Credit unions are strong proponents of democratic values. Until they have to practice them.
I was reminded of this reluctance in a press story of a recent merger approval. When asked about the vote tally, the credit union did not answer how many of its 9,870 members supported their charter cancellation:
Members of the $137 million Embark Federal Credit Union in Great Falls, Mont., voted to approve a merger with the $1.7 billion Horizon Credit Union, the Spokane Valley, Wash.-based financial cooperative said in a prepared statement Tuesday.
Horizon did not disclose the final vote tally. The credit union did not respond by deadline on Tuesday afternoon to CU Times‘ request for the member vote count.
Reporting the vote outcome, but not the actual numbers, suggests the credit union does not want the totals known. The credit union provides the veneer of democracy but not the facts of how many member-owners actually participated in this required step to give up their charter.
To paraphrase a term from writer Jared Brock, credit unions have become “cooperative oligarchies.” The word comes from the Greek oligarkhía, meaning “rule by the few.”
Merriam-Webster ‘s definition: “a government in which a small group exercises control especially for corrupt and selfish purposes.”
Democracy has rarely been tried by capitalists. Can credit unions really go against the incessant drive for corporate dominance and consolidation of power sought by firms in “free” market economies?
Many CEO’s and credit union boards don’t want democratic governance. They want silent customers who will passively accept the leaders who achieved their roles years, or sometimes decades, earlier.
What they ignore is that members are the political constituency to whom fidelity is owed. Boards and CEO’s are nothing without members. Members deposit the funds, borrow for loans, pay the fees and generate transactions that keep the credit union revenue flowing.
Member-owners are the reason credit unions exist.
Members keep the lights on.
Members create 100% of the wealth for their cooperative.
One would think it required practice to tell members the vote tally in this management initiated effort to give up their independent credit union charter. Especially as the CEO was awarded a $100,000 bonus and continued employment at an increased salary with the continuing credit union.
Horizon Credit Union assumes Embarks FCU’s member capital of $14 million, (approximately $1,500 per member). The members get rhetorical promises about the future.
Is this the democratic model that will sustain members’ belief in credit unions?
60 years ago seven employees of the Philip Morris Company formed a credit union to serve their employees. It cost 25 cents to join.
What is noteworthy is that the founder’s commitment, the human motivation required by any coop startup, still drives Call Federal today.
The mission statement is “passionately local banking.” The focus is building lasting relationships and giving back to the community. That commitment is stated as follows:
Call Federal has called the banks of the James River home for more than 60 years. Our employees live here, all decisions are made here. The money we make here stays here. We’re invested in this community, because it’s our community too.
The Members’ Voice
I learned about this “passion” for member service in a video celebrating their 60-year charter milestone. The three minutes is almost entirely member interviews. The culture of member service is described through real experiences. These are situations where the credit union has made a difference in members’ lives spanning generations.
The CEO John West recalls his predecessor, Roger Ball–CEO for 36 years–saying that service is not just the words used, but how you make members feel.
West’s current senior management team brings varied career backgrounds to the organization, not limited to financial services. “We want employees to span different schools of thought to continuously enhance our member relationships.”
West’s background illustrates this prior life and work experience. In November of 2021 he was appointed to the Board of Families Forward Virginia. The press release tells how this appointment aligns with the credit union’s mission:
Families Forward Virginia is the commonwealth’s leading nonprofit organization dedicated to disrupting cycles of child abuse, neglect, and poverty. . . Working with parents and their children, the statewide nonprofit provides Home Visiting Programs, Family Support, and Education, Professional Development, Child Sexual Abuse Prevention Programs, Advocacy, Public Awareness/Public Education.
Prior to joining Call Federal in 2012, West was a senior accountant with Mary Washington Healthcare. Before that he worked for the United Way of Fredericksburg. West is a graduate of Leadership Metro Richmond and served for one year with Lead Virginia.
West commented on his appointment: “Growing up in cooperative housing for steel mill workers, I know the value and importance of a strong community. Part of our mission at Call Federal is recognizing the stress that financial burdens can create.”
A Creative Financial Wellness Program
One example of how the credit union addresses this “stress” in members lives is its creative Financial Wellness Program. The program rests on three unusual principles to help members “be more confident in their financial decisions.” The three are:
Create Self-awareness. Discover your “money personality”: the habits and attitudes that influence your financial health, for better or worse.
