The Lehman Trilogy and the Arc of American Finance

The local Shakespeare Theater’s run of the story of Lehman Brothers family in America incorporates multiple themes.  They are all very much  present in America today.  I believe they  can inform the credit union story.

The play is an adaptation of a novel about the Lehman family. Three actors portray 55 different characters in the 163 years of the family’s timeline.

Although the firm’s $600 billion bankruptcy was the central drama of the 2008 financial crisis, the family had long been absent from any leadership roles when this occurred.

An Immigrant Story

The play is the story of a German Jewish family settling in Montgomery Alabama in 1844.  After first opening a dry goods store, they expand to become  “middle men” in the cotton trade between southern plantation growers and Northern textile mills.

They eventually open a New York office to enhance their trading activity and expand to other commodities post Civil War.  These trades include wheat, coal, iron ore, that is  the raw materials at the center of America’s industrial revolution.

As their trading activities expand they become a “bank” and underwrite the new industries being founded  from railroads to computers and entertainment after WW II.  Eventually these material commodities are supplanted by stock trading which brings the firm close to collapse in 1929.  Outside owners will now control a majority of the firm.

Post WW II trading activity dominates its traditional investments in other industries. These traders buy out the firm’s presiding CEO, Pete Peterson, putting their priority on a strategy that eventually leads  to the 2008 failure.

The story of growing economic wealth is interwoven with the family’s old world religious and family values. Jewish celebrations are initially central to life, but gradually become less so as succeeding generations assimilate into American culture.  Their religious observance is “reformed.”

A Three Part Saga

Part family history, part portrayal of evolving moral values and part the story of how finance becomes central to American enterprise give the play multiple layers of meaning.

As I watched this century and a half saga, many parallels with the present day credit union story come to mind.

Credit unions have largely moved away from their focus on a local group or community to become a diversified mixture of legacy founders and new market expansions.  The values and passion so critical for success in early years have been replaced by professional managers brought in for their expertise.

Growth becomes central to reporting success.  Corporate wealth creation versus member well-being is celebrated.  Instead of open governance, oversight is increasingly concentrated in a few hands where leaders perpetuate their tenures.  Rather than paying their success forward to future generations, incumbents explore options to cash out when their term in leadership is ending by turning control over to other firms.

The Past Is Gone

The Lehman family gradually lost control of their “bank” when market circumstances required new capital.  Evolving  financial trends for their trading skills also changed the firm’s purpose.  Middleman roles gradually evolved from buying and selling actual commodities, to underwriting new businesses and then merely trading pieces of paper, i.e.  stocks.  Ultimately finance became just digital transactions.

In this new world, everything becomes a number.   And everything has a price. Finance becomes just a way to make money, versus investing in tomorrow’s economy.

Buying and selling (acquisitions) become critical skills.  Member/customer trust is eroded because   consumers no longer believe you will be there for them.  Money management becomes the epicenter of success.  All ties to previous values and economic roles are ended.

That in short is the story of Lehman Brothers creation.   Is it an object lesson for credit unions?



A Case Study of a $96 Million Turnaround: Safe Harbor, Cannabis Banking, and Partner Colorado Credit Union

On year ago I described the announcement that  Colorado Partner Credit Union (CPCU) had arranged to sell its wholly owned CUSO (Safe Harbor), specializing in cannabis banking, to a Special Purpose Acquisition company (SPAC), or publicly traded company.

Serving the cannabis business has been a priority for some credit unions in states where the sale is licensed for several years.  This past week credit union leaders and trade associations announced their continued support of changes in  federal law to allow all financial institutions to serve the trade-which is now legal only on a state by state basis.

“CUNA said it supports the Secure and Fair Enforcement (SAFE) Banking Act, a bipartisan bill introduced in both chambers in April that would provide a safe harbor for financial institutions serving legal cannabis businesses.-from CU Today.

The Sale of Safe Harbor, a Cannabis CUSO

CPCU was to receive $185 million for selling its CUSO, $70 million in cash and $115 million in stock. Sundie Seefried – who created Safe Harbor cannabis business while the credit union’s CEO– would be the CEO of the new public company (NASDAQ: SHFS).

A $96 Million Turnaround In 90 Days

An immediate result of this September 28, 2022 closing was PCCU reporting a $55 million net income and an 8.7% ROA for the year ending December 2022.

This extraordinary gain occurred even as SHFS  reported a $35.1 million loss for the year ended December 2022, compared to net income of $3.2 million in 2021.  This result was described as “primarily due to the loss in value of several of the financial instruments placed in connection with the Business Combination.”

SHFS’s December 2022 balance sheet position  resulted in the following “going concern” comment by auditors:

Liquidity and going concern

As of December 31, 2022, the Company had $8,390,195 in cash and net working capital of ($39,340,020), as compared to $5,495,905 in cash and net working capital of $5,922,023 at December 31, 2021.

Included in the working capital deficit at December 31, 2022 is $25,973,017 current portion of the long-term payable owed to the seller, PCCU, from the aforementioned business combination, and $14,359,822 deferred consideration current portion related to the Abaca acquisition. The Company has also incurred a significant cumulative consolidated operating loss for the year ended December 31, 2022.

Based upon these factors, management of the Company has determined that there is a risk of substantial doubt about the Company’s ability to continue as a going concern for a period of at least twelve months from the date these consolidated financial statements have been issued.

Results at March 2023

In  the March quarter of 2023 CPCU reversed much of the 2022 gain on Safe Harbor’s sale resulting in a $41 million loss.  The credit union’s net worth ratio between the two quarter ends went from 20.9% to 14.7% as of March 2023.  Its total assets were $699 million which included new subordinated debt of $3.1 million and notes payable of $27.5 million.

