts to management that sometimes accompany such efforts matters.  It read in part:

We also got to see how many CUs opted to return net worth to the people who own it (in some cases, obviously, there was little to reserve from the reserves). We further got a peek into which were not offering any payout, with a few citing odd reasons such as the acquiring CU has more branches or, bafflingly, offers Apple Pay and Google Pay. Eh?

One CU did announce it would be paying out some of the excess capital, but in this case only to savers, with more than $2 million being distributed in all. I’m not suggesting the members of the board all had savings/CDs at the credit union and that few if any were borrowers. I’m just saying. 

Sunlight may indeed be the best disinfectant, but not if no one never opens the curtains. CUToday.info has made a commitment to reporting on all the merger disclosure forms sent to NCUA, meaning we will continue to give the curtains a pull. 

Needed:  A Pulitzer for Credit Union Reporting

At last week the White House Correspondent’s dinner the comedian Trevor Noah’s public roast of many public figures ended with this close about the never-ending importance of a free press.

While the international press coverage of the war in Ukraine was top of mind that night, a domestic event happened the following day proving Noah’s thesis.

The national press released a draft of a Supreme Court decision that would reverse the Roe vs Wade fifty-year precedent giving women the right to an abortion. The coverage took  the debate from behind the hermetically sealed Supreme Court process, to the public sphere.

If credit unions are to fulfill their purpose of bringing more economic democracy to their members and greater choice for all consumers, one of the most important ways to monitor this role is an independent press.  One that reports its successes and exposes its failures.

In addition to Herb Wegner awards honoring credit unions leaders who exemplify the best in cooperative commitment, I believe an equally important moment would be to award “Coop Pulitzers” to press coverage of credit unions.

These would recognize the writers and stories from within and without the industry who take the risks and invest the time to hold those in positions of leadership to public scrutiny.  Especially for those with public authority. For unlike the White House Press, in credit union land there is only one estate, the NCUA.

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Sharing  Exam Stories Helps All Credit Unions

The post describing NCUA examiner’s arbitrary imposition of IRR tests causing a credit union loss of $10 million resulted in other readers sharing their experiences.

Their long-standing frustrations suggest the need for a more balanced, common sense, exam process.

Story 1: LOC’s and Liquidity

“I remember conversations about our investments during the time of your most recent article.  Fortunately, the vast majority of our investments was in CDs  so there was very little to even talk about in terms of unrealized losses.  We did have one or two securities, but they were near maturity so even unrealized losses were minimal.

“This was around the same time that the examiners demanded we establish some kind of borrowing capacity in case liquidity suffered.  I set up a LOC with our corporate and “borrowed” just to be sure everything was set up correctly.  When the examiner saw the tiny bit of interest I paid for this test, the furrowed brows and disapproving scowl came out.  Why would I do such a thing?  It appeared as though our liquidity was fine so why did I use our LOC?

“I said it was a new product and I wanted to make sure it would function correctly in the event we ever needed it.  The only way to prove that was to actually test it.  All this ruckus over a charge of less than $100 interest for the less than 30 days we had the money.  In the process, I wrote up specifically how to borrow from it, how to book the GL entries, how to pay the money back, etc. so that if the line ever had to be accessed, we would know how to do it.  We have never used it.  Not once.

“During my last exam NCUA recommended we increase the limit on it.  GRRRR.  Keep in mind, our last exam was at the height of the pandemic when we literally had liquidity dripping from every corner of the credit union and they were recommending we increase our LOC.  I can’t imagine being the credit union that lost millions because of misguided “guidance”.

“I’m afraid I would have spontaneously combusted.  Credit to them for staying in the industry because those are the kinds of things that cause us to lose some of our best advocates.”

Story 2: Ending a Profitable Business

“A related horror story about examiners making short-sighted decisions…  A credit union right after the great recession was told by their regional examiner that their expense to asset ratio was too high and they must shut down their insurance division to get things in line.

