Category: Co-ops in Capitalism

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Wisdom: Running Lean

           On Running Lean

“I started my career as a football coach. Something you learn from coaching is that people can do more than they think they can.   They can be faster, work harder and do more than they thought possible when they got up in the morning.

“When I arrived at Patelco, I reviewed the numbers.  The credit union was sending 10% of income to reserves and returning 4-5% to members as dividends.  Patelco was bloated and did not know it.

“I set a new goal: 10% to reserves 28% to expenses and 62% back to the members,  To get that 10-28-62, everyone had to work leaner and better.  Nothing was considered sacred.” (pgs 22-23)

Note: The Coach’s Playbook is a brief collection of the thoughts of Ed Callahan over his 30 plus years in credit unions. The book was published in 2006 by the Member Value Network.

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Wisdom from The Coach’s Playbook

                  On Members

” Most economic institutions exist for the capitalists, who are a tiny minority compared with the body of customers.   In such an economic system as now exists around the world, people do not come first.  Money does.

Credit unions are different and always have been. We never came together with notion of making money, but with the notion of helping people and improving their lives.” (pg. 7)

 

Note: The Coach’s Playbook is a short collection  of Ed Callahan’s observations.  These were collected from his writings and talks working in credit unions:  eight years as a regulator  (including Chairman of NCUA from 1981-1985), co-founder of Callahan & Associates, and as CEO of Patelco.   The book was published in 2006 by Member Value Network, a spontaneous “collection” of credit union leaders and consultants.

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Credit Unions and Public Banks  

On September 18, 2023 an organizing group Friends of the Public Bank of the East Bay  (PBEB) announced the hiring of a its start-up CEO, Scott Waite.   This is a brief announcement by Waite on YouTube.

Waite is a credit union veteran having served over 20 years as Patelco Credit Union’s  CEO.  More recently he had turned around Central State Credit Union which had been operating for four years under regulatory constraints.

PBEB has raised $1 million and is undertaking further fund raising.  Four local jurisdictions – Alameda County and the cities of Richmond, Oakland and Berkeley – are supporting the effort contributing financially to the bank’s groundwork and business plan.

The intent is to seek a bank charter with FDIC insurance to open by 2024 or early 2025. The goal is to facilitate local governments’ reinvestments back into their communities. As a wholesale bank, PBEB will partner with community banks, credit unions and CDFIs to finance affordable housing development, small businesses, the renovation and electrification of existing buildings, and the ability of cities and counties to refinance their municipal debt locally.

More Efforts Underway

On September 29, the online reporting site, Next City, posted a summary of the history of public banking and the growing interest in major cities across the US.

A Victory For Public Banking

A public bank in California’s East Bay is gaining more momentum to become one of the first public banks to start operating since the state-owned Bank of North Dakota got established in 1919. It is the first public bank to hire a CEO in the last 100 years.  Interest in establishing public banks has grown significantly in the last decade but many organizers continue the long push to get one created in their cities.

In an earlier article Next City described efforts of mayoral candidates in Chicago and Philadelphia to make public banks part of their electoral initiatives.

Organizers in New York also want to create a city-owned wholesale bank which was the subject on an article in Credit Union Times, Public Banks: An Important Idea Whose time is Overdue. 

The author, Melissa Marquez, CEO of the $37.7 million CDFI Genesee Co-op FCU, pointed out the public banks are not competition but “would partner with us to increase our capacity to lend, grow and meet our communities’ needs. This partnership model is effective precisely because it leverages the proven expertise of local lenders and the scale of public deposits.”

She pointed to the century long record of the Bank of North Dakota, a public bank with over $10 billion in assets.   From its 2022 Annual Report:

BND had “a record $5.4 billion in loans to the state’s farmers and ranchers, business owners and students in North Dakota and record profit  of $191.2 million in 2022, up $47 million from 2021.”

Her article  cited statistics from the Institute for Local Self Reliance that  “the Bank of North Dakota has fostered the highest rate of community banks and credit unions per capita in the country.”