The loss was due to a restructuring of the sale terms  for CPCU as described in an SEC filing and company press release:

On March 29, 2023, the Company and PCCU entered into a definitive transaction (Refer to Note 22, “Subsequent Events,” of the consolidated financial statements) to settle and restructure the deferred obligations, including $56,949,800 into a five-year Senior Secured Promissory Note (the “Note”) in the principal amount of $14,500,000 bearing interest at the rate of 4.25%; a Security Agreement pursuant to which the Company will grant, as collateral for the Note, a first priority security interest in substantially all of the assets of the Company; and a Securities Issuance Agreement, pursuant to which the Company will issue 11,200,000 shares of the Company’s Class A Common Stock to PCCU.

This restructure was driven by the SHFS’ financial position.  CPCU is now the majority owner of voting stock (55%) and CEO Douglas Fagan  is  on the SHFS’s board.

SHFS’s First Quarter Earnings Call

On Tuesday SHFS reported its first quarter earnings with an 8-page press release.  The financial results show revenue of $4.2 million, operating expenses of $5.8 million and an operating loss of $1.6 million.

The release also provides operational highlights and a 2023 financial outlook.  During all of  SHFS’s nine years building the cannabis business, CPCU has been the primary banking partner.  This means revenue from all the deposits, loan funding and investment returns are shared with the credit union under a services agreement detailed in the company’s SEC filings.

Credit Union and banking partners are key to SHFS’s business model. As descried on the website, the firm is a  financial technology company, not a bank. Banking services are provided by contracted NCUA or FDIC insured financial institutions. Some non-deposit products and services are not covered by FDIC or NCUA.” 

On May 11, 2023 SHFS announced another  partnership with Five Star Bank in New York that it said will add up to $1 billion in additional deposit capacity.  SHFS plan  is to scale the business.

External Contexts & Cannabis Opportunity

SHFS’s future is uncertain.

The firm’s stock price is reported daily on its website.  The stock’s value since the “business combination” has declined from a peak of just over $10 to yesterday’s close of $.38.   The total market capitalization  of the company has fallen from over $300 million to $15.7 million at yesterday’s close.

However, SHFS is not alone in its extended financial condition.

SHFS’s  public offering via a SPAC transaction was a way to truncate the time, expense and investor scrutiny of a traditional public offering (IPO).   As reported in an April 27 WSJ article, SPAC’s Are Running Out of Money.”  The story’s lead reads:  ”The SPAC boom took hundreds of risky companies to the stock market. The next stop for many is bankruptcy court.”

The article’s implication is that the SPAC process to take a private company public, may short cut a more rigorous traditional IPO due diligence and valuation process.

Another external factor could also be important.  SHFS is the front end, or entry platform, for cannabis related businesses accessing financial services.  The following is SHFS’s business value proposition:  Our services allow Cannabis Related Businesses (herein referred to as “CRBs”) to obtain services from financial institutions that allow them to run their business more efficiently and effectively with improved financial insight into their business and access to resources to help them grow.

Due to limited availability of payment and other banking solutions for the cannabis industry, most businesses transact with high volumes of cash. Our fintech platform benefits CRBs and financial institutions by providing CRBs with access to financial institutions and financial institutions access to increased deposits with the comfort of knowing that those deposits have been compliantly monitored and validated. . .

A recent WSJ news story suggest that Legal Cannabis Can’t Compete  because licensed sellers are facing steep taxes and regulation.  In states like California (and New York) the article reported unlicensed sales were almost eight times licensed sales.

In many states cannabis began and still is an underground business. So even when either federal or state authorization is achieved,  suppliers may wish to retain their business  anonymity.

Tomorrow I will analyze what some of the learnings credit unions may take from this the effort to “spin off” this credit union created business to become a publicly traded company.

How did cash decline so quickly following the combination?  How dependent is the CPCU on SHFS’s business?

The details of SHFS’s history from SEC filings for this transaction and subsequent updates  offer, I believe, instructive insights for others who may harbor similar ambitions.

Business and Life Wisdom from Warren Buffett (Part II of II)

Last Saturday’s Berkshire Hathaway’s Annual Meeting was preceded by a five hour Q & A with the two founders: Warrant Buffett and Charlie Munger.  Both are over 90 and answered multiple questions about the numerous business decisions at BRK as well as thoughts about life.

Many of their observations were relevant to any organization because of the scope and scale of the companies BRK owns.

However the most important lesson is their example of transparent leadership and accountability.  Buffett’s board is self-selected.  He is Chairman and CEO, roles that will be divided when he leaves.  The company has the fourth or fifth market capitalization of any publicly traded firm.  Its net worth of over  $500 billion is one of the largest in corporate America.

At age 92 with an unmatched  performance record over six decades, Buffet did not have to put himself into the public and shareholders’ conversation as he did. There was no script.  In addition to the tens of thousands in the live attendance there were hundreds of thousands following the life MSNBC telecast around the world.

His leadership example is one every credit union could follow.   In doing so, the CEO and Boards would honor their member-owners’ loyalty, communicate competence, and  fulfill the cooperative democratic governance model.

Following are few of his many insights.  However the most important message is this simple example of a CEO’s public dialogue with his owners.

Buffett’s Business Observations

  • Why problems with commercial real estate seem inevitable.  The value of any property is only what the buyer can borrow without signing their name to back the loan.  Market value depends on how much a buyer can borrow, that is the availability of credit. Downtown office buildings are being hollowed out and banks don’t want the properties.  Many properties have seen their value decline, and refinancing or sale in the new interest rate environment will be more difficult.
  • Money is too easy to raise—startups are selling ideas, not performance; People are just trying to outsmart each other not out-manage.
  • Opportunity comes to BRK when people do dumb things partly the result of easy money.
  • Wall street and company managers are overwhelmingly focused on the short-term, not how well you will be in five or ten years.
  • How well will a brand travel? Buffett gave numerous examples of learning about consumer behavior from his multiple retail businesses.  For example when trying to expand the See’s candy franchise, he learned that consumer’s preference for chocolate is different on the two coasts than in the Midwest.  The See’s brand has “limited magic” and does not fit well in other markets.
  • Why does BRK own so much of Apple? Consumer loyalty—users will give up their second car before they would their iPhone.
  • Because BRK pays no dividends and reinvests all earnings back into its businesses, it makes investments in its power companies that give it an advantage over its dividend paying utility competitors. This is especially important when new power sources and transmission capabilities are required to make renewables an increasing component of energy supply.
  • BRK’s secret to success: Keep a small headquarters staff (about two dozen people) and practice extreme decentralization for managers to run their business.

