Photo from 1971- mom, dad and baby Lara.
On the US Navy pier, Yokosuka, Japan. My ship, the USS Windham County (LST 1170), had just returned from Vietnam deployment. Homecoming. An unbelievable joy.
Votes Counted: Closest Election Ever
The elections this week were full of last minute drama. There will be many consequences yet to be sorted out from the results.
In one case the vote was especially close. Only 318 votes separated the two sides. The percentages were 51.1% versus 48.9%. Certainly one of the closest elections ever.
Voting participation however was not particularly high in this critical ballot. Of the eligible voters, only 21% cast votes.
“Highly Engaged Members”
The results were announced in this document on November 9th after polling had closed.
However this was not a republican vs. democrat political election. It was a vote to extinguish the charter of a 75-year, innovative state chartered financial cooperative.
The official tally was 7,622 for the merger and 7,304 against. The result is that $1.1 billion VSECU and its 71,000 member-owners will no longer have their own credit union.
It will be merged into the $1.9 billion New England FCU, officially on January 1, 2023.
Voting matters. By law the charter belongs to the member-owners, not management or the board. The leader’s duty is fiduciary, to always act in the members’ best interest. Voting is the core of democratic design.
So when almost 50% of members vote against a strategy that management has tried to sell them for almost a year, such a no confidence result would cause most responsible leaders to rethink their plan.
When announced in February, the opposition was visible, public and well thought out by conscientious members who launched their own website, Calling all Members. The State Employees Association Board of trustees voted to oppose the merger.
Even controlling all the communication and marketing resources, member contacts and legacy relationships, the vote barely exceeded the required majority. The members sense there is something that doesn’t add up in this charter cancellation.
The Merger Math
The merger explanation contained two specific benefits: the NSF fee would be reduced by $10 and access to NEFCU branches would be opened. Both “benefits” could have been done immediately without merger.
The reasons for merging was given in rhetorical phrases about future plans and a new partnership, but no specifics.
The math for coop mergers is simple, 1 + 1 = 1. There is no increase in members, loans, capital or any objective market share measure. Instead one charter goes away along with its independent leadership and business strategy. VSECU relationships, good will and member loyalty is dissolved after 75 years and three generations of building its unique identity.
There was not even a thank you dividend for the $100 million in collective equity now transferred to the control of a new board and management with their own financial priorities and strategy. They have no operational or political connection with the 70,000 members who created this common wealth.
The merger announcement included the VSECU CEO’s observation: Our membership is highly engaged in the democratic process as member-owners evidenced by the highest credit union voter turnout ever in our history,” noted Miller. “As we look toward the future, we are excited about the opportunity this partnership promises and ready to take VSECU into our united future for all of our members.”
A Weaker System
There are other consequential problems with this transaction. The first rule of financial soundness is to not put all one’s eggs in a single basket. This merger increases concentration and reduces diversification for both credit union members and the Vermont system.
Separately these two credit unions competed for market leadership and innovation. Now they are 47% of the Vermont credit union market by assets and 40% of members. That concentration should raise both financial as well as public policy issues. As the American Banker’s lead story on February 23, 2022 described the situation, Vermont’s Largest Credit Union Merging with Rival.
Vermont’s credit union system is smaller, losing it largest state charter with total credit unions numbering just 17. Traditionally, the state charter has been more innovative and flexible than the federal option, but the largest example of that difference is now gone. The political sway in state debates is lessened both institutionally and by members.
Here’s What’s Next
From VSECU’s press release:
The two credit unions will continue to operate separately as VSECU and NEFCU until January 1, 2023. On that date, VSECU will become a division of New England Federal Credit Union. No changes will occur for members of either credit union while integration of systems, services, and products occurs. While there is no firm deadline for the conclusion of the integration, it is expected that the combined credit union will operate as one entity later in 2023.
Currently, it’s banking as usual at VSECU, soon to be a division of New England Federal Credit Union, until we identify and create a new name for our combined organization.”