“The insurance division was profitable.  It was throwing off $360k of profit a year – profit with no strain on net worth – and profit from any perspective (GAAP, Free Cash Flow, Cash Basis).  There was no funny business in the numbers.  It was showing steady growth in earnings as it was finally hitting its stride.

“What the examiner failed to understand was the fastest way to restore capital is with an income source that requires no regulatory capital to begin with.

“I told the CEO he needs to die on that hill and fight hard.  He complied however, and shut down the insurance operation.

The Moral of Stories

Sharing stories, good or not so good, is how credit unions learn from each other’s experiences.  This is one way change for the better can occur in NCUA’s interactions with the industry.

 

 

 

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Tantrums and a $10 Million Credit Union Loss

As interest rates continue their upward cycle to reduce inflation, credit unions will manage this year-long transition process with multiple tactics and product adjustments.

There is no one operational formula to be universally applied because every credit union’s balance sheet and market standing is different.

But a simple model was the core of NCUA’s response in 2013 and 2014 when Fed Chairman Ben Bernanke announced a policy change to reduce support for the recovery after the Great Recession.   The reaction to his June 2013 announcement was an abrupt rise in rates, referred by some writers as  a “market tantrum.”

The following  is one credit union’s experience as NCUA  pursued its own regulatory tantrum as recalled by the current CEO.

A Case Study from a Prior Period of Increasing Rates

Today’s rapidly increasing interest rate environment is very reminiscent of the 2013-2014  period when Federal Reserve Chair Ben Bernanke’s “Taper Tantrum” led to a great deal of market volatility.  While Bernanke’s comments in May of 2013 touched off the increase in rates, it really took until the next year for the full effect to be felt.

NCUA’s response to this period of rising rates was nothing short of a panic.  Any credit union holding bonds whose value declined due to the increase in market yields was heavily criticized for having too much interest rate risk.  This critique was despite the fact that most natural person credit union had more than adequate liquidity to hold the bonds. 

The use of static stress tests, which showed dire results from up 300, 400 or 500 basis points, was used as a reason to force credit unions to sell some of their holdings turning unrealized losses, with no operational reason to act, into realized ones.  These forced sales unnecessarily depleted capital, the very thing that an insurer/regulator should be trying to preserve.

Things got so heated at our credit union that the Regional Director called a special meeting. Only our Board of Directors could attend; management was forbidden to be there. NCUA lectured them about the evils of excessive interest rate risk.  This sent many of them and our CEO into a full-scale panic. 

We sought advice from outside experts but finally settled on the dubious strategy of selling bonds at losses as well as borrowing funds from the FHLB that we did not need.  These were done to bring the results of these static stress tests in line with the NCUA’s modeled projections.  We calculated these actions caused us unnecessary losses of over $10 million before we stopped counting.  These came from both the realized losses, the added expense of unneeded borrowings, and the lost revenue on assets sold.

In the aftermath of that debacle, the credit unions senior management and two board members travelled to Alexandria, Virginia to meet a top NCUA regulator to explain our frustration at the loss.  After waiting for hours for our scheduled appointment, he heard us out.  We never heard back; however, the Regional Director soon departed.  Perhaps our message had at least been partially received.

The Problem with Static Tests

Fast forward to today.  We find ourselves in the “extreme risk” rating at the end of the first quarter due to the rapid rise in rates.  The glaring problem with static stress tests is that non-maturity deposits (which make up a large part of most natural person credit unions’ share liabilities) are limited to a one year average life. 

Several third-party studies document our share’s average life to be in excess of ten years.  Despite this, the asset side of the balance sheet is written down while the long-standing member relationships, on which most credit unions’ balance sheets are built, doesn’t get much credit at all.  For example, if a two-year average life on savings and checking accounts were used, the results of the static test wouldn’t even put us in the high interest rate risk category. 

Closing Thoughts

While we have authorization to utilize derivatives (something we didn’t have back in 2014), this could help lower the costs of compliance if we are forced to take action. However, I’m adamant against doing illogical things just to pass a static stress test this time around.