Life Wisdom

  • Live your life by writing your obituary and then reverse engineering it.
  • On AI: it will change everything except how people think and behave. AI does not replace the gene.
  • How American industry and society performed in WW II: Americans understood the challenge creating a unity of purpose and the mechanisms and urgency to organize capital and industry to win the war. That unity is lacking today.
  • Must refine our democracy -how to keep good parts and call out the worrying. The country has moved from partisanship to tribalism.
  • Charlie Munger on why he left law practice: “Working in a large law firm and moving up is like winning a pie eating contest where the prize is getting more pie.”
  • Why do formerly independent companies and managers agree to be bought out by BRK to become part of a large conglomerate. “We let them operate independently without worrying about analyst’ opinions, stock prices, bank lines, or trade associations’ priorities.  They can just run their business. There is nothing like working for yourself.”
  • Shouldn’t the second half of life be better than the first?
  • Society has trouble preparing for events that seem remote (another pandemic, climate change).

Full details of this live Q & A can be found here:, the Warren Buffett Watch.


Warren Buffett’s Annual Meeting and Wisdom for Credit Unions (Part I of II)

Last Saturday was the annual meeting of Berkshire Hathaway (BRK) in Omaha, NB.  The event, called the “Woodstock of Capitalism” was attended by over 40,000 shareholders and broadcast live on MSNBC.

I believe there are valuable observations for credit unions.

Prior to the formal annual meeting agenda Warren Buffett (age 92) and Charlie Munger (age 99) answered questions from online and in-person shareholders for over five hours separated only by a short lunch break. Their goal was to take at least 60 questions.

They covered all aspects of company operations, long term strategy, and recent decisions (eg. selling TSMC stock after holding only two months) as well as questions on Fed fiscal policy, international relations and life’s most important decisions.

The full sessions and excerpts can be found from Saturday’s edition of, the Warren Buffett Watch.

Three Important Lessons for Coops

Here are my top three takeaways with significance for credit unions.

  1. Respect for shareholders. Buffett: “For fifty-eight years we have regarded shareholders as the reason for our existence.”  The open-ended questions at the meeting came from young and old including families that had owned stock for generations.  No subjects were off limits.   The entire event was a celebration of the firm’s various businesses and designed to be both informative and a good time.

This model of dialogue with shareholders is one that can be emulated by credit unions.  It would increase cooperative transparency, confidence and good governance.  In Buffett’s words: “Management has an obligation to explain to shareholders everything. . .to say what they think is right.  We want owners to understand what they own. . .We are working for the people in this room, not a quarterly operating target from Wall Street.”

This question and answer with ordinary people from all over the country (and other countries) was direct and straight forward.  No talking down or 10-Q explanations.  No discounted cash flows or present value kinds of reasoning; only plain answers to hard questions.

  1. The entire US banking model is under review. After the runs caused the closures of three major banks, the two most frequent proposals have been to make deposit insurance unlimited in coverage or to eliminate short selling of public bank stocks.  Future uncertainty in the current environment seems probable.   Unlimited deposit insurance would make all deposit liabilities of shareholder owned banks an issue of federal government backing.  The second reform would reduce market discipline in the pricing of bank stock performance.

At another point in discussing property-casualty insurance (a market which operates on a margin of only 4%), Buffett noted his strongest competitor was one which created the last significant innovation: State Farm a mutual, not a stock company.  Here is his analysis from the 2019 Annual meeting:

“If you go to business school, you’re taught that it’s only because you have incentives and compensation, all kinds of things, that businesses can be successful. [But] Nobody really got rich outside of State Farm. They sat there, and they are the biggest insurance company,” he claimed.

“When Leo Goodwin started GEICO 80 years ago, he probably wanted to get rich,” he said, referring to GEICO’s founder. “And probably at Progressive, I know people wanted to get rich. And at Travelers and Aetna. You can name them, dozens and dozens of companies.

“And who wins? A mutual company,” Buffett concluded.

“In terms of presence, size, they are still the biggest company. If you omit Berkshire, they have the highest net worth by far. They have $140 billion or something in net worth,” Buffett said, speculating that Progressive’s net worth is about one-sixth that of State Farm.

“We’re spending $2 billion a year telling people the same thing we’ve been telling them for 70 or 80 years.” But when all is said and done, “State Farm still does more business than anyone else, and that shouldn’t exist under capitalism.”

“If you [had] a plan to start a state farm today and had to compete with Progressive, which would bring the capital [for] a mutual society from which you are not going to withdraw the profits? It makes no sense at all,” he said.

With the market driven banking model increasingly under question, and the example of State Farm’s mutual success, is it possible that  the cooperative credit union model is the best alternative design for resolving the uncertainties and internal contradictions of stock-owned depository financial institutions?

  1. How his insurance model benefits all BRK businesses. And why it suggests the FDIC is a flawed insurance model.

Insurance is a paid-in-advance business.  This gives a firm the ability to earn on the capital and invest the float before paying out claims expense.

