A June 26, 1984 gathering of “Old Timers:” current NCUA board members, prior Administrators, past General Counsels and senior staff celebrate the 50th anniversary of the passage of the Federal Credit Union Act.
Seated left to right: Deane Gannon, Joe Blomgren, Richard Walch and Bernard Snelick.
Standing left to right: Joe Bellenghi, Austin Montgomery, Fred Hayden, P.A. Mack, Ed Callahan, Elizabeth Burkhart, General Herman Nickerson and John Otsby.
A statement of cooperative enterprise from a church’s bulletin board
LEGACY
All of us are indebted to the past,
to those who precede us.
We drink from wells we have not dug.
We enjoy liberties that we have not won.
We share faith whose foundations we have not laid.
The Creighton FCU insolvency resulted from the sudden discovery of a $13.6 million hole in this reportedly $67 million asset credit union. The failure, NCUA’s largest in 2024, is apparently an unsolvable mystery. One in which the only suspect has died. As I first posted, NCUA has provided not a single fact about where any of the money went. Just speculation.
More incredible is the IG suggestion that there is no money missing, just a bunch of accounting errors. Moreover, no one seems very curious about finding out where money went. In the IG response to the Congressional inquiry he opens with the statement: “my office was not required to perform a material loss review. Additionally, NCUA informed us that the agency was not required to conduct a post-mortem review.” In other words, don’t look for any answers from us.
The one IG explanation is that the CFO, who died in April 2024 leading to the shortfall’s discovery. was covering up actual operating losses for up to 26 years. We’ll examine this idea later. In the IG’s summary review, no one within the credit union or NCUA examiners and external CPA auditors apparently saw any indications of irregularity during three decades.
The IG further assures Congress that an over “20 year review” of the CFO’s family records reveals no unusual credit union cash diversions. Yet this is still the person who carried out this cover up apparently alone, fooling every check and balance and division of duties for such an extended scheme.
Blaming a person no longer around, and who apparently took no funds, feels too convenient. Let’s look at the plausibility of the IG’s theory and facts we do know.
The Cash Came In
We know the members deposited the cash and the funds which went missing. When the $13.6 million shortfall was discovered, this hole was covered by underreporting shares by an almost equal amount. Shares balances in the March 30, 2024 call report were $61 million. Ninety days later the total reported by NCUA in their exam and the June call report was $74 million. This is the exact total change in net worth. And the same order of magnitude ($74 million) for Creighton members’ share liability when merged with Cobalt.
But where did the cash go? Here is the IG’s “official explanation” after reviewing all the information he reviewed:
NCUA officials believe the credit union failed due to bad accounting and financial statement fraud. The large deficit was hidden by the former CFO who exploited Creighton’s weak accounting system that allowed back posting, forward posting, deleting transactions, and hiding general ledger accounts when generating reports. Because no money was found to have left the credit union through this, NCUA officials believe the former CFO committed the fraud not for personal financial gain, but to make the credit union appear to be thriving in the eyes of its Board and membership.
The IG’s “Thriving by Hiding” CFO Motivation
Reread what the IG just asserted. Although we know the $13 million member deposits came in, “no money was found to have left the credit union.” This CFO was cooking the books just to hide operating losses for 26 years. This is what the IG wants us to believe?
Cash shortfalls creating a cumulative deficit can only occur if the credit union pays out that cash in some form (hidden operating expenses, fraudulent loans, fake withdrawals, phoney investments etc) What were those payouts? Some entity or person received these cash diversions hidden by accounting coverups for decades.
A brief IG reference is made to the management of the credit union’s 150 ATM’s for which the accounting was difficult to reconcile. This should have prompted questions such as, what accounts were used to fund the ATM operations? Who managed the cash deliveries and cash drawer balancing when machines were serviced? Was there an external servicing contract or were cu personnel responsible? The IG letter states: Fraud auditors reviewed ATM and lease payment accounting transactions. The regional director stated that the ATM accounting was extremely complicated due to Creighton having over 150 ATMs and the multiple ways in which income and expenses could be divided.”
The IG statement is an NCUA and auditor admission they could not figure out what was going on. Managing 150 cash receiving and paying ATM’s is similar to having to reconcile 150 teller cash drawers periodically. Cash comes from deposits and checks, and cash is with withdrawn by members from their share accounts.
NCUA’s Regional Director is reported to find that “ATM accounting was extremely complicated.” This is what should be expected from covering up a missing $13 million. But not a single instance of imbalance or shortfall is cited. Or even a reference to how the machines were managed.
And the closest we get to the smell of a smoking gun is not from NCUA or outside auditors, but from Cobalt which is quoted in the IG report:
“NCUA officials advised (note the passive voice) that in early October 2024, theylearned from Cobalt that after the merger, Cobalt determined that the former CFO understated expenses related to the ATM network to artificially boost Creighton’s income statement to appear to achieve a steady net income. The IG continues:
“Cobalt surmised that the former CFO was either not booking the monthly ATM expenses at all or was severely understating the expenses. Cobalt indicated the ATM costs alone should have been $255,000 each quarter. They determined the CFO booked around $120,000 per quarter to the office Operations account. Cobalt officials explained to NCUA officials that this would account for an approximate $500,000 to $550,000 reduction in net income per year if no other expenses were booked to the Office Operations account.
Cobalt officials explained that over more than 26 years, such an understatement would easily account for the $12.5 million deficit.”
One can only say Wow! to this explanation from Cobalt. NCUA did not make this finding. ATM expenses are for cash outlays for withdrawals and network operations. The bottom line is that someone or some entity was paid the money. Who wrote and signed the checks for these underreported expenses? The IG report makes it appear it was all just confusing bookkeeping.