With 50% of “highly engaged” members opposing this cancellation of their independent charter, how many others feel the same way? The new name, organization and operational integration is over a year away. How many will wait around to see what this new identify and “vision’ looks like?
Banking Values?
A number of years ago VSECU became one of a very few American credit unions to join the Global Alliance for Banking Values.
The vision of this global network is: Finance at the service of people and the planet.
Our collective goal is to change the banking system so that it is more transparent, supports economic, social and environmental sustainability, and is composed of a diverse range of banking institutions serving the real economy.
In support of this effort VSECU announced its own expanded vision five years ago:
“To inspire a movement that brings people together to empower the possibilities for greater financial, environmental, and social prosperity.”
The goal? To align our organization with a larger movement of values-based and impact-driven organizations in Vermont and around the world.”
Two major initiatives were begun as part of this restated purpose. One was called Powered by VSECU to stimulate social and economic opportunities through innovative partnerships around the state.
The second was Alternative Capital, to help small businesses and coops raise financing including direct investments in coops. VSECU was one of the few credit unions making these coop investments.
This new vision from 2016 lasted just five years. The merger has no expressed vision. The credit unions will continue what they were doing until they figure out the combined operations and develop a new name and brand. Both credit unions are giving up their historical legacies.
Many VSECU’s members sensed that this combination promised nothing and took away what the valued. The fact VSECU management gave up on their vision less than five years for an undefined merger, foreshadows a challenge retaining the trust of the members who built this organization.
What is Being Lost
More is at stake than just member-owner patronage.
At a time of increasing economic uncertainty and record inflation, the one institution members have counted on is no longer theirs.
Members have lost their capital, their independent leadership, their long established relationships and their unique identity.
Moreover in this stressed economic moment, members of both institutions will spend millions of dollars on vendor contract cancellations, product and operational conversions, and payments due when benefit plans are terminated.
Both sets of employees will eventually be rationalized. No organization needs two marketing, HR, mortgage lending, and operational leaders. There is no efficiency from scale without redundancy reduction. Aspirational professional career paths are eliminated.
The credit union system in Vermont loses its state leader and its ability to influence local regulatory and political institutions when change is desired. Larger credit unions tend to separate their self interest from the system that spawned their creation in the beginning.
The national credit unions system has lost one of its examples of green leadership. VSECU Eyes a Green Future in Vermont, is just one story of a series at creditunions.com portraying the credit union’s business innovations. The stories exist no more. The institution is gone. Size becomes the goal, not values.
The Betrayal
With widespread opposition and an absence of any concrete benefits or plans, the merger has cost thousands of members and multiple interdependent organizations real losses. The transaction comes at a time of heightened vulnerability for members and institutions.
Positive momentum is lost. Priorities become institutional assimilation projects, not serving local communities.
As one member read the posted results he wrote that within a year or so employees will be gone to “pursue other opportunities” and collect the benefits from their terminated plans. He ended saying: The board and senior leaders were hired to serve the members. What makes me deeply sad is not the money, it’s the betrayal.”
To build a successful credit union on a foundation on member loyalty and trust takes years. Both can be lost overnight. In a single election.
On Failing Retirement
At a recent class reunion, one of my peers admitted to “failing retirement.” His projects and interests kept him busier than a full time prior job.
It reminded me of this story:
An old physician, Doctor Gordon Geezer, became very bored in retirement and decided to re-open a medical clinic.
He put a sign up outside that said: “Dr. Geezer’s clinic. Get your
treatment for $500 – if not cured, get back $1,000.“Doctor Digger Young, who was positive that this old geezer didn’t know beans about medicine, thought this would be a great opportunity to get $1,000. So he went to Dr. Geezer’s clinic.Dr. Young: “Dr. Geezer, I have lost all taste in my mouth. Can you please help me?”Dr. Geezer: “Nurse, please bring medicine from box 22 and put 3 drops in Dr.Young’s mouth.”
Dr Young: ‘Aaagh! — This is gasoline!”
Dr. Geezer: “Congratulations!
You’ve got your taste back. That will be $500.”