Understand the fundamentals of money management.
Go Beyond by taking care of your physical and mental health and by giving back to your community and the world around you.
One example of this holistic approach to member financial well-being is a free resume review. Other services include coaching, financial workshops, even for kids, and articles to help members with both financial events and career planning.
Sustaining the Movement
Speaking with West about how the credit union sustained the founder’s original passion for serving members, he replied that the effort was not merely a credit union story. Rather it is the “human story,” that is, serving each other while living in community.
The credit union’s 2021 “State of the Union” video below describes the credit union’s response during COVID. It includes two members recounting their personal circumstances, an employee’s special efforts to help staff and a community agency discussing the credit union’s steadfastness. Each person speaks with passion about their credit union connection.
That passion is the difference that never grows old, no matter a credit union’s charter date.
(https://youtu.be/K4REjbxV68A)
60 years ago seven employees of the Philip Morris company formed a credit union to serve their employees. It cost 25 cents to join.
What is noteworthy is that the drive and commitment, the human capital required by any coop startup, still motivates Call Federal today.
The mission statement is “passionately local banking.” The focus is building lasting relationships and giving back to the community. That commitment reads as follows:
Call Federal has called the banks of the James River home for more than 60 years. Our employees live here, all decisions are made here. The money we make here stays here. We’re invested in this community, because it’s our community too.
The Members’ Voice
I learned about this “passion” for member service in a video celebrating this 60-year charter milestone. The three minutes is almost entirely member interviews. The culture of member service is described through real experiences. These are examples where the credit union has made a difference in relationships that span multiple generations.
The CEO John West recalls his predecessor, Roger Ball who was CEO for 36 years, saying that service is not the words used, but how you make members feel.
West’s current senior management team brings varied career backgrounds to the organization, not just financial services. “We want employees to span different schools of thought to continuously create value in our relationships.”
West’s background illustrates this prior life and work experience. In November of 2021 he was appointed to the Board of Families Forward Virginia. The press release tells how this appointment coincides with the credit union’s mission:
Families Forward Virginia is the commonwealth’s leading nonprofit organization dedicated to disrupting cycles of child abuse, neglect, and poverty. . . Working with parents and their children, the statewide nonprofit provides Home Visiting Programs, Family Support, and Education, Professional Development, Child Sexual Abuse Prevention Programs, Advocacy, Public Awareness/Public Education.
Prior to joining Call Federal in 2012, West was a senior accountant with Mary Washington Healthcare. Before that he worked for the United Way of Fredericksburg. West is a graduate of Leadership Metro Richmond and served for one year with Lead Virginia.
West commented on his appointment: “Growing up in cooperative housing for steel mill workers, I know the value and importance of a strong community. Part of our mission at Call Federal is recognizing the stress that financial burdens can create.”
A Creative Financial Wellness Program
One example of how the credit union addresses this “stress” in members lives is its creative Financial Wellness Program. The program rests on three unusual principles in their efforts to help members “be more confident in their financial decisions.” The three are:
Create Self-awareness. Discover your “money personality”: the habits and attitudes that influence your financial health, for better or worse.
Understand the fundamentals of money management.
Go Beyond by taking care of your physical and mental health and by giving back to your community and the world around you.
An example of this holistic approach to member financial well-being is a free resume review. Coaching, financial workshops, even for kids, and articles help members with both financial events and career planning.
Sustaining the Movement
Speaking with John about how the credit union sustained the founder’s original passion for serving members, he replied that the effort was not merely a credit union story. Rather it is the “human story” of providing service to each other living in community.
The credit union’s 2021 “state of the union” video shows how the credit union responded during COVID in this five minute video. It includes two members recounting their personal circumstances, an employee’s special help for staff and a community agency discussing the credit union’s steadfastness. Each speaker communicates passion about their credit union connection.
That is the difference that never grows old no matter a credit union’s charter date.
Reverse Robin Hood: Bank Purchases by credit unions
A response to my comments in a recent conference call: Your points that really resonated were lack of transparency and accountability inherent in the cooperative governance structure. Also the fact that the bank acquisitions are taking money from CU members to line the pockets of bank shareholders, truly a reverse Robin Hood situation.
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“If My Words Can Convince One Credit Union”
I think CEOs just get tired. I think boards can get tired, too. And they think if our current CEO can’t make this place grow, who can? They see the simple solution is to merge out.