Putting the Blame on a Fall Guy
Cash from members shares came in and $13 million cash ended up missing. For 26 years it was all the “fault” of a person no longer living. Which means that all of those who were simultaneously responsible for the safe and sound operation are let off the hook.
Among these listed in the IG letter are the CEO of 32 years, a senior accountant, the board, the supervisory committee, the outside auditor, special auditors and multiple NCUA officials from the supervisory examiner, problem case officers up to the RD’s office.
These were not just persons called in to observe a financial autopsy. They were directly responsible for this institution’s safe and sound operation in their various capacities in the many years before this failure came to light. Yet we read not a word about their roles including the person who oversaw the CFO and his senior accountant staff this entire time.
The Reported and Reconstructed Net Income
Here is what we know from the most recent eleven yearend call reports prior to June 2024.
Creighton FCU’s Reported Financial Performance
OK performance, but certainly not world beating. If one believes the IG’s theory, then the real result in this most recent eleven years was an operating loss of $5.5 million from ATM “expenses” plus false net income of $2.0 million. A $7.5 million difference somehow hidden by creative accounting.
However if one presumes a steady cash diversion as the problem, then adding back the estimated $500,000 or more per year means the credit union actually made $7.5 million—most of which was “expensed away.” This earnings would equate to an average ROA of 1.2% or four times the net in the call report. And a reasonable possibility.
The cash from member share growth came in. The cash went out the door as an “operating expense” somehow, somewhere.
A diversion of this magnitude for this long would seem to require several participants. Presumably the ATM’s were not deployed all at once. A system of diverting cash was initially set up and expanded as the network grew. Was some entity or person(s) servicing the machines somehow involved? Other credit union employees had to balance the ATM total cash receipts and disbursements to the general ledger. There had to be a system for quickly producing expense and suspense entries to cover up the missing cash for exams and auditors. No one person could fill all these roles.
Since the share shortfall was quickly found suggesting a second set of books, there is probably a similar recurring system for diverting cash to sustain this activity for decades.
All the people listed in the IG reports were in the room when this happened. But none of them was apparently asked for an explanation of how this could have occurred on their watch. For example how could the CFO have “managed” the expected net income without first talking to the CEO about the results?
After reviewing 20 years of the deceased CEO’s family records, and finding “no improper transfer of credit union funds”, the IG’s simple explanation is that “that the CFO hid this $12 million deficit by exploiting the credit union’s weak accounting system.” But how long had this “weak accounting system” been in place?
The lack of any IG mention of NCUA exam and CPA responsibility for “weak accounting” suggests a reluctance to learn who is accountable for what in this failure. Instead put the blame on the person no longer available, and who took nothing.
Questions the IG should have asked include: What were the examiners’ CAMEL ratings in the most recent years? What did the supervisory committee do? How did examiners record the problems of” back posting, forward posting, deleting transactions, and hiding general ledger accounts” now offered to explain the inability to find the shortfall? Did the CPA firm give a clean audit opinion?
The NCUA and IG’s failure to look at the standard processes for oversight and accountability reflects a flaw in the agency’s own structure. Handing problems over to another credit union to cover up NCUA’s supervisory failures, will only lead to more such failures.
Throwing a Credit Union Under the Bus
Cobalt FCU and their members are taking the hit for Creighton’s financial and supervisory failures. The immediate results of the Creighton merger in the September 2024 quarter include a share inflow of over $73 million; a reduction in undivided earnings of almost $7.0 million (from $115.6 to $106.5–( i.e. Creighton’s negative net worth); and an increase of 6,700 members versus declines in the immediate prior quarters.
Additionally, Cobalt’s net income from ongoing operations reported a $400,000 third quarter loss. The year to date net income is a negative $2.2 million. These combined changes resulted in Cobalt’s net worth falling to 8.1% from 9.2% at the September 2023 quarter end.
A Case Study of Failure-at All Levels
In the IG’s reply to Congress, he states one of the objectives was to report on:
the effectiveness of the National Credit Union Administration’s (NCUA) examination and oversight processes in detecting and preventing financial irregularities, and the role and performance of external auditors in this case. The letter covers none of these issues.
At this time no one yet knows where the missing cash has gone. NCUA has not worked very hard to get critical information on the event. The IG mentions a possible explanation suggesting there is no missing money-just accounting confusion. But the $13 million of member funds is gone.
NCUA seems to have distanced themselves from any further explanations, even citing Cobalt for the latest accounting examples. Yet overseeing the safe and sound operations of credit unions is NCUA’s number one priority. NCUA failed totally and quickly moved on in this case. They have literally closed the books, fended off queries and said there is nothing more to see here.
If this sudden $13 million failure is not a wakeup call, when will the senior leaders of the agency step up to the mike and take responsibility? The NCUA board is responsible for governing the agency, not staff.
The Board’s silence and turning over responses to the IG for a Congressional inquiry for its largest cu failure in 2024 is a leadership failing. The agency’s no comment and the IG’s second and third hand reporting, undermines pubic trust and confidence in NCUA’s administration. Congress, credit unions and the public want to hear from their leaders in a crisis, not the bureaucracy.
Perhaps it is time for a real change at the NCUA board.
The TV story told of the $13.6 million dollar loss at Creighton FCU leading to its subsequent merger with Cobalt FCU in August 2024. Cobalt said this was the result of the “CEO’s retirement.” Both Peter Strozniak’s Credit Union Times article and I had written about this forced merger and the loss in its final June 2024 quarter of operations.
The merger was caused by an enormous deficit equal to 20% of assets uncovered following the CFO’s death in April. NCUA gave no explanation of what happened, where the money went or who was responsible for the follow-up. NCUA and Cobalt refused to answer any questions about the event. Problem resolved, no questions please.