She added: “The New York Public Banking Act (S.1754/A.3352) would create an appropriate regulatory framework for enabling localities, such as Rochester or New York City, to apply for a special purpose charter for a municipal public bank. They will be charter-bound to reinvest in equitable economic development in low-income communities.“

The article also cites the history of the CDFI programs as a model for a new, locally focused financial institution system:

“30 years ago, the federal CDFI Fund was established during the Clinton Administration as a part of the U.S. Treasury. There were naysayers and name-callers then as well. But three decades later, thousands of successful CDFIs are operating in urban, rural and native communities across the country, and CDFIs enjoy broad public support across political and other divides.”

Why Public Banking Could Take Off

Scott Waite explained his decision to lead the PBEB as a “grass roots movement meeting the moment.”  The bank will partner with other institutions to ensure public funds are reinvested locally.  His three areas of initial support are affordable housing, renewable energy and small business lending.

PBEB cannot be a retail bank.   As a wholesale firm they will rely on other community financial institutions and firms to initiate projects for joint financing.

I believe there are two factors that suggest public banks could succeed.

The first is that the increasing consolidation of financial institutions.  This means that locally owned and directed firms are becoming less and less prominent in major American cities.

When I worked at the First National Bank of Chicago ( 1974-1977), the city had three major local banks:  First, Continental and Harris Bank plus dozens of correspondent banks under Illinois unit banking charter limits.  Today I know of no major locally owned bank that calls Chicago its headquarters.

Yet municipal and country governments manage hundreds of millions of dollars that are all deposited in for-profit institutions, whose priorities may not align with how local governments might see funds used.

Just as credit unions were formed by tapping into the steady flow of wages for military and public employees in earlier generations, public governments and authorities are now focused on the wholesale use of funds with local partners.

Secondly. government today is big business.  Public contracts for roads, health care, schools involve overseeing hundreds of millions of dollars in dedicated public spending.   Some of these same skills will be required in overseeing new institutions for local financing. In many cases the expertise is already there or readily available such as Scott Waite’s hire.

In one instance, credit unions have already chosen a public banking option. The Midwest Corporate Credit Union serving North Dakota voluntarily dissolved in 2011 after the multiple uncertainties driving the new corporate regulations. They did so because “North Dakota credit unions had access to the Bank of North Dakota that provided many of the services of a corporate credit union without having to maintain a capital share.”

Just as the FHLB system has become the preferred liquidity lender for the credit union system not the CLF, public banks may accelerate their role in local financing projects that are now too large for one institution to undertake.

Scott Waite believes credit unions should embrace these efforts as it will facilitate a greater local role for their members’ funds.  And just as important, the underserved needs are growing in cities across the country, so that innovative initiatives will be critical.

We’ll know the concept has taken hold when there is a public banking support organization such as Inclusiv for CDFI’s.

 

 

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The Challenge of Being a New Coop CEO

Leadership changes are necessary to sustain every organization’s success.   Sometimes changes at the top work well; other times they come with drama and uncertainty.

New CEO’s, especially if brought in from outside an organization, will have a healthy disrespect for the status quo.

But no one wants a job they disrespect.

So the critical performance standard is the leader’s vision of the future.   Is the person equipped with the right motivation, not just relevant professional skill sets?  Or, are they chosen just to break from the past?

A  Difference, If Understood

Credit unions as cooperatives can teach and illuminate human possibility.  But it can only do so to the extent that leaders are determined to use the design for those ends.

Otherwise, it becomes nothing more than an aggregation of financial accounts in a marketplace full of options.

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A Credit Union’s Calling: Be “Stewards of Humanity”

Everything in life comes around, full circle, even in credit unions.

“In 1908, Monsignor Pierre Hevey, Pastor of Sainte-Marie’s parish in Manchester, New Hampshire, organized what was soon to be known as the first credit union. The goal was to help the primarily Franco-American mill workers save and borrow money.

“On November 24, 1908  in Manchester, New Hampshire  “La Caisse Populaire, Ste-Marie” (The People’s Bank)  became the first credit union in the nation.”  (from Our Story, St. Mary’s Bank)

Today the Bishops and priests of the Episcopal Diocese of New York are following in Monsignor Hevey’s footsteps.   And for many of the same reasons, as demonstrated in these founders’ statements:

“As a diocese, we are committed to making a meaningful impact on the lives of those who have traditionally been marginalized and underserved. That’s why the establishment and launch of our diocesan credit union is such a pivotal moment for us.

“It’s not just about providing financial services, it’s about creating an inclusive space where everyone, irrespective of their financial standing, can feel valued and supported. . .

