Category: Cooperative Design

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Can Merger Incentives Be Replaced by Better Comp Plans?

Editor’s note: The following guest commentary is a response to the NCUA board’s July 18 proposed rule requiring written succession planning policies for all credit unions.  One rationale was that this action would reduce the number of mergers now occurring due to a lack of available CEO or board candidates at times of leadership transition.

By Ancin Cooley

The succession planning discussion during last week’s NCUA proposed rule is about who will control the future of an organization’s resources: the member-owners versus transferred to an outside third party’s control?

Here’s the key question to keep in mind as you read my views:

Is the members’ loss of their charter and capital comparable to the costs of Board/CEO succession planning by any measure?

Bridging the Gap: “The Middle Way”

The solutions below are born of fatigue from reading about merger abuses and pragmatism. I’d rather a Board give a CEO what they feel he or she has earned in a manner similar to community bank compensation versus that same CEO attempting to convince their Board to merge for a “backend” payout from the surviving institution.

If we don’t openly address “backend” payouts post-merger, we won’t have a serious conversation on this issue. (Source: CU Merger Update Part II: More Management Comp Deals, Some Member Payouts, Usual Reasons and, Sometimes, No Reasons are Cited for Combinations)

Practical Solutions for Succession Planning

Let’s get down to business.

  1. Incentivize CEOs with Bonuses for Succession Planning Tasks: Offer financial incentives to CEOs for the annual completion of board succession tasks. This ensures that succession planning remains a priority and is executed effectively. (A colleague on LinkedIn thought this was a horrible idea, stating that CEOs are already getting paid to do their jobs. I agree with her logic, but I have also been working in financial institutions for 20 years. It won’t happen without a carrot.)
  2. Allow CEOs to Benefit from Capital Growth: Create a system where CEOs can benefit from the internal capital growth within their organizations, fostering a sense of ownership and alignment with the credit union’s success. For example, if a CEO starts with $8 million in capital and grows it to $24 million by retirement, they should access some of those funds in the form of a “liquidity event.” This approach reduces the risk of CEOs seeking payouts through unnecessary mergers.

Implementing these actions addresses the “elephant in the room” of self-interest driven mergers while aligning personal and organizational outcomes. The goal:  fewer mergers and more stable, mission-driven leadership transitions.

Who is going to object to the solutions I’ve provided above?

  1. Credit unions that rely on one solution for their continued growth-more mergers
  2. Firms that provide secondary capital that support mergers
  3. Lawyers that offer merger services
  4. Financial firms, brokers and consultants that provide merger services

This collective group drives the marketing and PR surrounding mergers, shaping the narrative to their advantage. During the comment period, this same group will prompt state leagues to oppose what is truly in the best interest of the members, thus prioritizing their own financial gains.

The institutional efforts to grow via industry consolidation is a feasible external growth strategy. But it belongs in the banking open-market world, not the credit union cooperative model. Credit unions with merger growth plans are playing tackle at a flag football game.  Cooperatives were intended to be perpetual by paying results forward, a different outcome entirely from private wealth accumulation. 

Common Rebuffs Against Succession Planning

  1. Regulatory Burden:

Ah, the classic “regulatory burden” argument—how many times have we heard this one? It’s a tired refrain. But let’s break it down: What is the regulatory burden, and for whom? For the management teams who find it cumbersome? What if this so-called burden is a safeguard for the members?

If we truly embrace free markets, then if one CEO finds succession planning too burdensome, the members, through their directors, can find a CEO who sees it as a manageable task. The framing of regulatory burdens should always consider who is complaining and why.

During the recent open discussion on the matter, NCUA Board Member Kyle Hauptman mentioned a CEO who claimed that implementing succession planning would force his credit union to merge.

Is it the managers’ place to suggest to their members that putting effort into leadership continuity—to protect their charter—is going to result in a merger? Imagine if you owned a commercial building and asked your property manager to implement a succession plan. If your manager rebuffed with, “If you make me put this succession plan in place, we’ll be forced to sell the property,” what would your response be?

  1. Flexibility Concerns:

Some feel that a one-size-fits-all rule for succession planning would not consider each credit union’s unique needs. The NCUA proposal allows for broad discretion in implementation, enabling each credit union to tailor its succession plans according to its specific circumstances and needs.