But the TV news triggered immediate additional facts that NCUA has refused to provide the press and public about its actions. The TV reporter received a letter NCUA’s Inspector General (IG) sent to Omaha Congressman Mike Flood responding to his inquiry about the circumstances of the loss in November.
The IG response is linked here. The letter opens with an unusual disclaimer of direct responsibility as the IG and NCUA are not required to investigate this situation any further:
Because there was no loss to the Share Insurance Fund, my office was not required to perform a material loss review. Additionally, NCUA informed us that the agency was not required to conduct a post-mortem review for the same reason.
But the IG then proceeds to state facts from the public 5300 call report and details of all the external resources and NCUA officials who became involved when the CFO died in April. Those listed include a local CPA firm, the NCUA’s supervisory examiner, the regional director, associate regional director, the director of special actions and a problem case officer. NCUA requested the credit union hire a bond attorney, fraud auditor and an interim CFO to work with its problem case officer. On May 3 the case was transferred to the Western Region’s Special Case office on May 3.
The only NCUA offices not listed are those ultimately responsible for the oversight of NCUA’s federal credit unions: the Executive Director, the Director of Examination and Insurance and the NCUA board. By omitting any mention of their role, they are apparently excused from any accountability.
In October 2024 Cobalt reported to NCUA that the “former CFO understated expenses related to the ATM network to artificially boost Creighton’s income statement to appear to achieve a steady net income.” The IG’s explanation also includes this assertion of agency’s due diligence:
When reviewing the deceased CFO’s family financial records and computers that:The regional director also said the fraud auditors looked for all ways cash could have left the credit union and found no instances of cash removal.
The IG’s concluding paragraph provide NCUA’s theory of the case:
In summary, NCUA officials believe the credit union failed due to bad accounting and financial statement fraud. The large deficit was hidden by the former CFO who exploited Creighton’s weak accounting system that allowed back posting, forward posting, deleting transactions, and hiding general ledger accounts when generating reports. Because no money was found to have left the credit union through this, NCUA officials believe the former CFO committed the fraud not for personal financial gain, but to make the credit union appear to be thriving in the eyes of its Board and membership.
The IG’s Theory of the Case
Several observations from the IG’s summary. First all the information is second and third hand. The IG did not complete any direct review, but solely reported what others have said and done.
If this preliminary description is accurate, one has to believe this accounting coverup occurred over at least 26 years with an average operating shortfall of $500,000 per year between reported and actual net income.
To accomplish this alleged coverup, the CFO would have to keep two complete sets of books. As the deficits were recorded from share balances this would require hundreds of individual entries each quarter to balance out the shortfall but keep member statements accurate. Then these two sets of books would need to be updated quickly whenever external NCUA examiners and auditors arrived on site. Or whenever there was any external loan and share verifications.
A person capable of this legerdemain bookkeeping effort for over 26 years was however not capable of managing the credit union’s financial performance with positive net income?
There is no explanation of how such a consequential scheme could have gone undetected from annual CPA audits, NCUA examinations. supervisory committee share and loan verifications and traditional separation of duties in the accounting shop. It was not discovered until the CFO’s death in April. New people quickly found the out of balance situation and the $13 million shortfall. The fact that the share shortfalls were recovered so rapidly and then transferred in full to Cobalt, suggests these two sets were readily available. An internal defalcation involving member share balances over three decades would normally be an auditing and forensic nightmare to reconstruct. But in this case resolved quickly.
Just Country Bumkins Fooling Experts
Finally, it strains credulity to believe there was no shortfall of funds. The cash had been received from the incoming share deposits. But the IG’s letter presents the assumption that the CFO just used “suspense accounts” to cover unrecorded continuing operating losses—that would average at least $500,000 per year. Why would a person go to this much trouble to just cover operating losses for which he was not directly responsible? If in fact it was failure to balance out ATM deposits and withdrawals—one suggestion—how could such a continuing imbalance go unnoticed for over three decades?
The IG report describes the accounting coverup: Specifically, the CFO had understated expenses related to the credit union’s ATM network to artificially boost Creighton’s income statement. And, The regional director stated that the ATM accounting was extremely complicated due to Creighton having over 150 ATMs and the multiple ways in which income and expenses could be divided.
A credit union of this asset and member size managing a 150 ATM network seems highly unusual. What happened to this system after the merger? Why were examiners and auditors unable to balance out this system for decades?
Assuming the CFO’s only rationale was to hide a continuing operating loss and that he received no benefit from his actions, one must ask who also might benefit from such a coverup? Who supervised the CFO? Is this just a situation of two country bumkins fooling all exam and auditing experts for decades?
NCUA’s Silence on This Failure
Until the IG’s December response to Congressman Flood’s inquiry, all responsible parties have said nothing about the situation. Press queries are referred to call reports and to Cobalt’s press release saying the merger was due to the CEO’s retirement, a completely false account. Why would the NCUA and Cobalt put out such a blatantly false and easily contradicted explanation? Was it to avoid addressing the $7 million or greater shortfall that Cobalt members will now cover?
One fact is clear, everyone, including the IG is distancing themselves from any responsibility for getting to the bottom of this $13 million loss. The IG presents second hand information and lists multiple NCUA involvements with everyone handing off the ball to someone else-either internally or externally. Cobalt does the cleanup. The IG quotes Cobalt’s theory of the loss from October, not NCUA findings, for the missing funds. The IG washes his hand because no “material loss” review is required, but he will consider adding a review to his 2025 “to-do” list.