“These initiatives are more than just programs or ideas, they are a call to action, a call to embody the love and grace of God in the world.”

A second organizer:

“As a member of the inaugural board of trustees and co-chair of the Diocese’s credit union task force, I am thrilled to see the New York Episcopal Federal Credit Union open its headquarters and first branch here in the Bronx. It’s a testament to our commitment to the local community and our mission to serve everyone in our field of membership, regardless of their financial circumstances.

The existing banking system often neglects the needs of those who are underserved and overlooked, and that’s why we’re excited to offer a financial institution that prioritizes the well-being of all its members. We look forward to empowering our neighbors in Fordham and throughout the Bronx, as well as the entire Diocese of New York, with the tools and resources they need to achieve financial stability and thrive.”

The biblical calling to be “stewards of humanity” was featured in this short recording by the Diocese announcing the credit union’s formation.

In the June 30, 2023 call report, the credit union reported $477,000 in total assets, all in investments, and a net worth of the same amount.

A Long Journey

Here are some details of the charter journey from an Episcopal  News Service May 23rd story:

“The journey towards establishing the NYEFCU began in 1990 when the Diocese of New York committed 10% of donations to its endowment funds to economic justice efforts and created a task force to recommend projects. Despite initial discussions and resolutions in 2003 and 2004, the credit union’s development was slow.

“It wasn’t until 2014 when the diocesan convention voted to “authorize the establishment of a task force to prepare a charter and solicit initial grants and deposits to establish the Episcopal Diocese of New York Credit Union.”

The Diocese embraces a lively community of faith, fellowship, service and spiritual commitment across almost 200 congregations and 50,000 members.

“The task force submitted an application for a federal charter to the National Credit Union Administration in December 2020, and spent 2021 and 2022 addressing the federal agency’s requests for more information and revisions before finally receiving approval.

“The credit union was launched with an initial investment of $500,000, with $250,000 from the diocese and another $250,000 from Trinity Church Wall Street. An ongoing fundraising drive aims to secure an additional $300,000 to cover the first five years of operating expenses, including staffing, office supplies, and computer technology. After this period, NYEFCU aims to have enough members to sustain itself without further external funding.

“The first branch of the NYEFCU is located next to St. James, Fordham in a new mixed-use development (St. James Terrace) that will house 102 affordable apartments, half of which are allocated for formerly homeless individuals. In its inaugural year, the credit union aims to cater to the specific financial needs of its low- to moderate-income members by offering an array of services.”

Credit Unions’ Future as Credit Unions

No matter the size of America’s collective consumer wealth,  many still have limited access to fair financial options.  These are often the targets of for-profit financial offerings.

It’s no accident that people of faith have played a major role in the establishment of coops as a way to serve their congregations.   They remind all of the values animating credit union pioneers.  And the values that make cooperatives more than “nice banks.”

The fact that this charter application and processing will take from 2020 (when submitted) until the end of this year to raise sufficient capital,  shows the perseverance required overcoming government bureaucracy.

These spiritual founders are responding to the call to serve by creating a financial cooperative.

The major difference is that the Diocese had one hurdle that Monsignor Hevey did not have to deal with, the NCUA.  It just shows it helps to  have God on one’s side.

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Members Win at SECU Annual Election & One Observer’s Reaction

Following the formal board reports and the one hour Member Feedback Forum  (comments limited to two minutes each), the Chair read the results of the contested election.

The three member-nominated  candidates won all open seats by receiving the three highest vote totals of the six candidates.   Overall 13,335 votes were cast, based on the highest total from each group.   Incumbent directors received 47% and the candidates nominated via petition, 53% of all votes cast.

The new directors, left to right, are Michael Clements,  Barbara Perkins,  and Chuck Stone.

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Why the Members Won

Voting is the essence of democracy.   All members had the chance to choose who they wanted to lead this iconic credit union.  That is a choice that rarely occurs in credit unions today.  But now the precedent has been set.

Another fascinating aspect of the meeting was the open Forum.  I counted 32 members who spoke up.  Here are several brief snippets of their remarks, addressed to the full board and CEO.  There were no  responses  given to any of the concerns.