  1. Cost of Implementation:

While developing and maintaining a succession plan involves some time and cost, these are minimal compared to loss of the charter. NCUA’s new charters are required to raise a minimum of $500,000 t0 $1.0 million to open for business.  Thus, the loss of any charter for the membership, the community and the credit union cooperative system is huge. 

Conclusion

Succession planning is not just a procedural necessity; it is an organizational imperative to ensure the continuity of the mission and values of credit unions. As we navigate the complexities of leadership transitions, let’s prioritize the long-term health and cooperative principles that define our organizations. By doing so, we can safeguard the future of credit unions and continue to serve our communities effectively.

Implementing practical solutions, such as incentivizing succession tasks and allowing CEOs to benefit from capital growth, can harmonize personal and organizational interests, leading to a more stable and mission-focused future.

In short, THERE AREN’T TOO MANY CREDIT UNION TRUE BELIEVERS LEFT. COOPERATIVE IDEALS SEEM TO BE A THING OF THE PAST. IF THE MOVEMENT HAS ANY CHANCE OF SURVIVING, FOLKS GOTTA GET PAID. 

P.S. To all the institutions relying on mergers as their primary driver of growth.

The day after the merger, all the problems that existed before your merger will still be there. Only now they’re scaled and compounded.

Mergers teach you one thing: how to merge. You haven’t learned how to execute a strategy, build your brand, or manage the risks of a larger organization. You haven’t developed a talent pipeline. And candidly, you won’t have time to address any of these issues because you’ll be too busy dealing with the residual effects of the merger, such as core integrations and member withdrawals.

Mergers should accelerate a strategy that’s already working, not as the ignition for your growth. God bless and happy hunting.

If you are interested in further conversation, please reach me at acooley@syncuc.com or check out my YouTube channel here.

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Knowing When It is Time to Leave Office

For the past month, the public has watched President Biden struggle whether to continue his campaign as more and more questioned his leadership capacity.   His predecessor took a more forceful effort to remain in office on January 6, 2021.

It is extraordinarily difficult for appointed or elected public officials to know when to leave their roles.  These public positions are prized for their power, perks and prestige.  Stepping out of the limelight is contrary to the ambition that brings most persons to seek roles of public responsibility in the first place.

Moreover appointed positions frequently confirm a person’s sense of special purpose or even even self-worth.  As former NCUA Board member McWatters commented about his colleagues’ views in May 2015:

“Regulatory wisdom is not metaphysically bestowed upon an NCUA board member once the gavel falls on his or her Senate confirmation. NCUA should not, accordingly, pretend that it’s a modern day Oracle of Delphi where all insight of the credit union community begins once you enter the doors at 1775 Duke Street in Alexandria, Virginia.”

Compounding the difficulty of moving on, is that one’s closest advisors brought to new positions of responsibility that will be lost, are hesitant to tell the “boss” it’s time to go. So their counsel is to remain until external events cause turnover.

The Two Exceptions

Every NCUA board member and chair have stayed beyond their established term until the administration moved to replace them.  There are two exceptions-the first two Chairs of the NCUA Board.

Larry Connell left his six year term on January 1, 1982 following the appointment of Ed Callahan as Chair the previous October.  He became CEO of Washington Mutual Savings Bank in Seattle.  The thrift had 37 branches and was the largest and oldest mutual savings bank in Washington.  For Larry it was a clear move up in terms of personal and professional opportunity.

At the February 1985 CUNA GAC meeting in Washington DC, Chairman Callahan announced that he and his two colleagues, Chip Filson and Bucky Sebastian, would be leaving NCUA to form a credit union consulting company.  Ed’s resignation was effective May 1, 1985 or over two years before the August 1987 end of his six-year term.

Ed’s explanation for why he believed it was time to move on is insightful. He said that he had done what he came to NCUA to accomplish.  In a May 1985 NCUA News interview he listed these as “the deregulation of Federal credit unions, the decentralization of the agency, the capitalization of the NCUSIF. The result was that “most people at NCUA have a good sense of where the Agency is going and how they fit into the picture.”