I am telling small credit unions that is a mistake; at least look for someone. I have had conversations with a number of CEOs who are retiring from small credit unions and they’re not even considering looking for somebody. They aren’t doing anything. They are not telling their boards to look for somebody. In fact, they’re telling the board the opposite—nobody can do this job at my pay.”
That type of thinking, and an unwillingness to “fight,” is hurting the movement.
“If my words can convince one credit union…if one credit union decides not to give up and says at least I will look for a replacement for the retiring CEO, I will feel good. I hope more small credit unions will follow what we are doing here.” (source: David Sawin, CEO, MN Catholic Credit Union, interview in CU Today)
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What’s Missing?
“I am starting to think that credit unions are a waste of my time.
. . . as best I am able to ascertain, CUs are essentially just nonprofit banks – institutions that exist first and foremost to keep their employees employed and to keep the regulators happy. The trappings of cooperation – invocations of principles, mechanisms for elections of board members, etc. – are either ignored or treated as empty formalities.
The new CEO of the CU on whose supervisory committee I serve told me that members simply don’t give a damn about that stuff; they just want convenience.
From my perspective, if CUs are just going to do exactly what the local banks are do, then I might as well just move my accounts over to banks. What am I missing? (name withheld by request)
An uncomfortable change in the conversation (with regulators) will require incredible bravery. I’ve been kicking around CU’s all my life. My parents were members of a Teachers and a Manufacturing credit union. I have been on Boards and now a CEO.
I have studied the history of the movement and the credo’s doled out as battle cries. We were “choice”, we were “people helping people” – those goals were always color and socioeconomically blind as we emerged fighting against banking practices that were not–think redlining.
But we forgot one credo recently – “not for profit, not for charity, but for service.” Since this credo does not make a singular virtue of EQUITY, can we no longer espouse it?
The conversation change needs to be about DOI – Diversity, OPPORTUNITY, and Inclusion. We were born out of opportunity and we are still built on it. Will we be brave enough to say it? We don’t need to be admonished with a new recitation.
We just need to remember our founding principles – which are both relevant and powerful. (David. A. Jezewski, President/CEO, CommStar Credit Union)
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Dear readers do not despair. Tomorrow, Friday the 13th, is good news. I will tell the story of a credit union that believes in the power of cooperative design.
As interest rates continue their upward cycle to reduce inflation, credit unions will manage this year-long transition process with multiple tactics and product adjustments.
There is no one operational formula to be universally applied because every credit union’s balance sheet and market standing is different.
But a simple model was the core of NCUA’s response in 2013 and 2014 when Fed Chairman Ben Bernanke announced a policy change to reduce support for the recovery after the Great Recession. The reaction to his June 2013 announcement was an abrupt rise in rates, referred by some writers as a “market tantrum.”
The following is one credit union’s experience as NCUA pursued its own regulatory tantrum as recalled by the current CEO.
A Case Study from a Prior Period of Increasing Rates
Today’s rapidly increasing interest rate environment is very reminiscent of the 2013-2014 period when Federal Reserve Chair Ben Bernanke’s “Taper Tantrum” led to a great deal of market volatility. While Bernanke’s comments in May of 2013 touched off the increase in rates, it really took until the next year for the full effect to be felt.
NCUA’s response to this period of rising rates was nothing short of a panic. Any credit union holding bonds whose value declined due to the increase in market yields was heavily criticized for having too much interest rate risk. This critique was despite the fact that most natural person credit union had more than adequate liquidity to hold the bonds.
The use of static stress tests, which showed dire results from up 300, 400 or 500 basis points, was used as a reason to force credit unions to sell some of their holdings turning unrealized losses, with no operational reason to act, into realized ones. These forced sales unnecessarily depleted capital, the very thing that an insurer/regulator should be trying to preserve.
Things got so heated at our credit union that the Regional Director called a special meeting. Only our Board of Directors could attend; management was forbidden to be there. NCUA lectured them about the evils of excessive interest rate risk. This sent many of them and our CEO into a full-scale panic.
We sought advice from outside experts but finally settled on the dubious strategy of selling bonds at losses as well as borrowing funds from the FHLB that we did not need. These were done to bring the results of these static stress tests in line with the NCUA’s modeled projections. We calculated these actions caused us unnecessary losses of over $10 million before we stopped counting. These came from both the realized losses, the added expense of unneeded borrowings, and the lost revenue on assets sold.