As an example, last year BRK was earning 4 basis points on its $125 billion  cash, or about $50 million per year.   Recently the company bought a Treasury bill at 5.92%.  The company will earn about $500 billion this year on its cash.  This float from the insurance doesn’t cost anything. Capital stock is very expensive. Debt has to be repaid like deposits.  Importantly BRK has multiple options for investing its float.

The FDIC has no capital base.  Its primary revenue is from premiums.  The combined losses of an estimated $35 billion on the bank failures so far this year will be paid by the banking community. FDIC has not been able to accumulate earnings from its capital base to cover its risk.

The NCUSIF has a 1% capital base that matches-grows or declines-with the level of total insured shares. The earnings on this capital and additional retained earnings of .2-.3% of insured shares are sufficient to cover even the most extreme risk scenarios.  So long as the investment portfolio is well managed.  The NCUSIF’s breakeven earnings level is between 2.5%-3.0%.  That outcome should be the measure of NCUA’s management effectiveness.

The three areas above are a trifecta for credit union optimism:  the  public example of shareholder-owner engagement, the questions around the US banking model, and the sounder NCUSIF financial structure.  All three are inherent in cooperative design.

Tomorrow I will share some of Buffett and Mungers’ comments that have direct relevance for credit unions’ businesses.  As well as some of his wisdom about life.

NCUA’s Organizational Growth and Google’s Example

1982 was a consequential year for NCUA, credit unions and the future of the cooperative system.  The Penn Sq bank failure occurred in July.  The NCUA board approved the total deregulation of shares in April, and there were multiple credit unions with 208 assistance trying to turn around.  The agency’s new leadership implemented a complete reorganization to become more effective.

NCUA’s 1982 Annual Report described these events and Chairman Callahan’s explanation for the redesign of the agency’s structure.

“The third area I want to report to you is decentralization because I think that ties in with regulation. We had a very strong Central office, a very talented Central office and one that was developed over time for a very good reason.

As I viewed it, it had become so talented and strong that the very mundane operational things that our field people tried to do got caught up in this pipeline—this pipeline of talent and centralization in Washington.

Seldom did things come out in a very efficient manner. Everyone was overdoing their job so we found that decentralization was the answer.

We found it necessary to cut the size of the Washington office by a third, to re-channel these resources to the field and to delegate to the regional directors the responsibility of using these resources in a timely way to get the exam cycle down to an annual one, to give backup and information to the field examiners, and to make those decisions on-site that involve safety and soundness, chartering, and supervision.”

The most important decision in the Agency’s management of its personnel was to reverse a five-year trend of increasing numbers of personnel in the Washington office and to reallocate. positions and personnel to the field. (Page 43)

More Growth-Limited Office Time

Today NCUA’s central office continues to expand in numbers and new departments.  The budget continues to increase as the number of credit unions falls.  Moreover even with the Covid emergency over,  the agency requires D.C. personnel to be in-office only two days per pay period.

Is now time to reevaluate NCUA’s organizational trends?  And accountabilities?

Many companies, non-profits,  and other civic organizations including credit unions are adjusting their corporate structures.   News reports of layoffs are daily events.  One analysis in particular caught my attention about the reasons for Google’s layoffs.  Here is an excerpt with examples very similar to patterns in DC:

A lot of tech workers were hired to do nothing: I’m not happy about anyone losing a job. But among the tens of thousands laid off from big tech companies, some people are coming out to admit that they did literally nothing at their jobs. . .

Meanwhile, now that bosses are accustomed to all their mid-level remote employees who never come to the office, they’re realizing that the jobs can actually be super remote, like maybe in Bangladesh. 

In order to get promoted to senior levels (starting from director up) your organization needs to look a certain way. There are boxes you have to tick including having the right people at the right levels underneath you.

The long term approach to this would be to grow your people and that this will naturally happen if you’re working on things that matter. The trouble is that this takes time and you’re never more than 6–18 months away from a potential reorg that might make you start again from scratch. Ambitious people also tend to be impatient. So, what do you do?

You start vanity projects and hire. You hire in people at the right job levels so your organization has the “right” shape to it. You chase after vanity metrics about you looking good like active users rather than how useful your product is. You use your authority to subvert the promotion process so that your promo candidates get through even if they don’t deserve it.

You avoid performance managing people out because every headcount matters in your quest to make the next jump. You step back from confronting your peers over toxic behavior because you need their support for promotion. Eventually your cargo cult gets you where you want to go.

Another reason that Google is wasteful is that it’s too easy. The people inside it don’t see it as a business as they don’t have to struggle against the market forces everyone else has to deal with. Why would you when ads is so profitable?

This complacency means senior leaders often follow their personal agendas above all else. Empires rise and fall. Too often I saw that personal ambition trump doing the right thing for users, the business or employees.

The root cause is the leadership because it’s their personal ambition over running their part of Google like a business. I’ve seen people promoted to VP based on a set or vague promises they haven’t delivered, mass hiring and vanity metrics. Google can go to great lengths to protect people in senior leadership positions way beyond what they would do for the rank and file.


Credit Union Learnings from the Costs of Regulatory Mismanagement

With this morning’s announcement of First Republic Bank’s failure and subsequent sale to JP Morgan, the total cost to the FDIC of the three recent bank failures is approaching $35 billion.

The banks will pay for these losses through greater FDIC insurance premiums.  That additional  bank expense will be passed on to their customers.   There is no government tax money being used.

I believe there are important initial  lessons from these current failures for credit unions:

  1. Regulatory mismanagement is extremely costly. The institutions and their customers will pay for these shortcomings.
  2. The initial response will always be to issue more regulation-in this case both capital and liquidity requirements.
  3. The problem is  “bureaucracy,” not individuals with responsibility in the agencies.
  4. All of the explanations offered below have been part of NCUA’s own playbook in the past.

The question for credit unions Is whether NCUA is exempt from the internal bank regulatory shortcomings described below?   Or is it that the problems have yet to surface?