When people in positions of responsibility have nothing to hide, they will speak up with their understanding of events and what more needs to be done. In this case there is silence for all parties, but most especially the highest levels of NCUA. The initial explanation of multiple decades of accounting coverups creating a $13 million shortfall seems unlikely and inconsistent with some of the data reported. It feels like there must be more to the story.
The True Shortcomings
NCUA’s lack of public candor is the real problem. No one at NCUA wants to take responsibility for the agency’s most fundamental role of overseeing a credit union’s safe and sound operation. Noticeably absent from IG’s account is the role of the three-member board, the information they received and the actions they did, or did not, take.
Did the Board approve the forced merger without member vote? If so, what was in the Board Action Memorandum about the situation and alternatives? Why was Cobalt FCU willing to absorb this accounting and operational mess with a $7.0 million loss which their members must now cover? Where is their upside, if any?
Why weren’t the previous NCUA annual (?) exam papers reviewed for how so-called unrecorded expenses could be disguised in other accounts (suspense and office expenses)? The three quarterly call reports clearly show the credit union reporting positive net income, but no increase in net worth until the yearend. Don’t examiners first review the accuracy of call reports as one of their first verifications? Etc. etc.
The Largest Credit Union Failure in 2024
The Creighton case is an example of institutional failures. The most serious is not the $13 million unexplained loss shutting down a federal credit union. But the total lack of responsiveness to the members and the public by NCUA’s leadership. In a crisis, leadership should come from the NCUA board members, not the professional staff. They are merely foot soldiers. The leaders are missing in action.
Is the best explanation NCUA can provide Congress and the public an IG summary of second-hand agency actions, a listing of all the professional resources sent and offering a third party’s partial explanations of what may have happened?
The buck should stop at the Board’s three desks. The board members are nowhere to be found or heard on the most significant failure in 2024. A long standing, apparently successful federal credit union collapses overnight and costs its members their institution and $13 million in combined resources.
More Precious than Dollars: Trust and Confidence
The NCUA board member’s inaction and silence when facing real problems in an open, prompt and responsible manner is a failure of leadership. Hiding from issues and accountability leads to internal coverups. It creates a lack of public confidence in the agency’s oversight. The perception that board members are not up to the agency’s most basic responsibility raises questions about their competency supervising other areas of credit union activity in which members good faith and trust (e.g.merger payouts) are routinely compromised.
After the TV investigation was reported on Monday, I received the following from a former Creighton member. It read :
Hi Chip – I ran across your coverage (in November) of Creighton Federal’s large shortfall. I am a customer there and had followed their directives to switch to Cobalt. Now I’m wondering if my money is safe at Cobalt! I liked some of Cobalt’s products (a money market savings account with high interest, for instance) and have been happy with their service so far. Still, your coverage of the slap-dash management at Creighton Federal, and its rescue by Cobalt has me wondering if I should move my money to another credit union in town that doesn’t have any problems (that I know of). Thanks!
Hopefully this case is at its beginning and the three members of Congress on the IG’s response will continue to press for actual facts, updated numbers and direct explanations for what happened. NCUA seems incapable of self-assessments. Credit unions should not expect perfection from their regulator, but they should have honest accountability.
Editorial update at 5:00 PM January 8.
Yesterday the WOWT station published this follow up report incorporating some of the IG’s December letters comments to Representative Hood.
Jimmy Carter’s life is a witness to making a transformative difference in the world by personal example and faith, versus the power of a position. This Thursday, January 9th, his legacy will be honored in a ceremony at Washington National Cathedral.
He has stated that the two great formative experiences of his life were the Great Depression and WW II. Today those events and their lessons seem from another era.
When he first announced his Presidential ambitions in December 1974, a Gallup poll asked voters to rank 31 potential democratic candidates. His name was not on the list. Yet just two years later he won the first primaries in Iowa and New Hampshire defeating nationally known opponents including Senators Scoop Jackson, Ted Kennedy and Robert Byrd.
At the July 1976 convention, he became the democratic presidential nominee.
He was a Southern Baptist who taught a Sunday School class whatever his position—as Governor, as President or as a private citizen. He lived his faith not by telling others what to believe, but by example.
In this official portrait by Robert Templeton (1929-1991), Carter is standing in the oval office as it was during his tenure. On the desk is a crystal donkey statute, a gift from the Democratic National Committee. This oil on canvas 1980 painting is in the National Portrait Gallery.
His Presidency and Credit Unions
Credit unions, as in other segments of the economy, were entering a period of regulatory and market transformation. Carter’s one direct initiative for coops was to ask congress to charter the National Cooperative Bank in 1978. The bank’s purpose was to advocate for America’s cooperatives and their members, with emphasis on serving the needs of communities that are economically challenged.
However, the unique role of credit unions in America’s financial system was not a singular focus.
Rather, changes in the industry during his four years were largely driven by credit union’s specific legislative efforts and external economic events. The destabilization of oil prices led to rising energy costs, increasing inflation and ultimately, the highest interest rates seen in the 20th century. These economic factors helped spark the need and response for the policy of deregulation in multiple sectors of the economy.
NCUA’s Institutional Redesign
Within the federal bureaucracy, Congress re-established the National Credit Union Administration (NCUA) as an independent agency in the executive branch on November 10, 1978 (12 U.S.C. 226).
The NCUA’s Central Liquidity Facility Act (CLF) (12 U.S.C. § 1795) was also created by Congress in 1978. The purpose was to provide credit unions their own source of liquidity similar to the Federal Reserve System’s discount window for banks and the FHLB system for S&L’s.
NCUA’s restructure gave President Carter the opportunity to appoint the three initial board members:
Lawrence Connell, Jr. – The Chairman, had previously been Connecticut Bank Commissioner. He served in the office of the U.S. Comptroller of the Currency (OCC) from 1958 to 1968.