In the aftermath of that debacle, the credit unions senior management and two board members travelled to Alexandria, Virginia to meet a top NCUA regulator to explain our frustration at the loss. After waiting for hours for our scheduled appointment, he heard us out. We never heard back; however, the Regional Director soon departed. Perhaps our message had at least been partially received.
The Problem with Static Tests
Fast forward to today. We find ourselves in the “extreme risk” rating at the end of the first quarter due to the rapid rise in rates. The glaring problem with static stress tests is that non-maturity deposits (which make up a large part of most natural person credit unions’ share liabilities) are limited to a one year average life.
Several third-party studies document our share’s average life to be in excess of ten years. Despite this, the asset side of the balance sheet is written down while the long-standing member relationships, on which most credit unions’ balance sheets are built, doesn’t get much credit at all. For example, if a two-year average life on savings and checking accounts were used, the results of the static test wouldn’t even put us in the high interest rate risk category.
Closing Thoughts
While we have authorization to utilize derivatives (something we didn’t have back in 2014), this could help lower the costs of compliance if we are forced to take action. However, I’m adamant against doing illogical things just to pass a static stress test this time around.
I’ve wondered how it’s OK for the NCUSIF to hold similarly long-term bonds in their portfolios without any concern during periods of volatility like this. We have the strength of our core share relationships and capital positions to withstand periods of rising rates. NCUA just keeps reporting growing unrealized losses transferring their IRR risk to credit unions to make up any operating shortfalls.
I also believe that NCUA should really be much more worried about very low interest rate environments. These periods of very narrow yield curve pickups are actually much worse for financial intermediaries to navigate than periods like the one we’re now in. Overall the industry’s net margin should generally benefit from rising rates, shouldn’t it?
Two Observations
1. One expert’s view of the situation today: As you know, but people often forget, there is no ‘unrealized loss’ if a bond or loan is held to maturity. There is an interest rate risk component that needs to be managed. But if I am holding some 4% mortgages 10 years from now, and the overnight rate is 4%, then I am not upside-down. I just have some of my assets earning the minimum rate of return.
This is why I prefer net income simulation over IRR shock. We don’t live in a static world, it’s a dynamic one.
2. During the November 2021 Board meeting the following interaction took place on the agency’s management of the NCUSIF portfolio and stress tests:
Board Member Hood: Thank you, Myra. And again, I do have another question and this is for the record. Do we all have an interest rate risk shock test to the fund (NCUSIF) like we do for our credit unions under our supervision rule? And also, do we do a cash flow forecast on a regular basis as well?
Eugene Schied: This is Eugene Schied, and I’ll take that question Mr. Hood. Yes, we shock the – we do perform a shock test and perform cash flow analysis for the share insurance fund. These are both reviewed by the investment committee on at least a quarterly basis. The investment committee looks at the monthly cash flow projections for the upcoming 12 months as part of this regular analysis. That concludes my answer, sir.
Board Member Hood: Great. Thank you, Eugene. I would just say that as I consider our investment strategy, we should note that examining portfolios and managing investments in the portfolio are two separate and distinct skillsets. The NCUA today has over $20 billion, with a capital B, in investments under management; so I think we should have an even greater focus on this during our upcoming Share Insurance Fund updates.
While traveling yesterday I was copied on an email between two credit union members. The sender asked in part:
“ I belong to five different credit unions. I’ve clawed my way onto the supervisory committee of one of them. . . Alas, the Board of one has recently approved a deal by which it will be swallowed up by the biggest credit union in the state. . . When the deal was announced I wrote asking for whatever merger documents they could disclose.
I heard back directly from the CEO, who cheerfully explained they would be disgorging absolutely no documents. It appears to me that the board and management actually expect the membership to ratify this deal entirely on a “trust me” basis. . . literally every justification that has been publicly offered comes down to some version of “bigger is better.”
His request: “I am wondering if you would refresh my memory about what specific questions a concerned member ought to be asking about a deal like this.”
Topical and Troubling
If the situation is familiar, it is because it happens weekly. Not mergers, but member-owners cut out of the process entirely. Private deals supported by rhetorical promises and void of any objective facts.
Takeovers are an everyday event in capitalism and its anything-goes world of buyouts and mergers enabled by the financiers.