Dr. Young gets annoyed and goes back after a couple of days figuring to recover his money.
Dr. Young: “I have lost my memory, I cannot remember anything.”
Dr. Geezer: “Nurse, please bring medicine from box 22 and put 3 drops in the patient’s mouth.”
Dr. Young: “Oh, no you don’t — that’s gasoline!”
Dr. Geezer: “Congratulations! You’ve got your memory back. That will be $500.”
Dr. Young (after having lost $1000) leaves angrily and comes back after several more days.
Dr. Young: “My eyesight has become weak — I can hardly see anything!”
Dr. Geezer: “Well, I don’t have any medicine for that so, “Here’s your $1000 back” (giving him a $10 bill).
Dr. Young: “But this is only $10!”
Dr. Geezer: “Congratulations! You got your vision back! That will be $500.”
*Moral of story* — Just because you’re “Young” doesn’t mean that you can outsmart an “old Geezer”
Elections. And Truth?
This poem published in 1901 is about the legendary Muskogee orator and chief, Crazy Snake, who led resistance to federal allotment of Muskogee lands.
The author, DeWitt Clinton Duncan, was born in the Cherokee Nation in Georgia in 1829. A poet, short story writer, and essayist, he was an attorney for the Cherokee Nation and a translator of Cherokee law, as well as a teacher of Latin, English, and Greek.
The opening line is an allusion to line thirty-three of William Cullen Bryant’s poem “The Battle-Field,” which reads “Truth, crushed to earth, shall rise again”—an idea which this poem sharply contradicts.
Which “truth” will rise today?
“Truth crushed to earth will rise again,”
’Tis sometimes said. False! When it dies,
Like a tall tree felled on the plain,
It never, never more, can rise.
Dead beauty’s buried out of sight;
’Tis gone beyond the eternal wave;
Another springs up into light,
But not the one that’s in the grave.
I saw a ship once leave the shore;
Its name was “Truth;” and on its board
It bore a thousand souls or more:
Beneath its keel the ocean roared.
That ship went down with all its crew.
True: other ships as proud as she,
Well built, and strong, and wholly new,
Still ride upon that self-same sea.
But “Truth,” and all on her embarked
Are lost in an eternal sleep,
(The fatal place itself unmarked)
Far down in the abysmal deep.
Let fleeing Aguinaldo speak;
And Oc̅eola from his cell;
And Sitting Bull, and Crazy Snake;
Their story of experience tell.
There is no truth in all the earth
But there’s a Calvary and a Cross;
We scarce have time to hail its birth,
Ere we are called to mark its loss.
The truth that lives and laugh’s a sneak,
That crouching licks the hand of power,
While that that’s worth the name is weak,
And under foot dies every hour.
When Voting . . .
Virginia’s Fall Colors
NCUA’s 9.6% Increase in the Proposed 2023 Budget Shows the Need for A Better Way for Spending Oversight
NCUA’s 2023 Staff Proposed Draft budget is 84 pages. It adds 25 new positions and an 80% increase in spending on the Merit technology system.
CUNA and NAFCU provided 8 and 9-page detailed suggestions for changes. Credit unions pay all NCUA’s expenses. The two trade associations critiques are an excellent starting point for readers who want to see the critical issues.
A Longer Term Spending Perspective
Two weeks ago I posted a blog called NCUA’s budget hearing and inflation that included a chart from the Bureau of Labor Statistics showing the 22 year cumulative price increases for many sectors of the economy. The largest was the 240% gain in hospital services followed by college tuition and fees at 180%.
Average hourly wages had increased 100% and overall inflation was 74.4% in this time frame.
In this 22 years the US population has grown by 50 million. Each of these economic sectors are serving many more customers with more products and more facilities than was the situation in 2020.
NCUA’s proposed 2023 budget would result in a 283% increase for this same period, higher than any other economic sector. Meanwhile number of NCUA insured credit unions has fallen from 10,316 to 4,853.