The Example for Today’s Leaders

In Callahan’s view, his role as Chair was done. “It’s all working. The team is in place. There is a sense of confidence in the Agency, and it has infected the credit union movement as well.”

Time to move on.  Government employment was not his career goal or personal ambition.

Ed and Larry’s examples of leaving with time left on their terms illustrates the character of these two initial chairmen.  Their professional lives and contributions were not defined by their time at NCUA.  Both continued to make meaningful impact in multiple future leadership roles.

I believe the logic Ed used to describe his decision is important for  leaders today.  He became chair with a purpose and a plan.  When the results were accomplished, his role as chair was complete.  His tenure was not arbitrarily defined by the term of an appointment.  Or the next election outcome.

Without a clearly defined purpose, leaders within government and credit unions will resort to cliches about safety and soundness or people helping people. Leaders whose purpose is simply responding to unfolding events will not know when their role should end. For change is always happening.

The instinct to perpetuate one’s time in a role and then referring to one’s experience as the basis for continuation, will lead to stagnation.  This is the common justification for renominating current board members to fill annual vacancies in credit union elections.

Knowing when it’s time to leave is as important a skill as the effort used to earn the position in the first place.

President Biden has been universally congratulated for his decision to give up his effort to remain in power.  Likewise Ed’s service has NCUA Chair of just under four years, is recalled as a special time of “partnership” between the agency and the credit union system.   Isn’t this outcome what democratic governance is intended to accomplish?

 

 

 

 

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“Rush to Judgment”

An excerpt from Chapter 14 of Community Capital,  Race, Equity and the Credit Union Movement.  Co-author Michel McCray continues telling how NCUA closed  Kappa Alpha Psi FCU in 2010. (fourth in a total of five selections)

“The NCUA board members refused to dissolve KAPFCU at first,” I said. “They recognized that cash basis vs. accrual accounting increased expenses and created our net worth ratio problems.”

“That’s good.”

I explained, “Region IV officials convinced the NCUA board to liquidate KAPFCU based on a series of lies and false representations in an ex-parte proceeding.”

“Which is total bullshit.” Victor said, “We need to demand a personal meeting with Debbie Matz or get a hearing before the entire NCUA board.”

“They ain’t gonna listen to us, Vic,” I said. “They’re trying to screw us.”

“Well, if they won’t listen to us, then we need to get [Representative] Eddie Bernice Johnson,” Victor said, “and the whole freaking Congressional Black Caucus to reach out to NCUA on our behalf.”
“If that doesn’t work, Vic, we need to take them to court ASAP.”

Victor nods. “Who do we know in Washington, D.C.?”

Representative Eddie Bernice Johnson (D-TX) wrote a letter to Debbie Matz requesting a meeting or emergency hearing for KAPFCU. NCUA officials ignored the emphatic request from a distinguishedCongressional Black Caucus member.

They also ignored KAPFCU’s frantic meeting request in a last-ditch effort to stop the surprise liquidation.

I issued a press release announcing KAPFCU’s decision to sue NCUA. If successful, KAPFCU v. NCUA could be the Brown v. Topeka Board of Education case of the credit union movement.(pages 201-202)

Tomorrow: the Court Hearing

 

 

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Confrontation: An NCUA Examiner and Credit Union Leader

In Community Capital,  Race, Equity and the Credit Union Movement co-author Michel McCray tells the story in Part 2 of the closing of Kappa Alpha Psi FCU in 2010.

He creates first person accounts and reconstructed dialogue of some of the events from the participants.  The following excerpt is from a quarterly  meeting between the NCUA examiner and Victor Russell who was leading the credit union.

Confrontation  (From Chapter 12, Alice in Wonderland)

An angry sun glared off the tinted glass of a small law office in Richardson, Texas. I waited for my cousin, the proprietor, to return. Tall in stature but slight in height, Julius Thompson is a brilliant attorney who is the general counsel for KAPFCU. He provides legal expertise and guidance to the fraternity enterprise. He also offers his offices, file cabinets, and conference room to support the KAPFCU effort.

Friends and family call him the “Godfather;” Julius Thompson, the bald barrister with a caramel coffee complexion. Julius has a knack for networking and connecting people. He also recruited me to assist KAPFCU with government relations and community development expertise to help grow the fledgling credit union. . .