Here is how one long serving capitalist CEO described the process in his Annual Report:
Acquisition proposals remains a particularly vexing problem for board members. The legal orchestration making deals has been refined and expanded (a word aptly describing attendant costs as well). But I have yet to see a CEO who craves an acquisition bring in an informed and articulate critic to argue against it. And yes, include me in that category.
Overall, the deck is stacked in favor of the deal that’s coveted by the CEO and his/her obliging staff. It would be an interesting exercise for a company to hire two “expert” acquisition advisors one pro and one con, to deliver his or her proposed views on the a proposed deal to the board—with the winning advisor to receive, say, ten times a token sum paid to the loser.
Don’t hold your breath awaiting this reform: the current system whatever its shortcomings for shareholders, works magnificently for CEO’s and the many advisors and other professionals who feast on deals. A venerable caution will forever be true when advice from Wall Street is contemplated: Don’t ask the barber whether you need a haircut. (Source 2019 Annual Report, Berkshire Hathaway Inc. pgs 12-13)
A Game without Rules: Credit Unions Become Commodities
Mergers are being undertaken by sound, well established and stable credit unions not to better serve members. But rather to make life easier for their leaders.
Instead of cooperative communities expanding long-time member relationships, these transactions treat credit unions like a commodity. Leaders who give up their fiduciary positions to an outside third party without engaging the owners prior to the decision and who must approve this charter cancellation.
This is the situation the member’s email describes. And hundreds of thousands more members who end up becoming just consumer accounts to be bought and sold.
This is worse than the acquisition games Buffett describes in his Annual Report. Credit unions and cooperative design is supposed to protect member-owners from self-dealing leaders and board toadyism.
Mergers lack transparency, public disclosures of strategy or benefits, and certainly no post acquisition accountability. These are private deals negotiated by CEO’s putting their interests first and then announcing their intent to members.
The member vote is merely an administrative process without substance where very few members even bother to participate. All the messaging, resources and formal requirements are under the complete control of the persons benefitting from the transaction-not the members who must approve the decision.
What can members do? How can the supposed democratic one member one vote governance model be revitalized to ensure member interests are front and center in these self-dealing transactions?
That is what the member is asking. I will share your thoughts, and offer a few of my own. Where is the Kristen Christian when members now need her to save their own credit unions?
Buffett’s Merger Conclusion
“I’ve concluded that acquisitions are similar to marriage: The start, of course, with a joyful wedding–but then reality tends to diverge from the pre-nuptial expectations. Sometimes, wonderfully, the new union delivers bliss beyond either party’s hopes. In other cases, disillusionment is swift. Applying those images to corporate acquisitions, I’d have to say it is unusually the buyer who encounters unpleasant surprises. It’s easy to get dreamy-eyed during corporate courtships.”
“Alexis de Tocqueville shows that the capacity to choose the right thing is best understood in communal and political terms.
“Praising the New England townships of early Puritan America, he points out that the citizens made their decisions in common, framing laws, electing those who would govern them, setting taxes, providing for the poor, and in all things looking only to themselves and their own responsibility. These physically unimpressive settlements in the New World enacted self-government in ways that monarchical old Europe could hardly imagine in the 17th century. . .
“Tocqueville consistently reserves the word “freedom” for active engagement in public life and a concern for the common good that counters isolated self-interest. Citizens are free when they see and respect their dependence on each other. They can best continue to do what they know to be the right thing if they are committed to political self-rule.”
Democracy is difficult to practice, especially when incumbents mange the process.
No one likes to give up positions or power, even if one is a volunteer. This is true for local and national elections and in credit unions.
The press has reported on the attempt by four members of Virginia Credit Union to be considered for nomination to stand for election to the board. Their efforts were ignored, and they were denied the chance to raise the issue at the March Annual meeting.
“The four people seeking to run for a board seat—Frank Moseley, Richard Walker, Tori Jones and Kati Hornung—have called the election a “sham” and alleged the process protected incumbent board members or their hand-picked candidates. The group said in earlier remarks that the CU’s chairman selects members of the Governance Committee that selected members to run for board seats, including the same CU chairman.”
An early account of their efforts can be found in this post, The Fix is In.
A Shining Example of Democracy in a Coop
Shared Capital Cooperative is a lending and investment fund for co-ops of all types and sizes. They are cooperatively owned and managed by the co-ops that borrow from and invest in the firm. Borrowers and investors experience genuine cooperative finance—generating grassroots community wealth while building social, environmental, economic and racial justice.