NCUA’s budget process is one sided. It details all spending request but provides no cost control or expenses reductions. An example is this excerpt from CUNA’s analysis of administrative costs: Specifically, the budgets for contracted services, administrative expenses, and rent, communications, and utilities are proposed to increase by 30.3%, 10.8% and 21.8%, respectively.
Without external oversight, the budget process becomes a PR exercise with scripted answers and no independent review. Board members readily give in to the inflation rationale.
NCUA’s budget grows inexorably faster than every other sector because there is no check and balance. The agency is answerable only to itself. Or as one board member frequently observes, “NCUA is a monopoly.”
Chairman Ed Callahan’s Last Congressional Hearing
For there to be accountability over NCUA’s spending, the process should be changed. The example of former NCUA Chairman Ed Callahan’s final Congressional testimony suggests a possible solution.
On April 24, 1985 Ed appeared before Chairman Boland’s subcommittee of the House’s powerful Committee on Appropriations. He presented the CLF’s 1986 appropriation request.
The following are excerpts from Chairman Callahan’s opening statement:
For fiscal year 1986 we are requesting a $600 million in new loans, the same number as the previous five years. The expense limitation $850,000 is the number as the current fiscal year and has been unchanged for the past four years. . .
We believe the lending limit is adequate to meet the needs of over 18,000 credit unions. . . Our agents, the 42 corporates, have reported minimal increases in loans even though loans outstanding at their member credit unions have increased 44% the past two years. . .
The CLF’s loan balances of $288.5 million represent a very slight increase since our fiscal year end. . .
Mr. Chairman, today the (CLF) system provides services to more credit unions at a lower cost and with fewer employees than at any other time in its history. Credit unions and we are proud of its success.
At the time of this hearing, NCUA insured 18,000 credit unions with six regional offices and a DC headquarters. Total employment was 600. The CLF’s bottom line of no increases in operating expenses for four consecutive years was the same outcome for both the NCUSIF and agency’s operating budgets.
In contrast, NCUA’s total spending has grown over 200% more than the economy’s total inflation for the past 22 years. The solution to NCUA’s open-ended spending is to make the entire NCUA budget subject to Congressional oversight and approval.
A Better Way: Put NCUA Spending “On Budget” for Congressional Review
All CLF spending was subject to Congressional oversight until the 2008/2009 crisis changed this annual approval process. Congress no longer reviews CLF lending or expenses. The CLF’s coverage has never been as comprehensive or meaningful since.
Currently the NCUA is seeking to extend the CARE Act provisions enlarging the CLF’s capabilities. This legislative request is an ideal opportunity to put the CLF back on budget along with the remainder of the Agency’s spending.
In the real economy, constraining costs is the first responsibility of leaders when facing unprecedented inflation and the prospect of an economic downturn. Personnel and other resources must be redirected to immediate priorities, rather than just adding staff for new initiatives.
Both efficiency and effectiveness concerns were raised in NAFCU and CUNA’s detailed budget responses. However, these comments come with no formal authority. NCUA routinely restates its positions, such as the need for consumer examiners or more specialists. Board members, with rare exceptions, just support each other’s spending priorities.
Putting the NCUA on-budget would open up the process to independent monitoring and public commentary. Congress would review and approve the spending as well as the underlying “themes” or policy justifications. As the NCUA’s taxpayers, credit unions would then have a meaningful way to comment on NCUA’s budgets and operating performance.
It worked for the CLF. It would be a better way for insuring accountability for NCUA’s performance today.
A New Class Act?
Risk based lending (RBL) was introduced to credit unions in the mid 1990’s. Many credit unions now use this approach in some or all of their lending offerings.
The debate continues as to whether this is consistent with coop principles. Here is one CEO’s view.
(from Jim Blaine)
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| Balanced lending… |
Many, many credit unions have successfully implemented risk-based lending to the benefit of each and every member. More and more members are calling out and demanding increased risk-based lending by credit unions. Never has one concept been so uniformly and enthusiastically accepted by the masses. RBL is the top requested service on every member survey – right?.