At 6:02 p.m., an alabaster male with stern, square cheekbones and thin lips walked into the conference room at Julius Thompson PLLC to conduct the quarterly examination of KAPFCU, the only federally chartered Black-owned financial institution in the state. He wore a dark conservative suit, a busy patterned tie, and polished leather shoes. He was clean-shaven with amber hair and piercing cobalt eyes.

NCUA Supervisory Analyst Tony Rausch personified the Texan view towards minority-owned financial institutions. Privileged, aggressive, and assertive, his demeanor was best described as “typical Texan,” exuding his white male privilege. Empowered as a federal official, he was assertive regardless of whether he was right or wrong. Ultimately, being a “Fed” means that you never have to say you’re sorry.

A loud commotion erupted inside the conference room of the small legal office and real estate title plant. Tony Rausch, a “good ‘ol boy” from Texas, versus Victor Russell, a fast-talking hustler from Chicago. They congealed like oil and water. However, Victor had transformed from Chicagoan to Texan, donning ten-gallon hats and ornate belt-buckles with Italian suits—even Black people do rodeo in Texas.

During the regular quarterly examination, Victor Russell described the current operations of KAPFCU and his plans to increase revenues by origination fees for residential or commercial mortgage transactions. Tony’s eyebrows rose. “Slow down, Victor, before you try to jump into high finance. You guys are just sitting on your deposits. If you want more money, make more loans to your members.”

Victor sat upright, interlocking his fingers. “We are trying to mitigate our risk. In banking, we say, ‘know your customer.’ We know our members and make loans to individuals we know will pay us back.”
“Very good, because that’s the only way you can legitimately make money to generate revenues,” said Tony.

Victor argued that KAPFCU was not issuing or holding mortgages on the credit union’s balance sheet. Instead, KAPFCU would only make referral fee income by finding qualified borrowers for other financial institutions. Rausch balked at this and declared that KAPFCU could not generate mortgage fee income because of real estate risk. “I will not let you do that, Victor.”

“What do you mean, you won’t let us do this? You don’t run our credit union—we do!” Victor bellowed.
“That’s not how small credit unions operate.” Tony replied, “You must grow your loan portfolio. Make your money from member loans.”  (pages 180-181)

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The Ultimate Coop Advantage

Every organization will face moments or periods of crisis.  These events can cause leaders to question the sustainability of their enterprise.

Sometimes the challenges are internal:  succession, mismanagement, poor leadership, or loss of confidence and purpose.   External threats seem  never ending from unrelenting competition, extraordinary climate events, and even the constant probing by criminal or ransomware bad actors.

What is the ultimate defense against these dual sourced  tests?   Some would say it is the level of capital (net worth ratio);  others, capable tested leadership; and finally some credit unions will reference the fact they are NCUA insured.

The irony of this last assurance is that NCUA has clearly demonstrated that it is not in the business of protecting credit union charters or even granting new ones.   Their approach is purely administrative: to note the steady passing and decline of  industry charters in quarterly updates.

The Strength in All Seasons

I read this mission-like purpose statement recently:

Our purpose is to manifest unity as:

We experience, practice and pursue community;

We share resources willingly to benefit one another;

We know and respond to other’s burdens;

We encourage, admonish and support each another;

So that together we achieve greater economic justice and individual well-being for this and generations to come.

Too idealistic?   Almost religious in tone?   Yet it captures the most important foundation of cooperative strength:  the support and belief of the member-owners working together, that is “community.”

When member confidence in a credit union is not the primary goal of every transaction or service, sooner or later, the owners will see that the organization as just another financial option.  It will have lost the unique cooperative foundation-the loyalty and belief of its members.

This confidence should be the principal responsibility of the board, to be visible and available in all seasons—the good and the challenges.

Because credit unions are in the financial business, it is tempting to assure success in purely financial numbers or goals.  However that has never been the credit union advantage.  Rather it is the relationships with members.  That is an outcome earned over months and years, not achieved with a branding or inventive marketing effort or even offering the latest technology.

Credit unions are organized on one of the most important aspects of life—what we seek is  relationships that reflect our values and priorities.