Dr. Harold A. Black – A PhD economist, Dr. Black as a board member brought academic and financial expertise. He helped to integrate his 1962 freshman class at the University of Georgia.
P.A. Mack, Jr. – Served as Vice Chairman. Since 1971 he had been administrative assistant to Indiana Senator Birch Bayh. Mack was reappointed to a second term by President Reagan in 1984.
Connell, center; Black on left; PA Mack on right
This was the administration’s most direct impact on credit unions. It followed the practice that personnel appointments in government are in fact policy. In his Presidential appointments, Carter tried to make the government more representative of the American people. His domestic policy advisor Stuart Eizenstat stated that Carter appointed more women, Black Americans, and Jewish Americans to official positions and judgeships “than all 38 of his predecessors combined.”
In terms of enhanced member services, in 1977 credit unions lobbied Congress to authorize mortgage lending and share certificates for FCU’s, products that had been available in multiple state charters for years.
Economic Forces Precipitate Deregulation
Inflation hit 14% in 1980 and led to ever rising interest rates creating financial crises across major industries dependent on energy and sectors reliant on stable interest rates. These sectors were often subject to government regulations that set consumer prices, or rates paid to savers and charged to borrowers. These regulated industries were often limited in the scope of their services and in turn protected from direct market competitors.
Deregulation of these government-controlled sectors was introduced by the CAB in the airline industry, in long haul trucking, railroads and finally, the national monopoly known as Ma Bell, the AT&T phone company. The Carter administration also deregulated beer production, sparking today’s craft brewing industry.
Financial Services Deregulated
Financial firms reliant on charters and deposit insurance were especially impacted by the sudden and increasingly volatile rise in interest rates. In response, Congress passed the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA ) signed by President Carter on March 31, 1980. DIDMCA had profound effects on financial institutions, including:
Increased Deposit Insurance: Raised the deposit insurance limit from $40,000 to $100,000 on individual savings accounts.
Authorized Interest-Bearing Transaction Accounts permitting credit unions and savings institutions to offer checking accounts, rather than relying on banks as payable through agents for their “share drafts or NOW accounts.”
Phased Out Interest Rate Ceilings for the banking industry by June of 1987. However, in March 1982 the NCUA board under Chairman Callahan eliminated all constraints on the terms and interest for savings in one regulatory action versus the six-year phased process implemented for S&L’s and banks.
In his signing statement, President Carter made only a brief reference to the bill’s impact on consumers: This is not only a significant step in reducing inflation, but it’s a major victory for savers, and particularly for small savers.
Following the 1980 DIDMCA legislation, NCUA authorized Share Draft Accounts, a service that banks had contested when introduced by state-chartered credit unions earlier in the decade.
A final administrative action triggered by inflation was Executive Order 12201—Credit Control of March 14, 1980. In this order, President Carter granted the Federal Reserve authority to control the growth of credit, including all loans extended by credit unions and other financial intermediaries. The intent was to lower inflation by limiting loan demand growth at the institutional level.
An Agency in Need of Administration
Other than the three NCUA board appointments, President Carter’s administration had little direct comment about the cooperative financial sector.
When Ed Callahan became NCUA Chair in October 1981, the agency was still in a period of reorganization. Agency staff was top heavy in DC with 16 separate offices including a consumer examination program run independently of the six regional offices. There were departments doing tasks and reports the same way as ten years earlier, despite the new challenges of deregulation. Examinations were on a two-year cycle, at best. Semiannual call reports were not collected from all credit unions. The NCUSIF was cash poor and used 208 assistance to help credit unions regain solvency. The CLF had only several of the over 40 corporates as agent members, and only a handful of the almost 16,000 natural person credit unions had joined. There was uncertainty about how the CLF itself would be funded. In brief, the NCUA in 1981 had too much regulation and not enough administration.
Carter’s Legacy
Most of the changes in NCUA structure, the CLF, and even the enhanced mortgage and certificate services were sought by credit unions and underway before Carter took office in January 1977. Credit unions had seen deregulation work at the state level but implementing that policy on a national basis was at best uncertain.
The combination of economic headwinds and changing market competition led CUNA President Jim Williams to say their primary goal was “survival” at the February 1982 GAC conference. In response Chairman Callahan in his first GAC address said the solution was deregulation for credit unions coupled with a simultaneous upgrading of the agency’s supervisory capabilities.
A Leader’s Impact
However Carter’s influence goes far beyond his time as President. While his administrative and policy challenges were not viewed as successful when he left office, his insights and leadership perspective are now being reassessed. For example, his reasons for establishing independent departments for energy and education are now seen as critical to America’s future.
But the most memorable contribution may be his calls to common sense individual accountability. In his 1979 “Crisis of Confidence Speech” he challenged Americans to acknowledge their responsibility for the urgent national economic worries. He said in part:
In a nation that was proud of hard work, strong families, close-knit communities, and our faith in God, too many of us now tend to worship self-indulgence and consumption. Human identity is no longer defined by what one does, but by what one owns. But we’ve discovered that owning things and consuming things does not satisfy our longing for meaning. We’ve learned that piling up material goods cannot fill the emptiness of lives which have no confidence or purpose.
His concern about society’s desire for the bigger, the newest, the “always more” is still a dominant motive today. For a person who grew up on a peanut farm in rural Georgia, lived through the depression, and who left military service to run the farm when his father died, character mattered more than material net worth.
Capitalism promotes and relies on consumer demand. This incessant drive has become endemic in society. When credit union leaders talk about progress in terms of billions, have we lost the cooperative focus on member well-being to the market’s alternative ethos of institutional dominance?