I’ve wondered how it’s OK for the NCUSIF to hold similarly long-term bonds in their portfolios without any concern during periods of volatility like this. We have the strength of our core share relationships and capital positions to withstand periods of rising rates.  NCUA just keeps reporting growing unrealized  losses transferring their IRR risk to credit unions to make up any operating shortfalls.

I also believe that NCUA should really be much more worried about very low interest rate environments.   These periods of very narrow yield curve pickups are actually much worse for financial intermediaries to navigate than periods like the one we’re now in. Overall the industry’s net margin should generally benefit from rising rates, shouldn’t it?

Two Observations

1. One expert’s view of  the situation today:  As you know, but people often forget, there is no ‘unrealized loss’ if a bond or loan is held to maturity.  There is an interest rate risk component that needs to be managed.  But if I am holding some 4% mortgages 10 years from now, and the overnight rate is 4%, then I am not upside-down.  I just have some of my assets earning the minimum rate of return. 

This is why I prefer net income simulation over IRR shock.  We don’t live in a static world, it’s a dynamic one.

2. During the November 2021 Board meeting the following interaction took place on the agency’s management of the NCUSIF portfolio and stress tests:

Board Member Hood: Thank you, Myra.  And again, I do have another question and this is for the record.  Do we all have an interest rate risk shock test to the fund (NCUSIF)  like we do for our credit unions under our supervision rule?  And also, do we do a cash flow forecast on a regular basis as well?

Eugene Schied: This is Eugene Schied, and I’ll take that question Mr. Hood.  Yes, we shock the – we do perform a shock test and perform cash flow analysis for the share insurance fund.  These are both reviewed by the investment committee on at least a quarterly basis.  The investment committee looks at the monthly cash flow projections for the upcoming 12 months as part of this regular analysis.  That concludes my answer, sir.

Board Member Hood: Great.  Thank you, Eugene.  I would just say that as I consider our investment strategy, we should note that examining portfolios and managing investments in the portfolio are two separate and distinct skillsets.  The NCUA today has over $20 billion, with a capital B, in investments under management; so I think we should have an even greater focus on this during our upcoming Share Insurance Fund updates.

 

 

 

 

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The Past as Prologue & Interest Rate Cycles

Tomorrow the Federal Reserve will announce an increase in its overnight Fed Funds target rate by at least 50 basis points.   This will be the second in a series of raises  to “normalize” the yield curve.  The goal is to curb inflation by increasing rates so that the “real” cost of borrowing exceeds the rate of inflation.

Bond prices have anticipated some of this increase.  Headlines reported the “rout” in bonds as market values fell and yields rose in the first quarter.  Yesterday’s lead story in the WSJ was “Bond Yield Rise Steepest since ’09.”

Interest rate cycle increases are not new.  In 1994 Fed Chairman Greenspan raised overnight rates from 3% to 6% in six 50 basis point jumps to cool an Internet driven economy.

Even though interest rate cycles are an ever-present factor in a market economy, for some leaders of credit unions this will be their first time navigating a cycle.  Learning from past events, can help with this process.

“Never say Never”

In late 1978, the US economy was entering a period of increasing inflation with short term rates rising close to 10%.   This increase was leading to some disintermediation to the newly created money market mutual funds.  But another credit union concern was the 12% usury ceiling on loan rates which was incorporated in most enabling statues.

In our discussions at the Illinois Department of Financial Institutions, I told Ed Callahan that 12% was like a law of nature.  Rates would never get above that level as we had fifty years of precedent to prove my point.  Ed’s response was “never say never.”

Short term rates went above 14% in December of 1979, by which time the Illinois Credit Union Act had been re-codified to remove the 12% ceiling. “Never” had taken place.

A Visit to NCUA by the ICU Funds

Short term and long-term rates continued to spike into 1980.  Chairman Volcker was committed to stopping the double-digit inflation resulting in short term rates of nearly 20% in June of 1981.