Regulatory Self-examinations

Before today’s announcement of this third failure, last week the FDIC, FED and GAO had issued preliminary postmortems of why SVB and Signature banks had failed.  The headline summaries of these reports signaled the “self-criticism”  of the agency’s performance.

However before turning the spotlight on themselves, the reports pointed directly at the banks’ management, from the Wall Street Journal’s account: 

The Federal Reserve report — commissioned on March 13 by Michael Barr, vice chair of supervision at the Fed — argued that SVB failed on March 10 because of “a textbook case of mismanagement by a bank,” and said its senior leadership “failed to manage basic interest rate and liquidity risk.” 

The FDIC report — authored by chief risk officer Marshall Gentry -– offered similar criticisms about the management of Signature Bank, which was seized by regulators on March 12. The FDIC said that Signature Bank failed to prioritize good government practices and often ignored FDIC advisory recommendations prior to its sudden collapse. 

“The root cause of Signature Bank’s failure was poor management,” the report said. “[Signature Bank’s] board of directors and management pursued rapid, unrestrained growth without developing and maintaining adequate risk-management practices and controls appropriate for the size, complexity and risk profile of the institution.”

The obvious political and accountability question is why weren’t the regulators up to the task of effective oversight of these “basic risk”management failures.   The reports then become more self-focused as reported in the Journal:

“Federal Reserve supervisors did not fully appreciate the extent of the vulnerabilities as Silicon Valley Bank grew in size and complexity,” Fed regulators said, adding that “when supervisors did identify vulnerabilities, they did not take sufficient steps to ensure that Silicon Valley Bank fixed those problems quickly enough.”

The two federal regulators also pointed the finger at themselves for failing to adequately supervise both institutions, and emphasized that new guardrails must be put in place to stave off another regional banking catastrophe. Both agencies said they missed weakness in both banks prior to their collapses, with the FDIC blaming a lack of staff to conduct targeted reviews of Signature.

The Federal Reserve’s Mea Culpa

Michael Barr, the Fed’s vice chair for supervision, issued a 114 page analysis.  Here are some of his summary findings in his short introduction:

Our first area of focus will be to improve the speed, force, and agility of supervision. As the report shows, in part because of the Federal Reserve’s tailoring framework and the stance of supervisory policy, supervisors did not fully appreciate the extent of the bank’s vulnerabilities, or take sufficient steps to ensure that the bank fixed its problems quickly enough. 

Higher capital or liquidity requirements can serve as an important safeguard until risk controls improve, and they can focus management’s attention on the most critical issues. As a further example, limits on capital distributions or incentive compensation could be appropriate and effective in some cases.

We need to develop a culture that empowers supervisors to act in the face of uncertainty. . .

Last, we need to guard against complacency. More than a decade of banking system stability and strong performance by banks of all sizes may have led bankers to be overconfident and supervisors to be too accepting. Supervisors should be encouraged to evaluate risks with rigor and consider a range of potential shocks and vulnerabilities, so that they think through the implications of tail events with severe consequences.

Oversight of incentives for bank managers should also be improved. SVB’s senior management responded to the incentives approved by the board of directors; they were not compensated to manage the bank’s risk, and they did not do so effectively. We should consider setting tougher minimum standards for incentive compensation programs and ensure banks comply with the standards we already have. . .

This report is a self-assessment, a critical part of prudent risk management, and what we ask the banks we supervise to do when they have a weakness. It is essential for strengthening our own supervision and regulation.

The Journal’s analysis of  Barr’s report: “Of the four top takeaways about the events leading to SVB’s collapse, three are tied to perceived shortcomings with the Fed’s banking oversight. The report focuses on errors by the agency but not on individuals’ responsibility.

The Fed also pinned some blame on its own bureaucratic structure. Authority for overseeing banks is parceled out to the Fed’s regional bank branches, but in practice, the central hub in Washington provides extensive input and must approve some enforcement actions.”

“Self-assessments-A Critical Part of Risk Management”

Over two years ago, one of NCUA’s board members requested a “look back” on the NCUA’s analysis and response to the corporate resolution.  A response was promised.  Nothing has been done, at least publicly.

Regulatory failures are costly.   Is the credit union system and its oversight subject to similar the bureaucratic shortfalls as the FDIC, Federal Reserve and OCC?

To retain, or recover, confidence in its own analysis, the Fed’s report includes details of its examiners’ findings, board presentations and other verbatim accounts of its oversight.  Transparency is the first step in accountability and trust.  That is certainly a model NCUA could emulate.







Is “Creative Destruction” the Future of Credit Unions?

One of Austrian-American economist Joseph Schumpeter’s descriptions of capitalism was called “creative destruction.”

This refers to a competitive economy’s relentless efforts to innovate for advantage and market dominance.   He described the process as: “the old way of doing things is constantly getting destroyed or supplanted as it is replaced by a newer, better.”

Some would suggest that business failures in a competitive economy are an inevitable and necessary event, even when they cause local hardship or dislocations.

The cooperative system is supposed to be immune from some of these economic forces. Credit unions are owned by their users, they have no traded stock, cannot be bought and sold as private firms, and reflect the values necessary for a communal, versus for-profit, enterprise.  Their founding, focused on a ”local” constituency with a common bond, is intended to improve the welfare of a community, not just individuals.

Local Destruction Where Dreams Become Reality

One example of this “creative” process is in neighborhood across the street where I live.   There is no home sold for less than $1.5 million and when offered, most list for at least twice that amount.

Even with this going-in price tag, Edgemoor is not a place for old homes.  No matter the asking price,  every purchase becomes a tear down.   Here is an example from across the street this past week.

The builder, entrepreneur, risk taker and innovator.

The destruction phase.

The front view.

This home built during  the depression was sold as is for $2.0 million.  About five or more large white oaks were cut down before the demolition started.  The land and location are so valuable that the builder will put up a mac-mansion of enough square feet to justify a new sales price at least double his cost.