The title of his first book when announcing his intention to run for president was Why Not the Best? It was about renewing the can-do American spirit. The question Carter poses for us is can we invert our thinking about credit unions as successful financial institutions and again see them as a movement by and for the people.
An elegy for Jimmy Carter, Jr.
by Paul Hooker, a retired Presbyterian pastor, presbytery executive, and professor who lives in northeast Georgia
Goodbye, fierce and gentle warrior, farmer with your hands full of good soil. You grew things.
You made your choices for weal and woe, held your power loosely, let it go; asked nothing of others you asked not of yourself.
In extraordinary times, you were an ordinary man — not a hero, not a saint, not a role model. You looked into our eyes and told the truth as best you understood it. We did not listen.
We wanted fairy tales of false greatness, glib promises of never-ending good times, eternal morning in a land immune to night — Lies, all, and so you warned us.
But comforting calumny is easier to hear than stony fact. We turned away to worship at their shiny altars these gods of glory, greed, and gore.
You wavered not an inch from your convictions, smile undimmed by public humiliation; you went back to planting crops in fields where no one else thought they could grow:
Peace in bloodied ground, homes in urban lots, love stretched like a wedding canopy over time and patience and simple faith.
Do not despair. The fields you plowed still wait their harvest. See, even now they bear your quiet fruit.
An unusual approach to assembling a leadership team for a government agency.
Persons interested might review his positions and priorities from a speech on September 9, 2024 to the ACU Congressional Caucus. In the opening paragraph he remarks that his term ends in August 2025 and his search for ideas for his “remaining days:”
Good morning and thank you. This conference is one of my favorites. One reason I’m here is to get ideas on how I should focus the remaining days I have left in this job. Around this time next year, the White House will likely announce a new Board Member. That’s because my term on the NCUA Board ends next August, so I have less than a year left. Whew, I was worried that would be an applause line.
Later he notes his regulatory approach:
in America, you deserve protection from an overbearing government. . .
If NCUA or other agencies ‘get over their skis’ and interfere in the private financial affairs of credit unions and their members, the resulting credit union use of NSF and overdraft services could have the paradoxical effect of limiting access to financial services for those who need it most.
Governments often have coercive powers far beyond any financial institution. . .
I want to mention two fascinating new technologies that we often hear about: Artificial intelligence, and blockchain and digital assets, which includes cryptocurrency. I’ve made clear that the NCUA shouldn’t be a technophobic agency. . .
In reading the full speech, there is no reference to credit unions as cooperatives and any role that design has in his regulatory agenda.
I had the opportunity to listen to a very small slice of NCUA’s Board’s public budget process for 2025-26 by watching the video of the November 21 discussion of the CLF’s spending requests for the next two years.
Although extremely small in the agency’s overall spending totals, I fear we see clearly in this simple example, the board’s inability to substantively assess spending requests.
A Brief Background
Several items from the CLF’s board action memorandum for November 21 provide some background for the hearing including these two points:
The purpose of the CLF is to improve the general financial stability by providing member credit unions with a source of loans to meet their liquidity needs and thereby encourage savings, support consumer and mortgage lending, and provide basic financial resources to all segments of the economy. and,
“(CLF) is owned by its member credit unions and managed by the NCUA Board”
CLF’s budget proposals were for $2,307,863 for 2025 and $2,448,263 for 2026. Salaries and benefits are 96% each year’s requests.
Several facts put this credit union owned public-private effort in perspective.
Total membership is 430, an increase of 32 in 2024, and 9.4 % of all credit unions. CLF’s balance sheet is $966 million and includes $44 million of net worth/retained earnings.
The Board’s Policy Failure
Each board member remarked on some aspect or other of the financials. Otsuka had no questions. She made an unexplained reference to “protecting the insurance fund.” Hauptman called the CLF a “buffer for the American taxpayer” and cited a vague reference to $18 billion of loans sometime in the past.
He reverted to his standard routine of demonstrating how to improve the “user experience” when contacting the CLF. He showed how staff had “made it easier to access” the CLF by removing the on-hold music replaced by an automated telephone routing message. He confirmed that a credit union inquiry would ultimately end at the CLF President’s desk, if no one else picked up the call before then.
He also pointed out that 3,300 credit unions (95% of those under $250 million in assets) had lost access when the special CLF-Corporate membership authority expired. Hauptman opined that credit unions should have multiple liquid cash sources which is how he arranged his personal financial management: “a credit card, home equity line and a margin loan established with a broker.”
As Chair Harper led off the discussion, one would have hoped for a focus on CLF policy and whether its purpose above was being carried out. Instead, he supported the budget in full and noted the 31 increase of members. He did ask about the cost of membership. The 4.46% third quarter member dividend was the only recognition that the CLF’s return to the owners was below market rates including the overnight Fed Funds yield. He again complained about Congress not renewing the special CLF authority for corporates to join by funding only a subset of their members.
Business as Usual While Failing the Owners
A critical capability of any NCUA board member is discernment. What is their understanding of the key issues in a staff presentation, especially when focused primarily on budgets? Is It really about numbers? Or should it be about whether the CLF is serving its owners?
All three board members stated that the CLF existed for the benefit of NCUA and the NCUSIF, not for the credit union funding owners. What are credit unions getting for their direct support of the CLF? In the presentation the number one productivity indicator and primary 2025 Planned Activity goal is to Provide CLF Advances as needed.
However, the CLF has not issued a loan to credit unions since 2009. Almost all of those advances, 15 years earlier, were to two corporates via the NCUSIF. They were very short term and not part of any overall recovery plan. I am ignoring a token $1.0 million mini-advance made to a small credit union in December 2023 and paid off early in 2024.