In early 1982, I had a visit from two senior executives from Madison to discuss the circumstances this had created for the two ICU investment  funds managed by CUNA Mutual.  Examination and supervision policy fell under the Office of Programs which I held.

I can’t recall all the details. The two funds had investments from several thousand credit unions, many of whom were small.  The market value of the two funds had declined dramatically.   The question they asked, would NCUA force the credit unions take a loss by writing down their investments to the current  market value?

They had taken steps to minimize withdrawals and believed that the decline would prove temporary.

I discussed the request with Ed who was now chairman of NCUA and Bucky the General Counsel.   There were many issues confronting the agency and credit unions.  A number of large credit unions had invested in GNMA 8’s, that were far underwater.  Their solvency was in questions and 208 NCUSIF guarantees were keeping some of them operating.  Shares were leaving credit unions as members withdrew funds for the double-digit yields offered by mutual funds.

Federal credit union share rates had not been deregulated as we had been able to do for Illinois credit unions. Jim Williams President of CUNA told Ed before his February 1982 speech to CUNA’s Governmental Affairs Conference that credit unions had only one issue on their minds, “survival.”

As we looked at the situation I can remember Ed’s comment in response to whether NCUA would require a write down of the ICU investments.  His words: “Leave it alone.”  Credit unions and the agency had more than enough concerns without adding to the moment.  Interest rates will change and today’s circumstances will not be tomorrow’s.

The ICU funds did recover their value.  By then the corporate credit unions had evolved into an option where they could meet the investment needs of credit unions. The ICU funds were eventually closed later in the decade.

Bernanke’s Taper Tantrum

 

In 2013 Fed Chairman Ben Bernanke announced that the central bank would begin pulling back its stimulus efforts by reducing bond purchases.  As summarized in a CNBC article in June:

Mr. Bernanke continued the theme into his press conference, stating again that if economic conditions continue to improve, the Fed will begin tapering its bond purchases at the end of the year.

He did put a little more flesh on the bond tapering plan: “may gradually reduce purchases later this year…will continue to reduce purchases through next year…may end in the middle of next year…will end purchases when unemployment is near seven percent.”

But time and again he emphasized the pace was data dependent: if conditions improve faster than expected, reduction in bond purchases can accelerate. If conditions worsen, purchases could even increase.

Why is the bond market over-reacting? Because they believe diminished tapering means higher yields. I agree, but to what extent?

NCUA Reacts

The taper tantrum carried over into the broader market as yields rose, bond prices fell.  The NCUA took up the issue. It imposed its internal interest rate shock and NEV tests on credit unions believing that this event presaged an ever-increasing interest rate cycle.

NCUA examiners created DOR’s on credit unions from by their models.  They required the sale of longer-term fixed rate loans and investments at a loss and borrowings from the FHLB, when the cash was unneeded, in order to comply with the model’s forecasts.

Tomorrow I will share one credit union’s story of how these modeling-induced DOR’s resulted in a loss of over $10 million.   The model’s assumptions were wrong.

This precedent is important because, unlike 2013 and 2014, inflation is here and the Fed is committed to raising rates until the trend is reversed.

The issue is whether NCUA will allow credit unions to manage their transitions through this cycle using their experience and operational options, or impose their modeling judgments on them?

 

 

 

 

 

 

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A Model for Your Annual Meeting

The Woodstock for capitalists had its annual gathering this past Saturday.

Here is Warren Buffett’s opening comments for this six hour marathon interaction with shareholders.

How would your approach compare with this effort?

(https://www.youtube.com/watch?v=4H5OibatT00)

Here’s is Buffett’s answer to a question about the best investment you can make in an era of high inflation.

(https://www.youtube.com/watch?v=NaX-bjJn-AE)

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Twelve Minutes of Pure Joy

This video is twelve minutes of a much longer performance by the Virsky Ukrainian National Folk Dance Ensemble.