Obviously, whoever buys this new home will believe this is progress, just what they were looking for. This is the free market at work.

Credit Union Destructions

We can debate the social and political implications of tear downs to build back bigger and more expensive homes, office buildings or condos.   But the example is not limited to real estate.  It happens in credit unions.  It is called mergers.

The key question is whether mergers are helping or hurting the credit union system–to be more precise, the mergers of sound, well capitalized long standing credit unions which have served their markets for generations.

Everyone undertaking a merger believes their new creation will be bigger and better.  Any downsides will be temporary.   Mergers are just a way of getting to the future faster especially when asset size is believed to be THE essential for competitive competence.

No Creativity, Just Destruction

Now to be fair, the house across the street had not been well maintained.  The owners had lived there for four or five decades.  The yard and landscaping were totally neglected.   The 80 foot tall oak trees made the property look like an unkempt urban jungle.

So whatever goes up after this tear down, will certainly be a visual and living enhancement-except for the missing trees.

Similarly, some sound credit unions have not been well maintained.  Leadership is just holding on until retirement; the board has given up leadership responsibility.   Selling out looks like an easy way to take care of members when the motivation has gone.

It becomes time for a new generation of leaders to take over the credit union’s legacy and continue serving members in the future.

An Existential Vortex

These easy-exit examples are becoming more numerous.  Personal advantage, not member value, appears to be the motive.

The systemic risk is creating an “existential vortex”  where all credit unions, not just the small, the poorly led or even the ambitious, are caught up in a system that is  increasingly circling the drain.

There are no new charters.  Industry assets are more concentrated. The leadership purpose  is more and more institutional growth and success.  The members, are not owners in any sense of the term, but merely customers used as the means to greater financial glory.

Credit unions competitive advantage has been collaboration and interdependence.  This is how the cooperative system was created, their regulatory institutions were differentiated, and why purpose justified a tax exemption.

Creative destruction destroys legacies, whether buildings, companies or credit unions.   New brands emerge.  Old locations closed.  New markets and business models tried.

Credit unions are not rebuilding on their old foundations.  Instead large mergers are just the age-old, typical financial market strategy of buying up competitors to become more dominate and survive.

I don’t think the merging of well run credit unions is sustainable.    It will take over two years before the new home is ready on the now demolished site and the new owners move in.   This  is also about the operational transition timeline of a large merger when members start to look for other options.

Unfortunately the creative destruction in credit unions is not putting new homes in place of the old; it is just moving all the occupants into the existing one.

Schumpeter believed that capitalism would gradually weaken itself and eventually collapse. Specifically, the success of capitalism would lead to corporatism and to values hostile to capitalism, especially among intellectuals.

In an historical irony, cooperatives intended as an antidote to the excesses of capitalism, are instead succumbing to the allure of free market takeovers.

Everyone wants to own a bigger house.

Respecting Cooperative Owners: The One Thing Essential

This past week’s financial runs show how fragile consumer confidence can be.

A critical distinction in credit union design is democratic ownership-one member one vote.

One of the challenges however is that it is easy to treat owners only as customers.  The fact is that many “owners” today are ordinary consumers attracted by a competitive rate or other marketing message.  In some cases, the customer is just an indirect loan borrower who had minimal voice in the selection of where the loan was made.

There is a difference between customers and owners in a financial institution.

Customers do not vote for directors at the annual meeting;

Customers do not vote on merger proposals for their institution;

Customers do not have a residual interest in the reserves of their firm.

Ownership is traditionally honored in other communications such as members’  founding stories or recognizing those who have played special roles in the credit union or cooperative system.

The One Thing Essential

Transparency is one critical leadership characteristic that acknowledges the owner’s role.

Without full, continuous and open communications, the default is to treat owners as customers.  That unfortunately is the attitude of many in positions of leadership today.

Most importantly lack of transparency on specific credit union commitments means the owners have little or no basis for their responsibility of electing directors.

A Regulatory Shortcoming

An example is from last week’s subordinated debt rule approved by NCUA.  Every party to the transaction is provided full information:  Senior management/boards, the brokers, the consultant, NCUA, and most importantly the individuals and entities (including other credit unions) that buy the debt.

Debt issuance of $100 and $200 million have been completed in the past 12 months. The only persons not provided the details of these events are the owners.  It is their loyalty that is the basis for issuing these borrowings that can now extend as far as 30 years.

Without transparency, there is no possibility of accountability.  The owners are removed from any role in governance.  NCUA presumes its in loco parentis role if something doesn’t go according to plan-a distinct prospect with terms of 10, 20 and now 30 years.

Senior Management and Board Compensation

Only state-chartered credit unions are required to file IRS form 990 which discloses senior management and board compensation, political donations and other activities such as grants for all non profits.

These disclosures are essential for owners to know the incentives and circumstances board and management have agreed to in leading the credit union.

Compensation consultants today are plentiful  with four part plans and multiple ways to structure payments now or later.  There are increasing references to a “change of control” clause which would trigger executive payouts no matter other merger bonus and benefits negotiated by the CEO.

Without compensation transparency there can be no accountability.  State charters have disclosed this for decades.  The same logic applies to federal charters.  This information is an important step in owner oversight, even consumer protection.

The Place and Time to Start Showing Trust in Owners

In the months ahead, most credit unions will hold their annual meetings-in person and virtual.  In preparation the annual audit will be available, a Chairman’s report prepared and other required business conducted including election of directors.

Some meetings will include updates on projects such as a new building or branch expansion, a report by a foundation or community activity.  Others will include an educational presentation, an outside speaker and even a meal.

The annual meeting is a primary opportunity for leadership to engage with owners in open and full conversations.