A Time of System Stress
The lack of credit union support and CLF membership is not a statutory shortcoming. It is a management one, an NCUA responsibility as stated in the staff memo above. During the 2022 and 2023 rising Fed rate cycle, liquidity pressures increased throughout the system. This concern peaked when the Silicon Valley and other bank failures occurred. However the CLF was totally missing in action this entire cycle.
Instead, credit unions borrowed in record amounts from the Federal Reserve’s Bank Term Funding Program (BTFP) and the FHLB’s. For example, the September 2023 call reports show 307 credit unions with Federal Reserve borrowings of $34.9 billion, an average of $114 million. For these credit unions, the Federal Reserve represents 66% of their total borrowings. For 112 of this group, the Federal Reserve is their only source.
Credit union total assets of $2.25 trillion at 3Q 2023 were just 9.7% of total banking assets. However, their participation in the special emergency Federal Reserve lending program equaled 27% of the BTFP’s loans at yearend or three times cooperative’s share of total industry assets. And this Federal Reserve borrowing was only a quarter of all credit union borrowings at the quarter end of $130.3 billion.
During this entire liquidity crisis, the CLF was nowhere to be found, or even heard. No programs, no outreach, no public discussion. And it was not due to a poorly designed website or failure to target market. Rather the CLF’s credit union owners were completely left out and shut out of any role except sending in capital—for a below market return. The agency made no effort to assist credit unions because the board and staff view the CLF as a liquidity partner for the NCUSIF, not the industry.
Why the CLF Has No Interest is a post from May 2024 which shows that the credit union owners have been subsidizing the CLF due to its below market dividends. The CLF’s return is much less that paid by the FHLBs and corporates on their capital accounts. Even though the CLF has investment authority similar to FCU’s, its own portfolio was underwater at 2023 yearend and its yield trailed the overnight FF rate the entire year. But the board ignored those facts.
Credit unions do not view the CLF as a reliable partner in times of balance sheet stress. They have plenty of tested alternatives. Ones that don’t impose supervisory judgments on top of collateral security. The Board’s view of the CLF to serve the NCUSIF has made it a “vestigial organ” within the NCUA body serving no credit union owner-members.
What the Board Could Have Asked Staff
Following are some questions that board members might have asked if they had really focused on the CLF’s policy failures in this most recent period of liquidity need.
How many of CLF’s current members have outstanding loans elsewhere? How much and for how long?
What unused lines do CLF members report on the latest call reports?
Has the CLF developed any proactive lending programs in the two years since the Fed began raising interest rates in 2022? If yes, how were these communicated to owners?
Given the dramatic increases in credit union borrowing in both total dollars and numbers as shown below, what did the CLF do during the crisis? The chart below would be updated as context for the question.
Total Credit Union System Borrowings (June ’22 to June ’23)
Why should the CLF continue as a separate department with a staff of six and overhead charged by the NCUA board, when it could easily be a collateral responsibility with other senior examination and supervision staff?
The failure of NCUA board members to ask the most basic questions about CLF’s non-activity while routinely continuing to increase its spending is disappointing. It undermines the NCUA’s capacity to serve the owners of the fund.
The board has failed in its policy oversight role. With zero lending productivity, why is there any reason for a staff of six to keep lights on? The entire system shows increased liquidity demand and draws but relied entirely on every other contingency funding source while its own funded resource was moot.
If credit unions are to get their money’s worth from the CLF, the agency must show leadership by working with the owners. Contrary to one board member’s assertion, CLF effectiveness does not depend on its members; rather it depends on the management by NCUA. Otherwise, just merge the shop back into the bureaucracy from which it came. Save the credit unions money.
Editor’s footnote: If you want to see how another cooperative designed liquidity lender communicates with its owners, read this latest update from the FHLB’s newsletter.
(This is the second of two posts on the first and only National Examiner and Credit Union Conference in December 1984 organized by NCUA. Part one is here.)
In March 1984 when NCUA announced its organization of the first ever National Examiners’ Conference in December in Las Vegas, much skepticism was heard.
The first concern was “You will need professional planners or you’ll never pull it off.” But NCUA central, regional and field staff put the conference together piece by piece without hiring a single consultant.
To get the lowest possible hotel room rate, NCUA booked the MGM Grand Hotel for early December. The critics were not optimistic. “Credit union people will never come to Los Vegas two weeks before Christmas.”
And the ultimate quip, “You think credit unions are going to pay to meet with their regulator?”
Once the marketing started, a limit of two per credit union had to be imposed. As one credit union explained, “I knew it would be a sellout so I reserved 12 slots up front so I could take all my volunteers. We’ve never been to a credit union conference and a lot of things are coming down the line. I thought it was extremely important for them to see what was going on.”
By October the conference limit of 2,500 had sold out. No new registrations were possible. A wait list was set up.
Examiners Come First
More than 900 federal and state examiners and regulators met from Monday through close of business on Tuesday. The goal was sharing experience and expertise. One theme of the conference was the changing economy. America was moving into a new era transitioning from an industrial economy to an information one.
Financial transactions were about moving information for members. Credit unions were at the center of this change. According to the most recent American Banker consumer survey, they had become America’s favorite financial institution.
Chairman Callahan opened these initial sessions saying, “Better trained examiners and better communication between federal and state regulators and credit union officials are essential in a deregulated financial environment. This national conference is a chance to discuss current concerns and share problem solving techniques.”
Some examiners had been on the job for years; others for just months. One commented about this joint effort: “We’ve always been first cousins but never knew each other. I was surpirsed to learn how much we have in common.”
One professional challenge was the increase in examiner responsibility. NCUA had been delegating to the regions and their field staffs greater responsibility for safety and soundness. The need as one NCUA executive stated was “to get close and stay close” to credit unions.