It is exuberant, colorful and uplifting.  Posted on February 27, 2022, following the Russian invasion.

Inspiration to start your week!

(https://www.youtube.com/watch?v=AOgdrrzOi1A)

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A Member Raises an Abiding Question Both Topical and Troubling

While traveling yesterday I was copied on an email between two credit union members.  The sender asked in part: 

“ I belong to five different credit unions.  I’ve clawed my way onto the supervisory committee of one of them. . . Alas, the Board of one has recently approved a deal by which it will be swallowed up by the biggest credit union in the state. . . When the deal was announced I wrote asking for whatever merger documents they could disclose.

I heard back directly from the CEO, who cheerfully explained they would be disgorging absolutely no documents.  It appears to me that the board and management actually expect the membership to ratify this deal entirely on a “trust me” basis. . . literally every justification that has been publicly offered comes down to some version of “bigger is better.”

His request:  “I am wondering if you would refresh my memory about what specific questions a concerned member ought to be asking about a deal like this.”

Topical and Troubling

If the situation is familiar, it is because it  happens  weekly.   Not mergers, but member-owners cut out of the process entirely.  Private deals supported by rhetorical promises and void of any objective facts.

Takeovers are an everyday event in capitalism and its anything-goes world of buyouts and mergers enabled by the financiers.

Here is how one long serving capitalist CEO described the process in his Annual Report:

Acquisition proposals remains a particularly vexing problem for board members.  The legal orchestration making deals has been refined and expanded (a word aptly describing attendant costs as well). But I have yet to see a CEO who craves an acquisition bring in an informed and articulate critic to argue against it.  And yes, include me in that category.

Overall, the deck is stacked in favor of the deal that’s coveted by the CEO and his/her obliging staff.  It would be an interesting exercise for a company to hire two “expert” acquisition advisors one pro and one con, to deliver his or her proposed views on the a proposed deal to the board—with the winning advisor to receive, say, ten times a token sum paid to the loser. 

Don’t hold your breath awaiting this reform:  the current system whatever its shortcomings for shareholders, works magnificently for CEO’s and the many advisors and other professionals who feast on deals.  A venerable caution will forever be true when advice from Wall Street is contemplated:  Don’t ask the barber whether you need a haircut.   (Source 2019 Annual Report, Berkshire Hathaway Inc. pgs 12-13)

A Game without Rules: Credit Unions Become Commodities

Mergers are being undertaken by sound, well established and stable credit unions not to better serve members.   But rather to make life easier for their leaders.

Instead of cooperative communities expanding long-time member relationships, these transactions treat credit unions like a commodity.  Leaders who give up their fiduciary positions to an outside third party without  engaging the owners prior to the decision and who must approve this charter cancellation.

This is the situation the member’s email describes.  And hundreds of thousands more members who end up becoming just consumer accounts to be bought and sold.

This is worse than the acquisition games Buffett describes in his Annual Report.  Credit unions and cooperative design is supposed to protect member-owners from self-dealing leaders and board toadyism.

Mergers lack transparency, public disclosures of strategy or benefits, and certainly no post acquisition accountability.  These are private deals negotiated by CEO’s putting their interests first and then announcing their intent to members.

The member vote is merely an administrative process without substance where very few members even bother to participate. All the messaging, resources and formal requirements are under the complete control of the persons benefitting from the transaction-not the members who must approve the decision.

What can members do?  How can the supposed democratic one member one vote governance model be revitalized to ensure member interests are front and center in these self-dealing transactions?

That is what the member is asking.  I will share your thoughts, and offer a few of my own.   Where is the Kristen Christian   when  members now need her to  save their own credit unions?

Buffett’s Merger Conclusion

“I’ve concluded that acquisitions are similar to marriage:  The start, of course, with a joyful wedding–but then reality tends to diverge from the pre-nuptial expectations.  Sometimes, wonderfully, the new union delivers bliss beyond either party’s hopes.  In other cases, disillusionment is swift.  Applying those images to corporate acquisitions, I’d have to say it is unusually the buyer who encounters unpleasant surprises.  It’s easy to get dreamy-eyed during corporate courtships.”