One CEO told me that RBL was an easy sale to the Board after one Board member got back from an RBL seminar cruise. Evidently, in the bar, the Board member was chastised by an RBL advocate with the arguments: “You mean you charge the same loan rate to an admiral as you do to an E-4? You mean your school superintendent pays the same rate as the first year teacher? The blue collars get the same deal?! Do your maid and gardener get the same rate you do? That’s not fair! You’ve got to start running that credit union like a business these days!”
It’s an especially easy sale, when you lace the poison with a few high heat words like unfairness, subsidy, unprofitable, freeloading – free riders. Fairness, of course, is something every credit union person supports. Every effort should be made to assure fairness is a fundamental, core value of the credit union philosophy.
Evidently for the first seventy or eighty years of the credit union movement, boards and members didn’t care much about fairness in lending. Unfairness existed in all credit unions since none used risk-based lending….
Evidently for the first seventy or eighty years of the credit union movement, boards and members didn’t care much about fairness in lending. Unfairness existed in all credit unions since none used risk-based lending….
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| Secret formula… |
Critics try to make an issue out of the “unfairness” in RBL. They always want to claim that while RBL may achieve consistency in credit union lending decisions, RBL was never designed to achieve fairness. With RBL, members are divided into risk “classes” (A,B,C,D,E, etc.) based on a secret formula of risk criteria.
Although the secret formula for risk criteria isn’t advanced enough to tell us which exact member will default, it is explicitly accurate in knowing which “class” to which you and I should belong. There are no shades of gray in an empirical, statistical model. Don’t tell me about the divorce, the flood, the death in the family, or the reporting error. Your statistical record speaks for itself. The secret formula knows who you really are in your heart of hearts. Cut the whining, pay the rate; fair is fair!
Complainers also don’t seem to appreciate the need to eliminate the subsidies within a credit union to “low class” borrowers. The financial stability of the wealthy few is being imperiled by the working class majority. If the poor can’t pay their loans, logically they should be charged a higher rate.
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| A New Class Act? |
But we haven’t even begun to fully exploit the benefits of risk-based pricing for the membership. Hope we can use the secret formula to help make some of the other operations of the credit union fairer. We’re already getting behind on the innovations being implemented by our guiding lights over in the banking industry.
Some local banks have used secret formulas to determine even more precisely which customers are profitable and which are unprofitable. Who wants an unprofitable customer? And there certainly isn’t any difference between an unprofitable customer and an unprofitable member, is there? Hey, credit unions aren’t welfare states, are we?
Those creative banks have started coding customers into green, yellow, and red “classes” at the call centers. Regardless of how long you’ve been waiting, green goes to the head of the queue. Greens have separate, fast teller lines and receive special services. Bright, bright greens can even receive “private banking” services so they never have to rub elbows with “the riffraff”. Don’t we want to serve our “best” members, too?
Whose credit union is it anyway?
Serving the members based on the distinction of “class” will go a long way toward increasing a sense of fairness and building unity within the credit union. We certainly haven’t been “a class act” in the past but surely everyone agrees that – in a cooperative – some members are more equal than others.
Can Credit Unions Be Uniquely Cooperative?
Apples and Oranges
(from Jim Blaine)
Comparing a b#!k to a credit union is as silly as comparing an apple to an…
Credit unions are uniquely different!!!
If you’re one of those cynics who think “nothing is unique”,
then name one word in the English language which rhymes with orange…
Don’t rush I’ll wait….
Alright, alright if you’ve had a couple of craft beers, I will accept “door hinge“..
The Halloween Spirit
The Listeners (1912) by Walter de la Mare conjures the spirit of Halloween. A seemingly empty house, night time, silent souls, the rider’s horse eating grass, and the Traveller, all alone, knocking loudly for a response.
The poem presents a mystery-I kept my word and the one left awake.
It ,might be interpreted as a literal event, “does anybody care“; or metaphysical, spiritual metaphor- is there anybody there who will answer?
The haunting atmosphere evokes Halloween, the night of All Souls.
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