  • A retired 47 year SECU employee:  I’m scared to death with what I see at the credit union. . .Risk based lending (RBL) and card rewards are paid by those who overpay interest.  Open your eyes.
  • Member since ’75.  Got loan as college grad and no credit score. . . against RBL. . . I’ve attained financial security. We should be a community where we help each other.
  • I’m amazed after 85 years that we cannot exist without treating members equally.  RBL is race  based lending.
  • Why is the credit card rate increasing?  If a member wants rewards go to a bank.  If the board wants rewards, they should go to a bank.
  • Transparency is lacking, especially the bylaw changes.  We have been denied democracy.
  • I’ve no prepared comments,  Just hope the board will see that the people here do not support the mindset of this board.
  • Retired 41 year senior employee:  Employees need a service heart for the membership.  Last two years has not been for the benefit of the member.   What I’ve seen breaks my heart.
  • Congratulated new CEO Brady and asked: Please report these comments online.
  • 51 year member.  There’s no term limits for those on stage. Nominating committee selected all board members-an old boys club.  We’re making money, but the members aren’t getting any of it.
  • 39 year SECU employee retired in March ’22.  New leadership wanted to turn us into a bank.
  • 36 year SECU employee.  Rarely saw a credit report without blemishes.  All members equally important.  We made life changing differences for people.

And many more.  There was no dialogue and no responses from the stage even when members posed a question.

One speaker, a new member,  stated that she wished she had known about these comments before she voted as she knew nothing about the candidates or issues except the information in the ballot.

The cumulative effect of these spontaneous, brief observations was overwhelming.  Speakers cared strongly about the credit union and its change of direction.

A long time credit union advocate who watched the meeting sent me this reaction.

This is What Credit Union Democracy Looks Like

This afternoon, my daily routine was disrupted in a good way by the annual meeting of North Carolina’s State Employees Credit Union (SECU), the  $50-billion, 2.7 million member, 85-year old credit union that is the nation’s second largest.

I became a cooperative idealist in the 1970s, first as a food co-op organizer until I was introduced to credit unions when I was charged with organizing one for the farmworker nonprofit I worked for.. . . I was enthralled with credit unions as democratic, egalitarian institutions, created to empower individuals excluded from the for-profit banking system.

I was fortunate enough to be hired by the National Federation of Community Development Credit Unions (rebranded as Inclusiv after I left), becoming CEO in 1983 and serving for nearly 30 years. . .

Over the years , , , I went to my share of annual meetings of our member credit unions, usually not very well attended (except if there were refreshments). It was great to meet members, and it was my job, but truth be told, it was not the liveliest way to spend an evening or weekend afternoon.  

My Life’s Work

The 90-minutes I spent watching SECU’s annual meeting on YouTube reminded me why credit unions became my life work. One after another, SECU members debated recent changes instituted by the board,  most controversially, the introduction of risk-based pricing—the nearly universal practice of U.S. credit unions which  charge members different rates according to the credit score-informed tier they fell into.

Not SECU. For nearly its entire history, it offered the same price for the same loan product for all members.  It was a simple, time-honored, financially successful practice, that fueled SECU’s steady growth. . .

But for some members and the credit union’s recent leadership, that was not good enough. Several speakers argued that the credit union’s savings rates were not competitive; one spoke of his children leaving SECU for better rates at a bank. How would the credit union grow and—well, compete—if it didn’t raise savings rates to retain members? . . .

Speaker after speaker—members of 30 years, 40 years, 50 years—spoke passionately about what SECU had meant to them and others, a place to get the best possible rate even when they were starting out in life, were struggling financially, or had marred credit.

True, risk-based pricing was everywhere in credit unions today—but for those with long memories, it had not always been so. They fully understood that better returns on savings were available elsewhere. But they were staying.

One-tier pricing is radically egalitarian—providing those with fewer financial means the same rates enjoyed by those with immaculate credit scores and ample resources. Except it is hardly radical, and hardly new.

One speaker denounced the strategy as “socialist”: This was North Carolina, he argued, not Russia, China, or Cuba. But I heard no “woke” or progressive rhetoric, only the testimony of people who cared deeply about their fellow North Carolinians and wanted to help them better their lives. “People helping people”—not simply a brand slogan, but an expression of human solidarity.

I spent my career working with small, community-based institutions. As the credit union “movement” became the credit union “industry,” with assets and membership disproportionately concentrated in a minority of institutions, I reluctantly concluded that my ideals and passion were nothing more than a relic.