 

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On the Fire Line-Again

Seeing the flames on the news ravaging the New Mexico countryside and park forests  is an unusual event for this scale of catastrophe. Sudden and destructive;  no prior notice.

This brief update yesterday is from Denise Wymore, a coop evangelist:

“It’s been over a decade since New Mexico has experienced a major wildfire.

In June of 2011, a wildfire that would consume over 155,000 acres in New Mexico erupted.  The Las Conchas Fire began around 1pm on June 26, when a gust of wind blew a 75 foot tall aspen into a power line. From that ridge top began the largest wildfire ever in New Mexico. During the first 14 hours, the fire raced eastward, consuming more than 43,000 acres (an acre per second) of forest and destroying dozens of homes.

Today a disaster of similar scope is occurring. The Calf Canyon and Hermit’s Peak fires have combined – burning over 60,000 acres in Northern New Mexico. Today it is only 12% contained with 817 personnel. The cause is unknown at this time.

The three employees of Rincones Presbyterian Credit Union, $5.45 million in assets providing financial services to almost 300 members, in and around Chacon, New Mexico had to evacuate its sole branch location yesterday.

Guadalupe Credit Union, founded in 1948 by Father Ed McCarthy to serve the parishioners of Guadalupe Church in Santa Fe, NM stepped up. They offered space for the staff of Rincones Presbyterian in their Taos and Las Vegas, NM locations.

Remembering a Prior Emergency

This isn’t the first time credit unions in New Mexico have helped each other during wildfires. The  Las Conchas Fire in 2011 caused the entire town of Los Alamos to evacuate for a week.

The Los Alamos School Employees Credit Union was able to “keep their doors open” with the help of Del Norte Credit Union in Santa Fe. Del Norte (DNCU) served the Los Alamos National Laboratory Employees. Matt Schmidt, Los Alamos School Employees CU CEO remembers his relocation at that time:

“Del Norte provided a conference room off the main lobby to setup our servers, computers and printers.  Kim Currie with DNCU met me after hours to open the branch doors and help unload our office equipment. My dog, also an evacuee, watched from the truck.   That moment personified the meaning of “credit union movement.” I felt supported and cared for in a time when the future was uncertain.”

To assist  credit unions like Rincones maintain member service, contact Denise Wymore, Marketing Manger, Qcash Financial at 503-805-4424, or dwymore@qcashfinancial.com.

 

 

 

 

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The Uncertain, Risky Virtual Universe

Should credit unions be investing time and resources in the emerging virtual realities, especially crypto options?

One of Warren Buffett’s truisms is that: Only when the tide goes out do you discover who’s been swimming naked.

The Fed clearly intends to take the tide out.  Coming rate increases will end the past two years’ historically low cost era of finance and restore  “normal” rate levels to tame inflation.

Markets are now sorting out what valuations have been overpriced with cheap money.  One of these newly created segments is the world of digital finance.  Here’s Bloomberg’s comment on one area of cypto on April 25:

Bitcoin seems to be stuck in a rut: Prices are flagging, online searches for the largest cryptocurrency and other digital assets have fallen off, fewer and fewer coins are changing hands and crypto-related funds are seeing massive outflows.  

An Assessment from the Digital Generation

I asked my computer science oriented grandson whether he or any of his online buddies were creating NFT’s as a way to make money in the virtual world.   He said no.  His reason was that this was virtual gambling.  He had seen newly issued NFT’s bid up in price through anonymous (self-promoting) purchases, and then crash when there was no offers at the pumped up value.

However he does spend lots of time in the virtual world of games and other digital experiences.

Is the meta-omniverse a real business opportunity and if so, for what end? Is it a vast new world of entertainment, an ideological, semi-religious political response to real world problems, or a temporary stage in the evolution of a parallel reality?