The Coop’s vision is “building economic democracy.”
Founded in 1978, it is a Certified Development Financial Institution (CDFI) located in St. Paul, MN. Its staff of 10 manages approximately $14 million in loans. The board has eleven members elected from coops across the country.
The coop has both individual and 265 organizational members. One board seat is voted by individuals and is not up this election. There are six candidates for the three open board seats, each with a three-year term.
Board Election Ends Today
Voting is electronically from March 28 and ends today. The link sent to me via email goes to an eleven-page listing of the candidates’ biographies. The second link provides current board members’ backgrounds. Here is an excerpt from the email:
Meet our candidates! For biographies and candidate statements of this year’s candidates please click here. For more information on our existing board, click here.
Cooperative members eligible to vote (not individual members like me) receive an email with their voting credentials. Annual meeting details are also given.
Shared Capital Cooperative’s Annual General Member Meeting and Cooperative Forum. It will be held virtually on Thursday, May 12th, from 12:00 pm to 1:30 pm CT.
The event will be free and open to the public. All are welcome! More details will be posted at www.sharedcapital.coop.
This relatively small, $16 million total assets organization, practices the democratic principles it committed to when formed.
Following Shared Cooperative’s Footsteps
This is an example of a board election/annual meeting that any credit union could emulate. The process might prove enlivening and a confidence builder with members. Especially as some credit unions struggle to involve members in this required annual democratic voting ritual.
This approach might result in more than a pro forma election; it could enhance member engagement and belief in the credit union!
History is vital to interpreting human experience and meaning. Understanding where we have been helps us appreciate the present and what the future may hold.
Our perspective of the past can change as events unfold. What may have seemed wise or foolish at the time can now be viewed with greater clarity. This capacity for self-reflection is critical when making decisions today. It is called wisdom.
Calling for Wisdom by a Board Member
At the March NCUA Board meeting during the staff’s update on the Corporate Resolution Plan, Rodney Hood observed:
But with any significant challenge, there are opportunities to learn lessons. One lesson I would take away from the failed corporates is patience in the resolution process. So I am glad that we are going to look back at the failed corporates, not to second guess or question decisions, but to learn from this experience as history can repeat itself.
The Largest Loss Ever for Credit Unions
The liquidation en masse of five corporates was the largest projected loss ever. NCUA said it would cost credit unions between $13.5-$16.0 billion. The latest corporate AME numbers estimates the actual loss to the NCUSIF will be just over $2.0 billion and that is from just one corporate, WesCorp.
Absent an effort to understand how these projections were made, everyone will offer stories and interpretations that may be totally at odds with the facts as they unfolded. In the desire to portray the resolution as a success, the most important lessons may be lost. The seeds for future mistakes, remain unrecognized.
One example where the learning might begin is the liquidation of Southwest Corporate FCU.
Modeling for Failure
Unlike US Central and WesCorp, Southwest was not in conservatorship when seized. It was being managed by its board and senior managers who made extensive monthly disclosures about the status of their credit union and every aspect of its investments. The last report they issued was for July 2010 and was 21 pages of detailed information.
On September 24, 2010 NCUA issued an Order of Conservatorship on Southwest. It was exercised “without notice” and warned that “Any business following service of this Order may subject members of the Board of Directors and management to civil or criminal liability.” An explicit threat not to contest the Order.
A second document Grounds for Conservatorship included the following facts:
The credit union was solvent with “$88.6 million or 1.06% of Southwest’s daily 12 month average net assets.”
The $88.6 million in remaining capital was after having “recorded OTTI charges totaling $496,258.357.” The Grounds document did not point out, as did the corporate in is July 2010 update, that only $49.7 million of actual losses (10%) had been incurred. These investment write downs were based on modeling of projected cash flows years, even decades, into the future.
OTTI is not an allowance account. It is a reduction in the value of an asset. Under the accounting treatment at the time, improving loss projections based on the same modeling may not be recognized or netted with increasing loss projections.
In addition to its low solvency ratio NCUA declared it “marked to market” the investment portfolio resulting in a Net Economic Value (NEV) shortfall of ($718 million). This determination was accompanied by the statement that there was “with minimal opportunity for material improvement.”
Yet in the six-month period ending June 30, 2010 the negative NEV had improved by $382 million (35%). The recovery had been underway since September 2009 and the market dislocations affecting the values of securities had begun to normalize.