Today, I thank the members of SECU for the inspiration and hope they gave me.

© Clifford N. Rosenthal

 

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A Hearing Today on Member Rights in a Credit Union

The credit union democratic cooperative model  is simple. The legal equality of each member’s voting role is intended to facilitate economic equality.

The intent of the one-person-one-vote in governance is that when accessing common resources, each member is on the same footing.  If one person is better or worse off than another, that should not affect their ability to access credit.

In almost all other for-profit organizations, control is exercised by who holds the most shares, or through classes with special voting rights.

Member Rights

A credit unions’s bylaws is the primary document implementing member rights.  NCUA’s bylaw description runs 45 pages. “The FCU Bylaws address a broad range of matters concerning a credit union’s organization and governance, the relationship of the credit union to its members, and the procedures and rules a credit union follows.”

But who ensures that the bylaws are followed, both in letter and spirit?   Here is NCUA’s description of their role:

“The NCUA has discretion to take administrative actions when a credit union is not in compliance with its bylaws. If a potential violation is identified, the NCUA will carefully consider all of the facts and circumstances in deciding whether to take enforcement action. The NCUA will not generally take action against minor or technical violations, but emphasizes that it retains discretion to enforce the FCU Bylaws in appropriate cases, such as safety and soundness concerns or threats to fundamental, material credit union member rights.”  (emphasis added)

What happens when the bylaw procedures for nomination and election are administered so as to form without substance?  Or interpreted to enable incumbent directors to protect their positions and prerogatives?

A Live Case Study

Today, October 9,  an actual situation will be discussed.  The North Carolina Credit  Union  Commission will hold a special public meeting at 1:00 p.m. (dial in # (877)-402-9753, access code – 6601929.)

The primary purpose as published in the Notice:

“Discussion about concerns raised by a member of the public regarding recently approved changes to the State Employees’ Credit Union by-laws.”

This is how Jim Blaine sees the issue to be discussed in a recent post.

This will be another way the Annual Meeting and election of directors at SECU could have an impact far beyond this credit union’s circumstances.

The Annual meeting occurs tomorrow October 10th and will be lived stream.

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The Value of a Critic-Even a Dishonest One

Yesterday Politico published an article on credit unions written by a Brookings-based economist.

The title and subhead give his  message:

Credit Unions are Making Money off People Living Paycheck to Paycheck

The subhead:  There’s a new predator making money off overdraft fees: Credit unions.

The article was prompted by a new report required of all California state chartered banks and credit unions beginning with 2022 data.  The first report is 17 pages and lists in data tables the total overdraft and NSF fees collected by each firm the year.  The final column shows these dollar amounts as a percentage of net income and total revenue.

The author’s academic and /Congressional staff credentials suggest an objective study of an important topic: the  sources and importance of non interest income.

However as I read the article Mark Twain’s observation came to mind:  “Figures don’t lie, but liers do figure.”  But this shortcoming should not cause readers to overlook lessons from even a biased report.

In addition to the headline, the author’s target shows early on: And the first report of that data reveals that many California credit unions are taking millions from their most vulnerable customers and spending it on perks and bonuses for executives that resemble those of big banks more than nonprofits.

He uses one ratio from the study, total fees as a percentage of net income and then prepares a brief table listing the ratios for 12 credit unions (out of 114) with highest combined $ fees.

However this single ratio  can fluctuate dramatically depending on net income, independent of the numerator being studied-combined OD/NSF fees.   

To suggest  a credit union like FrontWave is abusing members because its ratio is 140% ignores the  study’s second ratio which is 12% of total income.  This ranking would give a very different listing.

FrontWave’s net income in 2022 declined by 33% from $8.4 to $5.6 million (.44 ROA) thus making the fee/net income ratio appear much higher than a “normal ROA” might present. 

Whereas Dow Great Western’s ratio was a negative -200% and only 1.32% of total income.  Was the credit union giving back more fees than they collected?  No, the credit union reported a negative net income.   Perhaps it should charge more fees?

Predetermined Conclusions

But the author has made up his mind, and now wants to condemn a practice without  examining other relevant details, such as the actual fee charged per transaction.  He downplays the other ratio of fees as a percentage of total revenue, which would show each firm’s  dependence on this one area of income.  These ratios range from 0% to 15%.