What matters to you in your activities and professional endeavors?  The $ signs or the relationships?

 

 

 

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A Book Illuminating Recent Credit Union Struggles

July 30, National Whistleblowers Appreciation Day, is the publishing date for Community Capital,  Race, Equity and the Credit Union Movement.  

Here is a brief excerpt by Clifford Rosenthal, one of the authors.  The book’s principal case study is in Part Two. It is the story of Kappa Alpha Psi FCU and its abrupt liquidation in 2010 as recounted by one of the participants, and co-author, Michael McCray

From The Historical Context, page 20, by Clifford Rosenthal (used with permission):

     On August 3, 2010, without notice, NCUA seized and liquidated KAPFCU, sending out checks to close member depositors accounts. KAPFCU was effectively dead and gone.

      Why was KAPFCU’s case so important? For decades before and since, a steady stream of liquidations and mergers decimated the ranks of Black and other credit unions serving communities of color. Our Federation lost many small credit unions, painfully including many Black credit unions with roots in the Civil Rights movement and even earlier.

    But KAPFCU did what no credit union in our movement had dared to do during my 30 years at the Federation: they fought the liquidation in federal court.

    KAPFCU’s fate could have been—should have been—different. Had KAPFCU prevailed in court, Michael argued, KAPFCU v. NCUA could have been the landmark Brown vs. Topeka Board of Education case for the credit union movement.

 On Vacation

Next week I will be away at a singing camp working on Ralph Vaughn Williams’ A Sea Symphony and Five Mystical Songs.  Upon returning, I will post a number of key moments from the book to illustrate both the content and the style.   It is a glimpse into NCUA actions long before the letters DEI were aligned together.

In the meantime it can be ordered on Amazon for those who can’t wait.

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An Incumbant’s View of Democracy

 

“Tonight I taught my kids about democracy. 

First, they all voted on pizza toppings and which movie they wanted to watch. 

Then I chose the pizza and the film because I have all the money.”

This  “officeholder” view reminds me of the chairman of some credit union Board’s nominating committee. “I choose the names because I have all the . . .”

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Foundation Documents:  When Words Matter

“Polonius: What do you read, my lord?

Hamlet: Words, words, words.”

While seeming to trivialize text, Shakespeare’s most glorious legacy is his words.  Hamlet’s response  illustrates his indecisiveness at that point.

Some words matter more than others. The National Archives has just added two Foundation Documents to the three preserved under glass in its Rotunda: the Declaration of Independence, the Constitution and the Bill of Rights.  This legacy of words formed a new country and continues to motivate debate and political action today.

The two additional documents which can be seen in their original form for only the next three days are the two emancipation proclamations.   The first is Lincoln’s Emancipation Proclamation on January 1, 1863, as the nation approached its third year of the bloody civil war. The proclamation declared “that all persons held as slaves” within the rebellious states “are, and henceforward shall be free.”

The second is General Order Number 3 issued in Galveston, Texas, nearly 160 years ago. June 19th is the day the people of that city learned of the existence of the Emancipation Proclamation and its promise of freedom for enslaved people in the United States.

But it took more than a General’s Order as related in this article:  The last two sentences of General Order Number 3 stated, “the freedmen are advised to remain quietly at their present homes and work for wages. They are informed that they will not be allowed to collect at military posts and that they will not be supported in idleness either there or elsewhere.”

This foreshadowed the struggle for fair treatment and eventually led to the ratification of the 13th Amendment in 1865, which ended slavery in all states; the 14th Amendment in 1868, which provided citizenship, due process, and equal protection to all persons born or naturalized in the United States; and the 15th Amendment in 1870, which provided the opportunity to Black men to vote and hold office.

What Makes a Foundation Document?

The addition of the Emancipation declarations to the three original Revolutionary era ones, show that America’s founding ideal of freedom is not won and done.  It is an ongoing process subject to challenge.  Always a work in process.

The Archives Central Rotunda room is dark and cavernous.  The documents are barely visible in light equal to four candles, the original illumination.  Its temple-like appearance is appropriate for these articles of political faith.

Below the Rotunda is the  Rubenstein gallery with its more active historical description of multiple citizen campaigns to attain the rights promised in the Rotunda’s collection.  One educational purpose in showing these historical, and ongoing struggles, is that freedom is fragile.  It requires effort and constant vigilance.