It is especially important in light of recent examples about the resilience of regional and smaller banks.   Confidence in an institution is based on trust.   Trust is not created in a day or by a special press release about a firm’s financial standing.  It is a relationship founded on open communication as both customers and owners over years.

Nothing could be more important this year than showing coop owners that the CEO and board  deserve their trust by being fully transparent with facts and open to the members’ questions and points of view.

That is how free markets are supposed to function in a competitive economy. That is how democracy is supposed to work.







THE Credit Union Lesson from SVB and Regulation

In a news conference following the failed Bay of Pigs invasion of Cuba, President Kennedy remarked:  “Victory has a thousand fathers, but defeat is an orphan.

The SVB’s failure proves this adage untrue.  The press and numerous pundits have already assigned multiple parentage: the CEO and management, the Fed’s rapid rate increases, regulatory and examination shortcomings, the external auditor’s clean opinion, the Silicon Valley customers $40 billion twitter run, Trump’s deregulation in 2018 and the Biden administration DEI policy objectives.

When everyone and everything is to blame, then no one is accountable.  Just another “black swan” event. With more investigations/hearings to come, each new revelation will just add to the piles of condemnations.  No lessons taken away.  More regulations of course, for this is the default response whenever the barn door is left open.

A Spotlight on One Factor

From all these commentaries, I want to highlight one aspect that contributed to overlooking this risky situation. This factor has just become a part of the credit union regulatory eco-system.

In responding to my analysis earlier this week, Doug Fecher, the retired CEO of Wright-Patt Credit Union in Ohio, commented:

This situation makes me wonder if NCUA’s new “RBC” standards would have flagged the risks to SVB’s balance sheet. From what I can tell, much (most) of SVB’s investments were in “risk-free” treasury bonds and high quality agency securities, which in NCUA’s RBC formula would have earned some of the lowest risk multipliers.

To me it is another example of the folly of RBC-style risk management regimes … and why NCUA was wrongheaded in its pursuit of RBC.

This point of view is not limited to Doug’s observation.

During his time as Vice Chair of the FDIC, Thomas Hoenig challenged the agency’s reliance on risk-based capital requirements.  He questioned both the theory and practice, pointing to the lending distortions which contributed to banking losses during the Great Recession.

He wrote about the SVB failure in this commentary:

The regulator apparently relied on the bank’s risk-weighted capital standard for judging SVB’s balance sheet strength. Under the risk weighted system government and government guaranteed securities are not counted as part of the balance sheet for calculating capital to “risk-weighted” assets.

This allowed the bank to report a ratio of around 16%, giving the appearance of strongly capitalized bank. However, this calculation failed to account for interest rate risk in its securities portfolio or the risk of having a highly concentrated balance sheet. It misled the public, and apparently the regulators.

In contrast, if the regulator had focused on SVB’s ratio of equity capital-to-total assets, including government securities, the ratio falls to near 8 percent; and if they had calculated the ratio as tangible capital-to-assets (removing intangibles and certain unbooked loses from capital) the ratio would have fallen to near 5%.

What this would have disclosed to the world is that the bank’s assets could not lose 16% of their value before insolvency but only 5%, a stark contrast.

Had the regulator not relied on the misleading risk-weighted capital measure, it might have take actions sooner. A simple capital-to-asset ratio, tells the regulator and public in simple, realistic terms how much a money a bank can lose before becoming insolvent. The regulatory authorities need to stop pretending that their complex and confusing capital models work; they don’t.

RBC and Credit Unions: A First Birthday

RBC became the surrogate capital ratio for all credit unions with assets greater than $500 million one year ago on January 1, 2022.

Before this in a September of 2021 analysis, Why Risk Based Capital is Far Too Risky. Hoenig is quoted:

“A risk-based system  inflates the role of regulators and denigrates the role of bank managers. 

We may have inadvertently created a system that discourages the very loan growth we seek, and instead turned our financial system into one that rewards itself more than it supports economic activity.”

RBC and Asset Bubbles

Shortly after the critique of regulatory incentives induced by risk weighted assets, in Asset Bubbles and Credit Unions (JANUARY 10, 2022) the consequences from potential Fed tightening were noted:

When funding looks inexpensive and asset values stable or rising, what could go wrong?

The short answer is that the Fed’s inflation response will disrupt all asset valuations and their expected returns.

The distorted results  caused by RBC was presented in Credit Unions & Risk Based Capital (RBC): A Preliminary Analysis in February of this year.  Among the findings:

The 304 credit unions who adopted RBC, manage $822.7 billion in assets.  But the risk weighted assets total only $479 billion.  That 58% ratio is the NCUA’s discounting of total assets total by assigning relative risk weights. and,

One credit union with assets between five and ten billion dollars, reports standard net worth of 12.5% and an RBC ratio of 48.3%.  

This February analysis using June 2022 data of RBC credit unions showed that:

250 of these 308 credit unions reported unrealized declines in the market value of investments that exceeded 25% of net worth.   Four credit unions reported a decline greater than 50% of capital.  This was before the five additional Federal Reserve’s  rate increases through the end of the year. 

RBC’s primary focus is credit risk, the loss of value from principal losses from loans or other assets.  Balance sheet duration mismatch is not captured as are other common management errors:  concentration in either product or market focus, limited or no diversification of product or market, or  just simple operational mismanagement.

These common challenges become amplified by insufficiently considered non-organic growth forays such as third party loan purchases or originations. Whole bank acquisitions are an example of such risks often accompanied (disguised?} by growing amounts of the balance sheet’s intangible asset, goodwill.

The RBC proxy indicator for safety and soundness creates a distorted impression of real institutional risks.   Managers learn to game the system so that boards, members, and regulators fail to understand the institution’s total financial situation.

And when along comes a change in underlying assumptions, like the Fed’s rate increases, the previously unrecognized vulnerabilities quickly appear.