He makes no attempt to understand the data by calculating mean or the average fee-to-income ratio.  His conclusions  were formed before he knows what the data might mean:

Let’s be clear: Overdraft fees can be predatory. Every overdraft by definition turns money from someone who has run out of it into nearly pure profit for the bank or credit union that charged it because they get paid back immediately when the next deposit hits. Eighty percent of overdraft fees come from just 9 percent of account holders, highlighting that this product is targeted at people living paycheck to paycheck who run out of money from time to time.

Even given his limited analysis, the situation is dire:

The full picture among California’s 114 state-chartered credit unions is alarming.   And not just in California.  One suspects similar trends across the country. Several of Michigan’s largest credit unions have been sued for abusive overdraft practices and research from the Consumer Financial Protection Bureau shows credit unions averaging similar overdraft fees as banks.

A Political Lens

Near the end the author’s political bias comes out as he talks about democratic congressional members’ rhetoric against junk fees, and then this sentence:  Todd Harper, chair of the National Credit Union Administration (NCUA) has spoken out against abusive overdraft practices, but the NCUA Board has a Trump-appointed, Republican majority that is continuing to deregulate.

All three board members are Trump-appointed.   I’m not aware of any reg, rule or guidance letter that Harper has issued on this topic or that the other two board members opposed.  The singling out of Harper’s alleged views (no links) raises the question whether this is just a comrade in arms fronting for someone.

The Benefit of a Critic’s View

The author is a sceptic of credit union business practices:

California’s data shows that some credit unions are making a lot of money from overdraft fees. California’s largest state-chartered credit union, Golden 1, took $24 million in overdraft from their members, while spending $6 million a year for naming rights for an NBA stadium in Sacramento. North Island Credit Union bought naming rights for a famed music venue in Chula Vista and created an exclusive entrance, ticket discounts and other perks for some of its members while taking over $10 million last year in overdraft and non-sufficient funds charges from its members.

Do these business practices sound like those of nonprofits designed to provide basic banking services to people who share what the law calls a “common bond,” such as a workplace or other connection required for membership? Or are they what would expect from for-profit banks?

A Wakeup Call

The author asserts this not a single state issue:  California’s data is a wake-up call for the nation as a whole.

Even though he critiques mutiple credit union activities through his very limited NSF/OD lens, the article is a wake up call for those who believe credit unions are not banks in sheep’s clothing.

The article has all the indicators of a planned “hit piece” on credit unions.  But to try to kill the messenger or discount all the data is to miss the point.

Even when a public critic may be wrong, the better approach is to engage on the issue with facts and logic that show a grasp of the issue.  More rhetoric just makes the issue burn hotter but with no more light.

The need for fee transparency at the individual and macro levels is valid.  Credit unions, consumers and analysts/regulators can all better understand the role these fees have in a firm’s business model.

Comparisons between credit unions can be valuable, if all the data is known. How do some have very low fees and others relatively higher?

Members can more easily learn as they seek information on fees as they do now about loan and savings rates.

The author believes the only solution to his alarming “problem”  is more regulation.

But what kind of regulation would be relevant and consistent with one’s views on government’s role for coops and in markets? Should government regulate the fees somehow, mandate more disclosures, or control business practices as he hints by limiting fees to a percentage of net income.

More regulation will not stop credit unions tempted to put institutional priorities ahead of member-owner interests.

Regulators should ensure members have the tools to hold their repesentatives  to account-with the information and the ability to openly raise these topics in the traditional annual meeting and director election format.

What is missing is not regulation but the ability of members to play an effective governance role as owners in their credit union.   Enabling members to be more aware and active is critical to any credit union’s long term success.

No regulation, no matter how well intended, can replace members exercising their rights as owners.  That’s how markets are supposed to work.

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Doing the Right Thing

Yesterday a long investigative report on the contested SECU board director election was published in The Assembly.  This digital investigative journal’s role is to publish “deep reporting on power and place in North Carolina.”   Carli Brosseau has written a lengthy description of the circumstances around this election.

The article is well- researched, provides multiple points of view, and important context.   She contacted me as part of her reporting.   I referred to my blogs on SECU for why this event was significant for the entire credit union system.