Entering this exhibit are the words: “The great glory of American democracy is the right to protest for the right.”  The major controversies and generation long battles for equal rights are profiled in multiple contexts from slavery, women’s suffrage, union organizing and Pride protests.

Do Credit Unions Have Founding Documents?

How does the cooperative movement fit into America’s ever-evolving quest for greater individual and social freedoms?

Certainly, fairness and economic equity have been an important part of the political debates from the very founding of the initial colonies.  Building cooperative financial options to counter the overwhelming concentrations of capitalist power and control was an essential part of the  progressive reform initiatives in the 19th and early 20th centuries.

But do credit unions have “foundational documents,” that is words that motivate and energize when someone  believes and acts on them? Would words like Member-owned;  People Helping People; or some longer statement from Filene, Estes Park or even later in credit evolution be essential for understanding today’s movement?

Many credit unions have an About section on their web site providing the story of their beginnings. Some will even show continuity with the institution as it exists today.

The difference between a story of words, and a founding document, is that the latter still animates today’s leaders.  These are people who believe that the credit union ideal, like freedom itself, is a never ending struggle between the status quo led by those in charge versus the needs of those left out or behind.

Benjamin Franklin is quoted in the Archives’ Rights exhibition:  “There is truth in the old saying that if you make yourself a sheep, wolves will eat you.”

If a credit union has difficulty identifying its founding documents,  it is not because these do not exist. It is because they have been forgotten or overridden or, more likely, just eaten by wolves.

To honor and celebrate those on whose shoulders we stand, professionally or personally, take a moment to find that family, organizational or external expression that captures your purpose.

If you can’t readily identify one, you might link to this site and read through an example of engagement powered by words.   Credit union member rights, like all rights, are just words until someone believes in them and acts to attain their full meaning.

 

 

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What Credit Unions Can Learn From BND

Recently the Bank of North Dakota (BND) released its 2023 Annual Report of almost 80 pages.

The Report including the bank’s history (see excerpt below) is a creative example of an alternative financial institution thriving in the privately managed financial services marketplace in America.  Its ongoing success is the model for similar startups in other cities and states.

Founded in 1919, the bank is exempt from all state and federal taxes.  It is funded by receipts collected by the state government and its agencies.  There is no FDIC insurance but is backed by the state of North Dakota.

BND’s primarily lending activity is participation loans originated by the other financial institutions throughout the state.  It is a wholesale lender.   In 2011 when NCUA implemented new regulation requiring more member capital and reduced corporate operating and investment authority, the credit unions decided to close their corporate.  One of the factors was the option to receive much of the corporate’s  financing services from BND.

A Very Successful Year

The Dakota Credit Union Association has presented a summary of BND’s 2023 results. The highlights include total assets of $10.1 billion, record earnings of $192.7 million for a return on equity of 18.2%.

From the Association’s summary: The Bank originated and renewed 10,734 loans for more than $2.5 billion, bringing the amount of the total lending portfolio to $5.8 billion, a new record. The total portfolio increased by $394 million from last year. BND delivers both agriculture and commercial loans through 72 different financial institutions and their 218 branch offices. . .

In addition to these portfolios, BND administers more than $1 billion in legislative-directed loan programs, including school construction, state infrastructure, water projects and disaster recovery.
 
“Bank of North Dakota works closely with local lenders to ensure its programs are relevant and impactful,” said members of the Commission in a joint statement. The Commission, consisting of Gov. Doug Burgum as chairman, Attorney General Drew Wrigley, and Agriculture Commissioner Doug Goehring, oversees BND. “This attention to local needs is one of the reasons for the Bank’s success.”

A Bipartisan Embrace

Beyond the current success and its historical longevity, support for the Bank comes from leaders of both parties.  Gov. Doug Burgum is reportedly on Donald Trump’s short list of vice-presidential prospects.  Nowhere do we see opposition to this state-owned and managed financial institution that republicans or bankers in other states might call out as a “socialist enterprise.”  Its track record serving the agricultural, industrial and public financing needs across North Dakota has made it a vital component of state government.