Two recent articles have examined both the hype and the opportunity aspects of this emerging financial sector. An internet writer Ginsberg has compared the crypto hype to a religious craze in an April 22 post: Is Crypto Just a Religion for Online Gambling.  Selected excerpts follow:

Crypto is no longer just computer nerds talking mumbo jumbo about decentralization & “the blockchain” at conferences that everyone kicks themselves for not paying attention to earlier — it’s a fully-fledged, multi-trillion dollar industry, complete with mainstream media coverage and millions of people arguing about it on Twitter.

While the fan boys call crypto the “future of finance”, its critics denounce it as a giant Ponzi scheme. In short, I believe they’re both wrong.

To me, cryptocurrency seems to be something more like an internet-based religion, mixed in with technical gambling (“trading”), all wrapped up in a strange cyberpunk economy of value, which is ultimately being capitalized on by speculators as a way to make absurd amounts of money. . .

People are constantly zapped by these seemingly mythological statements that constantly obfuscate the fact that very little real world utility is being created in the world of cryptocurrency.

Right now, the total crypto market is currently worth a mind boggling $1.85 trillion, and world-leading financial institutions continue to throw more money into crypto with each passing day. . .

From what I can see, almost all large institutional involvement comes from FOMO more than it does from an actual investment strategy.

Matt Comyn, the CEO of Commonwealth Bank, Australia’s largest financial institution said it best:

“We see risks in participating, but we see bigger risks in not participating.” 

Ginsberg’s conclusion: Unless a crypto asset solves a measurable, real-world problem —it’s probably just another delusion peddled by a self-serving preacher in this strange, ever-growing digital religion.

  A “Real” Business Opportunity?

 

Gonzo Banker’s Ron Shevlin posted a column about lending in the metaverse: Entrepreneurial bankers have a chance to establish themselves as commercial metaverse lenders. Excerpts:

Claiming to be the first bank in the metaverse, JPMorgan announced the opening of a “lounge” in Decentraland. Upon entering the lounge—which was established by Onyx, the bank’s blockchain unit—visitors are greeted by a digital portrait of Jamie Dimon (which morphs into the image of the bank’s head of crypto) and a roaming tiger.

“Virtual branches are the next logical step for how financial institutions can utilize virtual reality. Imagine never having to take a break during working hours and wait in a line at the bank. Now imagine getting personalized banking service at the comfort of your home, when it’s convenient for you while enjoying a cup of coffee.”  

The two largest virtual worlds—The Sandbox and Decentraland—saw 86,000 virtual property transactions totaling $460 million in sales in 2021.

“Supply and demand dynamics are driving people into the meta-economy. Over time, the market for metaverse real estate could evolve in a similar way as the real estate market in the analog world. In time, the virtual real estate market could start seeing services much like in the physical world, including credit, mortgages, and rental agreements.”

The success of building and scaling in the metaverse is dependent on having a robust and flexible financial ecosystem that will allow users to seamlessly connect between the physical and virtual worlds.”

The Final Word

I give Warren Buffett the last word:  “Never invest in a business you cannot understand.”

 

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Too Small, Too Short

There is an urban myth about a bet a group of writers and hangers-on made with Ernest Hemmingway one evening during a night of drinking in Paris.

His friends wagered that he could not write a short story in six words.  They each put over $100 in francs on the table.

Hemmingway took a napkin and wrote the following:

For sale. Baby shoes. Never worn.

He won the bet.

Too Small-An Obsession with Numbers

A similar mindset exists in many organizations about the value of size.   Growing larger is the basic criteria for success.

I was reminded of this obsession with numbers, not from the siren calls for mergers among credit unions, but rather from an observation on the decline of churches in America:

A church with 1,000 people can be a dysfunctional mess, filled with shallow believers, making zero impact in their local community.

And a church of 30 people can live out the faith, change lives and be true to the Gospel.

Is my church too small? That’s the wrong question to ask.

Instead, ask whether your church is healthy?

Insert the word credit union for churches; repeat the question.