What It means to be a Credit Union

Carli provides a straight forward description of their unique design for her readers: “Credit unions are set up as not-for-profit cooperatives where every member, no matter their account balance, is an equal part- owner.  That ownership share is the reason members get a say in who’s on the board. It’s also part of what makes them different from banks, which are for-profit and owned by investors. “

Her story provides two themes about how this coop democratic design is at the core of this election.

The first is the multiple ways the incumbent leadership has tried to thwart the members’ role in elections.  The nominating committee refused  three member petitions to be on the ballot.  The “self nomination” process was changed to limit to ten days the time to gather the required 500 signatures once the “official’ candidates were announced.  The annual meeting process has been modified to prevent traditional new and old business from being brought to the floor.  This was how the initial member concerns had been raised.

This recounting of board incumbent’s trying to protect their position and to discourage or ignore member views is not new.  In almost all cases thwarting these attempts  is successful.  The result is no democratic coop governance.  Incumbency perpetuates itself. Boards crystallize into a ruling elite.

This SECU example is important because it shows that even in a very large coop, the members can make their voice heard-albeit with much perseverance.

The Debate Over Loan Pricing

The second element of democratic design at issue is how should the loan and saving products offered members be priced.   Should members using the same service such as an auto loan or a CD be given the same pricing?  Or, should those who are better off receive more favorable terms than those who have lesser funds?

SECU’s adoption of risk-based lending is the other theme in the story that is relevant for credit unions role as an alternative to for-profit banks.

Most financial firms and credit unions use risk-based pricing today.   SECU is an outlier. Its 85-year history shows a single pricing model can succeed. Carli’s story clearly presents these contrasting views of its role in SECU.

CEO Brady’s logic and initial results are reported as follows:

“SECU opted for a more compressed pricing structure than most other lenders use, said Leigh Brady,

“SECU launched risk-based lending for car loans in March, with a 4.5 percent spread between what a borrower in the lowest credit tier pays compared to a borrower in the top tier, Brady said. And the credit union’s core members—state employees and retirees—get a 0.5 percent discount.

“From Brady’s perspective, the policy is working. More members are opting for car loans from SECU, and a greater share of those borrowers have credit scores in the top tier—18 percent in March 2022, and 28 percent a year later, according to data Brady provided.

“SECU is still willing to lend to people with low credit scores, she said. “There are lenders that just absolutely will not lend to anyone below a 660 credit score,” said Brady. “We do. We lend below 540.”

“She thinks the new loan policy is actually fairer than the old one.

“Brady said she came to recognize the “harsh reality” that SECU had been overcharging its members with the best credit.

“Another factor, director Wooten said, was persistent questioning by regulators about the diversity of the loan portfolio. “We had regulators that were always concerned that we had all of our lending in one bucket,” he said. “We had all of these mortgage loans, and they were in this bucket where most of the folk were in, you know, this middle tier or lower.”

The contrasting view is presented by one member-nominated candidate’s letter sent to SECU’s chair following the risk based pricing discussion at the 2022 annual meeting:

“Clements laid out his credentials—he had been a member for 45 years, currently serves on the local advisory board, and was previously on the SECU Foundation board and a loan review committee—and said he was appalled by the board’s adoption of risk-based lending. “This policy clearly signifies that all our members are NOT equal.”

What is a Credit Union’s Purpose?

The debate is joined.  How should a democratic, member-owned  coop behave after the votes are  counted.   Does this democratic foundation end at the ballot box, or is it intended to carry over in the business practices of the credit union?  Should a member with more resources get a better deal than one with less?

Or even more direct, should those with a lesser financial status be charged more on loans so that the well-to-do pay less?

Both models can and do work.  Is coop design intended to perpetuate the financial inequalities that members bring to their relationships or to give everyone  an equal place on the financial starting line?

The distribution of wealth in America is increasing year after year.  Those that have the least or know the least, pay the most. If the coop model does not address these growing disparities in financial outcomes, how can democratic economic opportunity be realized?

The article presents clearly the credit union challenge of democratic governance and opportunity in a capitalist economy where accomplishment and status is often equated with personal wealth.

What’s Next

After interviewing many of the principals, the author concludes with this outlook:

“It’s unclear which vision will win members’ approval in the board election, or how many people will seize the chance to have a say.”

Now it is up to the members to decide.  This is how the democracy is supposed to function. This is the first-year online voting is  an option.