The success of BND has spawned similar startups in other jurisdictions. The Public Bank of East Bay (PBEB) has hired a former Credit Union CFO, Scott Waite, to lead its fund raising and organizational efforts.  There is an attempt to pass state legislation for a city owned bank in Rochester, New York described in this June 3, 2024 article Why a Credit Union Wants the Local Government to Create Its Own Bank.

Both of these organizers cite BND as the model for their more focused local ambitions.

A Lesson for Coops?

BND’s longevity demonstrates the variety and innovative capacity of an open economy.   When NCUA closed down many financial options for corporates, other institutions were available.  Long time relationships and collaborative capacity were lost as the FHLB’s and other secondary market providers stepped up to serve natural person credit unions.

One might view these events as just the normal process of creative destruction that is a hallmark of competitive economies.  Or. it might illustrate that options are available or adaptable when existing institutions fail to fulfill their core purpose.

More History of BND

Page 11 of this year’s Annual Report provides a summary of the Banks founding.  Here is an excerpt:

If you lived in North Dakota in 1919, it is likely that you made your living as a farmer or rancher, or in a profession that supported farmers and ranchers. There wasn’t a great deal of economic diversity at the time.

When you put your grain on the railway to be delivered to an elevator in Minneapolis/St. Paul, you were given the most broken-down of the railcars, causing tons of grain to be lost along the way. You were paid for the grain that arrived in the Twin Cities, not the amount of grain you loaded in North Dakota.

You weren’t present when they tested your grain so you needed to rely on the elevator’s assessment, often thought to be more favorable to the elevator than the farmer. When a loan was needed, it most likely came from a bank in Minneapolis or Chicago, with interest rates in the double digits. It was unaffordable for most agriculture producers, and they barely squeaked by.

This set the stage for the Nonpartisan League to come into power, and as part of its platform, the 1919 North Dakota Legislature created the State Mill and Elevator, Workforce Safety Insurance, and Bank of North Dakota along with the Industrial Commission to oversee them.

North Dakota tax dollars would be used to support North Dakota residents. While it wasn’t the first or only state-owned bank to be created, it is the only one that has survived the test of time.

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Do Credit Unions Have an Ethical Responsibility in Managing Members’ Money?

Over a decade ago, I asked a potential senior employee how he had first become aware of credit unions.  His response was when he was turned down for a loan after getting his first job out of high school.

He had gone to the credit union to finance his first purchase of an auto.   The credit union told him he could not afford his dream car, denied the loan and then showed him how much he could pay.   He found a different car.

This was not an uncommon example when I first began working with credit unions. Today’s credit union system is more complicated.  Every organization faces multiple decisions about what member activities and even industries they should be supporting with loans and business partnerships.

The following is a brief summary of some of these “opportunities.”

Crypto sales and Partner Brokers

Prior to the covid shutdown, the facilitation of crypto purchases was the latest and growing expansion of financial services.  Partnerships with crypto exchanges were announced with credit unions lending their reputation and operations for members purchase of this new form of financial instrument.

A recent article has summarized the numerous critiques of the crypto industry and the intense lobbying efforts to make these options part of the financial mainstream:  Crypto Just Got Exponentially More Dangerous.  Or in Charlie Munger’s (Warren Buffet’s longtime partner) immortal assessment:

“…A cryptocurrency is not a currency, not a commodity, and not a security. Instead, it’s a gambling contract with a nearly 100% edge for the house, entered into in a country where gambling contracts are traditionally regulated only by states that compete in laxity.”

Cannabis Sales

Another groundswell of credit union interest is in financing and supporting the growing legalization and distribution of medicinal and/or the recreational marijuana sector.  Political leaders such as Janet Yellen and Chuck Schumer have spoken publicly of the need to pass federal legislation taking marijuana use off the list of prohibited drugs.

One report from Marijuana Moment shows a total of 812 banks and credit unions reported actively working with marijuana companies in the second quarter of the 2023 fiscal year

Almost 30 states have approved some form of marijuana use.  Sometimes this is seen as an effort of social equity where a certain number or percentage of licenses are reserved for minorities to offset their disproportionate legal convictions prior to legalization.  NCUA board members, credit union trade associations and numerous credit unions have supported some form of a SAFE act by Congress to allow controlled distribution of cannabis.