But NCUA rejected these recent improvements asserting ‘future OTTI losses will continue to deplete its capital, negatively affect NEV, negatively affect its overall risk profile and decrease member confidence. Even if NEV continued its recent slight improvement, the losses are more than Southwest’s balance sheet can absorb.”
It further claimed: “Though a slight improvement in the increase in the fair value of the investment portfolio, the NEV increase is overwhelmed by the enormity of losses and the potential for additional OTTI charges from high risk investments. The prospect of significant and sustained NEV improvement remains bleak.”
A $1.5 Billion Modeling and Forecasting Error
Instead of a $718 million negative NEV outcome and dire predictions of greater losses, the December 2021 projection is that SW Corp shareholders will receive $736 million in returned capital and liquidating dividends. This is a $1.454 billion change in the actual economic value of the credit union.
The projected $736 million now being returned to shareholders equals 8.8% of the assets at the time of the seizure, or more than eight times the 1% solvency asserted by NCUA when placing the corporate in liquidation.
The projections and modeling were wrong. The credit union had expensed hundreds of millions in unrealized OTTI losses that never took place, but were based on faulty assumptions.
Three of the other corporates had similar circumstances Even in WesCorp’s situation, in which there will be no payment to shareholders, the estimated loss to the NCUSIF has gone from $6.2 million to just over $2.0 billion.
Next Steps in Understanding
A first review effort would be to update the projected versus actual loss experience on Southwest’s legacy assets. The complete spreadsheet of legacy assets updated through September 2017 (when the TCCUSF was merged with the NCUSIF) is here.
How accurate were the OTTI write downs? What percentage of the $736 million payouts are from recoveries in the value of “legacy assets”?
What can we learn further from the corporate resolution plan? Especially in today’s economic circumstances?
Certainly the value of patience, in that there is a cycle of value with almost all assets in a dynamic economy. This perspective could be especially important in this time of rapidly rising interest rates. These increases will temporarily depress the market value of many loan and investments assets on the books prior to Fed’s change in monetary policy.
The lessons should be more profound than relearning about fluctuations in economic value. These might include the shortcomings of relying on “experts” like Black Rock and PIMCO for understanding what management options might be; or hiring Wall Street to design cooperative solutions; or even the native intelligence and insights of some of the corporate leaders who were summarily dismissed.
“No reasonable alternatives to conservatorship are evident.”
This assertion about the future of Soutwest in NCUA’s Order is perhaps the most important factor to assess. What alternatives were evaluated? By whom? When?
One of the significant advantages of cooperative design versus private organizations is their dependence on member support and trust. This factor is embodied in their democratic governance structure.
However, if those who lead an organization directly or through regulation do not honor this capability, then the advantage is loss. The temptation to ignore, overrule or act based on solely on position and authority will sacrifice the long-term viability of an institution or even a system.
If NCUA demonstrates the ability to reflect on its own actions, transparently and in common cause with the industry, it could result in a leadership action that could resonate throughout the cooperative system—and perhaps beyond.
The title is from a Commentary by William Reinsch written four days after Russia’s invasion of Ukraine.
He is the Scholl Chair in International Business at the Center for Strategic and International Studies. His professional specialty within government and outside is international commerce and trade policy.
His article projected the end of the rules-based system of international trade that had been developed post WW II.
He foresees the war causing economic chaos, a return of power politics, and resurgence of authoritarianism. The world will not be the same; unintended consequences will proliferate.
Turning Points in History
In individual, organizational and country’s histories there are moments that are eventually understood as turning points. Sometimes these are sudden and instantly consequential. Like Ukraine.
Other changes occur slowly, but inexorably, in a new direction with the outcome unseen for years. For example the evolving demographic composition of the American population; or even the inevitable forces leading to the deregulation of financial services in the 1970’s and 80’s.
I believe the century long credit union movement is in one of these transformational periods. This involves significant changes in the regulator’s role, credit union business priorities, accepted performance norms and the ambitions of leaders.
These cooperative developments are occurring as economic trends are moving away from the two decade experience post 9/11. Inflation is nearing 8%, unemployment is at historic lows, worker shortages are occurring in many sectors, and interest rates are projected to rise to potentially the highest level this century.
The juncture of these economic and industry changes could significantly alter the institutional makeup of the cooperative system. They could result in the loss of credit union’s independent identify and purpose.