One person, one vote is an important aspect of coop uniqueness.  Letting the members vote is Doing the Right Thing.

On October 10th, the livestream link of SECU’s annual meeting will be available from the SECU website www.ncsecu.org at 1:00 p.m.  Tune in.

 

 

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When Will Interest Rates Fall?

On Friday’s market close, traders were talking about the 10-year Treasury yield reaching 5%. Right now, it’s at 4.49%.  Other short term rates were:

  • The one-month Treasury bill is at 5.55%.
  • The two-month T-bill is 5.60%.
  • The three-month T-bill is 5.55%.
  • The six-month T-bill is 5.53%.
  • The one-year T-bill is at 5.46%.
  • The two-year note is at 5.03%.

This inverted yield curve (10-year rates lower than short term yields) has been the situation for over a year.

When might rates stabilize or reverse is a topic for any CEO trying to manage  multiple ALM risks.   But must rates go back down?   Or are are markets developing a new normal, higher yield curve?

This week I will look at some industry data about how this rise over the past 12 months has affected credit union liquidity.

Many economic observers have been puzzled why the highest short term rates this century have not stalled the economy, caused a recession, or even undercut the positive stock market gains. GDP is still growing.

But one person thinks this not-too-hot, not-too-cold economy must  face a day of reckoning, unless interest rates come down soon.   This is certainly not the Fed’s latest policy intent from their September meeting.

Kelly Evans is a commentator on CNBC’s The Exchange.  For most of this year, she has been critical of the Fed’s increasing interest rate steps. She cites data from analysts which lead her to believe a recession is inevitable, unless the Fed pulls back quickly.

All of her columns last week examined the sources of interest rate pressures.  These include the changing line up of who is buying Treasury debt, the increased burden from rising federal budget deficits, and why the zero interest rate era of quantitative easing is possibly over.

She has been sounding Cassandra-like warnings  that the Fed’s rate rises are going to break something in the economy-a soft landing is not likely.

Here is  an unusual Saturday column listing all of her commentary from last week.  If you have time to skim only one, start with Friday’s because I believe it summarizes the forces she thinks are now  manifested in growing market jitters.

Her Edited Column

“This was an important week in global markets. Long-term government bond yields showed early signs of a “disorderly” climb, not so much because of any improvement in the economic outlook, but concerningly, as investors seem to be testing how high rates need to go in a high-debt, high-deficit landscape where the key buyer of government bonds last decade (central banks) has vanished from the scene.

Central banks altogether bought $23 trillion of assets (primarily government debt and U.S. mortgages) in the past 15 years, according to Bank of America’s Michael Hartnett. That “liquidity supernova” caused “big asset price inflation…and in recent years subsidized massive U.S., U.K., and European government spending,” he wrote yesterday.

Now, that excess is unwinding. . .

So how did we get here? Here’s a recap of the pieces that examined that issue this week.

Monday: The $2 trillion deficit. How did we get here?   A quick summary of growing government spending and flat revenue growth.

Tuesday: Will the deficit require the Fed to restart QE?  The difficulty in reducing government spending.

Wednesday: When will markets force Washington’s hand? Unless fiscal spending is reduced, there is no telling how high rates might go.

Thursday: If bond yields don’t start dropping… her conclusion: If yields don’t start falling sharply on weaker data–as we’re expected to get in the fourth quarter–investors will really start panicking and rates will rise.

Friday: The sovereign debt bubble is bursting. This is her strongest warning.  It starts by critiquing  Modern Monetary Theory which asserted government deficits don’t matter.  Here is an except:

“By the end of the 2010s, “austerity” talk was ancient history. Global bond yields simply weren’t rising, no matter how much debt governments were issuing. In 2019, almost a quarter of global government debt carried negative yields; it seemed markets were practically begging policy makers for more and more of it, with permission to juice their economies. The New York Times started carrying op-eds promoting the idea of “Modern Monetary Theory,” or near-limitless deficit spending; even mainstream economists like Robert Shiller seemed to half-endorse it.

“And if you really want to take a deeper dive, check out CBO’s writeup (from February) of the U.S. fiscal picture for the next ten years. You can see why markets are getting jittery.”

End

Tomorrow I will review the  liquidity trends in credit union balance sheets for the twelve months ending June 2023.