Gambling and Sports Betting

With betting on sporting contests now legal in almost all states, credit unions have become involved in these transactions.   A report after the Super Bowl betting surge in CUToday discussed the increasing member use of online gambling sites,  As reported in the Article  Why Credit Unons Should Place a Bet on Paying Attention to Gambling from a PSCU analysis: 

Gambling, fueled by further expansion of government-licensed Internet gambling to a total of 38 states, posted strong results in February, the analysis added, noting debit purchases were up 39%, while credit purchases were up 11%.

The top three merchants (FanDuel, DraftKings and BetMGM) represented over 70% share of purchases in this single category that peaked in February, with Super Bowl LVIII occurring in Las Vegas, PSCU/Co-op Solutions said.

The full PSCU report is available here. 

There are multiple other sectors or activities that credit unions have been or could be involved with that might raise ethical questions.   These include financing of gun purchases, liquor licenses, interval level vacation home ownership and perhaps more recently certain kinds of medical care including abortions.

Some would maintain that these are not credit union issues, but rather decisions for how members choose to spend their money.  Yet for every loan there is a “purpose” section stating how the funds would be used.

In defense of their crypto relationships, several credit union CEO’s have justified their partnerships by saying members want this service and if we don’t provide it, they will just go elsewhere.   It is strictly members’ choice.

Others, as PSCU describes in its review of gambling activity, would maintain these are situations for financial counseling:

“While online gambling was once viewed negatively, it now represents a growth segment opportunity, particularly among younger demographics. This growth presents an opportunity to keep internal staff informed about this evolving transaction trend, as well as provide members with financial wellness education.”

Other credit union leaders would decide that these areas of transactions and for financial loans are inconsistent with both the purpose and values of the cooperative.

Many want to avoid the controversy altogether.   Each credit union, and each member, should be free to do whatever they decide to act upon with their charter or with their personal savings.

This quasi-libertarian view is appealing to many until one recognizes that each of these areas is controversial because there are enormous and proven downsides to both members and society in each of these activities.

Crypto investors do lose money.  In  online gamblng, once the winners are paid out, online sportsbooks keep between 5% and 25% of all the money users wager. In other words, online betters typically lose 5 cents to 25 cents for every dollar they spend on a sports bet.  Marijuana usage can become addictive.  Its long tern usage consequences are still not known.  America’s gun culture is unique in the world and the consequences in mass shootings and suicides are just one aspect of this worship of the second amendment.

No one can deny that members will always borrow for activities and purchases that others might disapprove of or seem over the top, just examples of life’s numerous “fascinators.”

The Need for Discussion: Never Value Neutral

One of the fiduciary responsibilities of leadership  is knowing what issues to bring to the fore and how these are to be presented in the context of an organization’s purpose.

For some the topics above are not an issue.  Credit unions are value neutral.  There are no issues of right or wrong, but rather just the pragmatic questions of whether activities are legal and can we make money?

This debate about the ethics of organizational activity is never ending.  Here is an excerpt from a discussion similar to the above, about whether teaching economics at a university is “valueless.”

One of the first things that the over 500 students who take Economics 10: “Principles of Economics” are taught each fall is the distinction between normative and positive statements; the distinction between stating how things are and stating how things ought to be

Giving undergraduates the impression that economics is a value-neutral discipline, and that studying it will entail no further moral judgment or inquiry on their part, is not only dangerous but also intellectually dishonest.

The notion that calculus is more important to studying the economy than ethics, history, or psychology still ignores just how socially constructed our current economic system is.

Perhaps it is true that the price people are willing to pay for a good is the best estimate of their marginal utility.

Perhaps it is true that it is rational for a consumer to always prefer more to less.

Perhaps it is true that GDP growth is always desirable.

But those are assumptions about the world. And students should be invited to question them.

An economics degree ought to, in our normative opinion, entail a genuine reckoning with the moral stakes of the field. A discipline that studies human behavior and the distribution of resources was never value-neutral to begin with.

I agree that credit unions are a “normative” activity and in the management of member resources require a reckoning with the moral stakes of their actions.  So let the debates begin.