The Breakdown in the Regulatory-Industry Relationship
The seeds were sown in the disruption of the Great Recession in 2008-2010. The scope of the potential corporate problem created a rupture between NCUA and the industry.
NCUA leaders whether through fear, inexperience or bureaucratic instinct distanced itself from credit unions. The agency took the sole role of developing one all encompassing solution for five distinct corporate balance sheets. The results were disastrous for credit unions, the corporate system and the credit unions that relied on them. Additionally, 30-year industry partnership for the CLF was ended.
The most critical long term loss however was not financial, but the agency’s ability or willingness to work collaboratively with the industry—on all issues and in all circumstances.
Instead of viewing their role as empowering a system of cooperatives, NCUA positioned itself as rulers over the credit union system.
At the March 2022 Board meeting this view was expressed by Chairman Harper in comments on the agency’s Annual Performance Plan: With the geopolitical crisis unfolding in Ukraine, the NCUA will also continue to prioritize cybersecurity and guide the credit union system through the economic uncertainty caused by inflation, rising gas bills, and continued supply chain woes.
This paternalistic or in loco parentis approach to regulation and supervision emerged from the agency’s ability to impose solutions and rules unilaterally following the corporate crisis.
The agency publicly proclaimed its independence under Chairman Matz from both credit union involvement and external oversight. No one at the board or staff has been able to replace the critical experience and knowledge credit unions brought to all issues.
Credit union experience is absent in the regulatory bureaucracy. Credit unions manage over $2.0 trillion for over 100 million members but they have little to no voice in policy priorities. Stakeholders, both members and the professional leaders, are viewed simply as recipients of perceived regulatory wisdom.
Increasingly credit unions are developing new financial schemes with the regulator seemingly oblivious to their impact on these credit unions or the member owners. The wheeling and dealing in mergers, bank purchases and raising external capital is accelerating.
The makeover of a number of credit unions from member-centered to financial strategists, gamesman, hustlers and horse-traders is well underway.
This failure to interact removes NCUA’s most important resource – the industry’s professional leadership experience. Mistakes will continue to be made and paid for by credit unions due to the missing counsel of those who make the system work on a daily basis.
Overcoming the Schism
Credit unions created NCUA and designed and passed in Congress all of its constituent capabilities specifically the NCUSIF and CLF.
Board members seem divided between two binary positions: let the free market determine outcomes or, NCUA must pass rules to micromanage every credit decision and balance sheet IRR risk.
Effective NCUA regulatory policy is not democratic or republican, or even bipartisan; it is pragmatic supported by facts, logic and cooperative purpose.
Rules and manuals in the thousands of pages cannot replace business judgments and may in fact result in reducing sound operational choices.
Mutual respect is missing. Credit unions are intimidated or consider fruitless any effort to critique ineffective agency actions. NCUA’s most frequent justification for more rules is comparison with other financial regulators.
Mutual dialogue creates respect and enhances understanding of shared responsibility. Future posts will describe changes in priorities, norms and professional ambitions shaping industry character. All are examples of events occurring without the benefit of public dialogue.
Voting is the life blood of democracy. For both political leadership and within organizations.
Some firms, such as IBM, encourage their stock holders to vote at the annual meeting:
To express our appreciation for your participation, IBM will make a $1 charitable donation to Opportunity@Work on behalf of every stock holder who votes.
Voting is integral to credit union design. This is the season for annual meetings with members electing their directors. Unfortunately actual voting is rare. Most vacancies are filled by acclamation as the number of candidates equals the open seats.
Now CUNA has begun a campaign to encourage member voting. As reported in CU Today:
WASHINGTON–CUNA has relaunched its “Credit Unions Vote,” a campaign focused on getting credit union members to vote in the 2022 midterm election. The campaign ties civic engagement to credit unions’ ability to improve financial well-being and advance local communities, CUNA said.
“Credit unions understand that elections affect their members’ financial well-being,” said CUNA Deputy Chief Advocacy Officer for Political Action Trey Hawkins. “With the Credit Unions Vote campaign, we will reach out to America’s credit unions providing them with resources to encourage their members to play an active role in both their primary and the November election.”
An Observation:
Yes, elections do indeed affect members well-being. Especially the choice of credit union directors.
If CUNA wants to encourage member’s good voting habits, why not begin by promoting elections at credit union’s annual meetings?
That would seem a more immediate way to illustrate the power of the franchise and their well being.