RBC creates for some institutions a theoretical capital ratio that is nothing more than a “regulatory  house of cards.”  SVB will not be the last example.

As Doug Fecher recommended in his 2016 comment letter on the proposed rule, “RBC should be a tool, not a rule.”

To his credit,  Kennedy learned from the Bay of Pigs misjudgments when the Cuban missile crisis occurred in 1962.



An “Important Message From Our President and CEO”

Immediately following Silicon Valley Bank’s (SVB) failure, credit unions and banks sent messages to their members or customers.  They affirmed that  their institutions were safe. It was also common to point out that that they did not have SVB’s business model or its exposures.

Effective communication is an art, especially in a crisis.  The audience is used to receiving marketing promotions.  This situation is very different from those routine messages.

This special contact should be authentic (even personal), drafted for the event, and include relevant facts for the specific circumstances.

The following are examples from two CEO’s, one from a bank and the other a credit union.  Following each is a response from the audience.

March 13, 2023

Dear Customers and Friends of VeraBank, (posted on the bank’s web site’s landing page)

I want to take this opportunity to address what is going on in the financial markets, regarding the orderly liquidation of Silvergate Capital Bank, the closures of Silicon Valley Bank and Signature Bank, and how it relates to VeraBank.

It understandably creates worry any time there is a failure in our industry. Let me reassure you, these banks are nothing like VeraBank, and we have no exposure to the issues leading to those niche banks’ downfall.

Both Silvergate and Signature Bank focused heavily on volatile crypto industry, and Silicon Valley Bank was the largest bank serving start-up technology businesses and venture capital firms involved in that industry. These banks did not practice the prudent diversification of revenue and risk, unlike VeraBank and the great majority of community banks in this country. For instance, at the close of 2022, 97% of Silicon Valley Bank’s $175 billion in deposits were uninsured, and they only had $12.5 billion in cash on hand to cover those deposits. As of closing this past Friday, only 30% of VeraBank’s deposits are uninsured, and we have over $928 million in cash on hand or 87% of our uninsured deposits in cash on hand to cover any customer liquidity needs. I can assure you that is a very high level for our industry.

In other words, where Silicon Valley had only 7.1% of their uninsured deposits covered by cash on hand, VeraBank has 87% covered. We also have liquidity sources that could fairly easily increase our liquidity by close to twice the amount we have now. At VeraBank, we have always understood the importance of good liquidity and risk management. VeraBank is funded with stable local deposits from the communities in which we do business and not the kind of “hot” and unreliable money that funded the three institutions that are now failing.

VeraBank has been through many good and bad economic times, and we continue to operate with the same conservative philosophies that have served us well for over 93 years

Most recently we went through the Great Recession of 2008-09, the ups and downs of the oil and gas markets of the last 15 years, and a global pandemic, and we have not missed a beat.

Actually, it has been just the opposite at VeraBank: we have thrived because we understood the importance of risk management. We understand that we serve each of you and do not dare put your money at undue risk.

Please do not confuse VeraBank with these other banks and others you may hear about in the weeks to come. I am very confident in our bank and how we protect our customers. Please reach out and talk with any of my 500+ colleagues if you have any concerns at all. Let me provide you with my cell number, 903-649-8790, so you can feel free to text or call me directly if you would like to talk about these issues.

Thanks for your continued support,
Brad Tidwell

The response:  according to an evening business news report, Tidwell received over 700 calls spending most of his day on the phone.

VeraBank was established in 1930 at the height of the Great Depression, is a privately-owned community bank that serves East and Central Texas with its network of 38 conveniently located branches in East and Central Texas and has $3.5 billion in assets.

A CredIt Union CEO’s Email to Members



I’m pleased to report that Golden 1 Credit Union continued to thrive in 2022 and finished the year in a strong financial position. Throughout the year, our 1.1 million members were able to rely on Golden 1 to deliver financial solutions with value, convenience, and exceptional service. Please view our 2022 Annual Report for more details.

For 90 years, Golden 1 Credit Union has been a safe haven for our members’ money and a trusted partner for the financial products and services they need. Golden 1 exists to serve our members and we take our responsibility to you and your trust in us very seriously. That’s why we employ prudent risk management practices in our decision-making, including diversification of our portfolios, protecting Golden 1 and its members in volatile economic periods.

As the nation’s seventh largest credit union with assets nearing $19 billion, Golden 1 Credit Union is a well-capitalized financial institution with more than $1.3 billion in net capital. Golden 1 Credit Union also has access to more than $10 billion in available liquidity to absorb any potential impacts of shocks within the financial markets.

Safe and secure since 1933, we remain steadfast in our commitment to ensuring our members can thrive financially.

Thank you for being a valued member and putting your trust in us.


Donna Bland
President and CEO
Proud member and employee since 1994


A Member Responds:

Ms. Bland,

Suggestion: If you are going to send out an email blast starting with “I’m” as in “I’m pleased to report…” make sure that your Member/Owners (?) can contact you personally (and not have to guess at an email address because you may be too busy to respond to us plebeians…).

As a credit union that is supposedly member owned, WE (your members) should have an open line of communication with transparent abilities to see how our credit union is run on a daily basis.  

Again, this includes open lines of communication to ANYONE in our credit union, including a directory of staff.  As a member that is hearing impaired, a telephone is not a particularly viable option but email certainly is. . .

This is the first email that I have received concerning the operations of G1 since becoming a member over a year ago.  There should be email blasts to indicate G1 annual reports as well as opportunities for election to the board of directors…

This email is meant to be a frank/direct/open suggestion for improvement of member communications with the actual member/owners of G1.

Thank you,

A Comment

Each reader or CEO can choose which approach best fits their style.

As the credit union member suggests, this kind of member contact should be more frequent.  It would include other items that the owners (not customers) would find useful or relevant, not just when a special event occurs.  For most art generally improves with practice.