Case studies were presented in breakout sessions to practice analysis and problem solving approaches. The Early Warning system of 1 to 5 ratings was reviewed. NCUA was the first federal regulator to share its individual ratings with the institutions it supervised. Not all agreed this was a good idea. One regional director said some credit union managers used the ratings as a measure of personal performance and for negotiating higher salaries.
Dual chartering came up at several panels. Private coop insurance representatives sat alongside NCUSIF examiners. The focus on choice of charter was critical to the evolution of the credit union system. Share insurance options were an essential component of a meaningful dual charter choice which provided a check and balance on each system’s responsiveness. It was pointed out that deregulation of savings accounts, field of membership options, and broader investment choices had occurred first in individual states before these were adopted in the federal system.
The Grand Convocation
On Wednesday 1,500 volunteers and professionals joined for panels, workshops, and informal conversations. There were over 300 speakers and 60 different breakout sessions. While some of the sessions were repeated, the plenary sessions and many of the panel discussions were filmed, edited and then rebroadcast on the conference’s 24-hour video magazine. These excerpts were shown over the MGM Grand’s in-house television giving attendees a chance to watch sessions they couldn’t make. The broadcasts also included live interviews and comments from attendees.
Major topics included the future of the common bond with a panel of both state and federal regulators; how to monitor investments and find useful information; whether deregulation was beneficial for consumers and financial institutions. Breakouts covered mergers, the role and future of CUSO’s, and changing examiner skills and new analytical data base resources.
Richard Breeden, the Vice President’s Deputy counsel for Financial Institutions, moderated the panel Is the Regulator Obsolete? Will technology and the speed of money transfers make it impossible to track critical changes in a timely way?
Federal Reserve Governor Martha Seeger described how deregulation had changed the role of regulators: “We must think of ourselves as business advisors, not as policemen. To me, examiners and credit union mangers are partners in fostering depositor trust and we have just got to work together in this.”
Popular sessions at both parts of the conference were led by Rex Johnson, the president of a newly charter credit union in Illinois. He had been deputy supervisor for the Chicago office of the DFI before taking over the cu startup. His had provided training for NCUA examiners using actual examples of credit underwriting prior to this conference. Rex’s unique collections of case studies generated a lot of interaction. He noted, “We had a lot of fun in the breakouts, but more important we learned a lot from each other”
The Bottom Line and Bigger Story
One of the guest speakers was former Marquette basketball coach Al McGuire. He remarked: “You’re a family; you’re a team and there’s no “I” in team. Credit unions are on a fast break and have unlimited potential. You must make the maximum effort and you must be together.”
The conference was a gathering where people could translate a belief in themselves and their credit union into practical terms. Comments included: I’d give it four stars , , , because of the enthusiasm of the people and the direct involvement of NCUA Chairman Callahan himself. Usually people at that level don’t become involved. He lit one hell of a fire in Las Vegas.”
That fire was because this first National Conference of examiners, supervisors and credit unions showed that their efforts were all part of a bigger story. Everyone contributes, no matter their credit union’s size or time on the job. What each does individually adds to the greater purpose of the cooperative system in America.
Selected Photos
Dick Ensweiler, President of the Illinois League, Callahan and Board Member Mack. The League presented Ed with a framed motto on his departing for NCUA, that read We Don’t Run Credit Unions. It was in the Chairman’s office at NCUA.
Larry Blanchard then editor or Report on Credit Unions. He worked for Austin Montgomery at NCUA, ran a credit union and has been involved with multiple credit union firms from TruStage to Callahans–still to this day.
Federal Reserve Governor Martha Seeger speaks to the full conference.
NCUA Executive Director Bucky Sebastian with regional directors Carver, Riley and Skyles.
Texas credit union Commissioner Pete Parsons and NASCUS Chair on a panel on dual chartering.
Carmen Hyland, credit union attorney, mother of Gigi. (corrected from first description) Her daughter became counsel for a corporate credit union, NCUA board member and President of the National Credit Union Foundation.
At a reception: Ted Bacino, NCUA Director of the Office of Administration, Laura Rossman, Senior Advisor to PA Mack, and Callahan.
There are two NCUA videos of the conference plus more than 300 more photos if someone wants to use in a more detailed report on the event.
On December 9th, 1984 a unique, one-of-a kind credit union event took place at the MGM Grand Hotel in Las Vegas.
The National Credit Union Examiners Conference was the inspiration of NCUA Chairman Ed Callahan. It reflected his belief that state and federal regulators had common purpose with the credit union community. While each had separate responsibilities their shared goals could best be accomplished through collaboration and continuing communication.
The Operational Context
This unprecedented national initiative was accomplished while NCUA was doing its “day job” overseeing 11,000 FCU’s and monitoring 5,000 state charters with NCUSIF insurance. The agency was in the process of completing an annual exam for all FCU’s for the third consecutive year. CLF membership, in partnership with the corporate system, included all 16,000 credit unions in its liquidity coverage.
The NCUSIF redesign was passed by Congress with complete credit union support. This structural change from cooperative principles created the strongest of all three federally managed funds-a fact still true four decades later.
The 1985 agency budget had been passed in the fall. It slashed spending by 4.9%. This spending cut enabled a third reduction in the FCU operating fee of over 20% for a total of 64% over the three yers. Moreover, it was NCUA resources that underwrote the conference including the attendance by all its field examiners plus regional and DC staff.
The credit union system was moving forward in the market. In August the agency reported credit union loans had grown 26.2% over the 12 months ending in June 1984. Member shares were in their third year of double digit growth following deregulation.
This year was also the 50th Anniversary of the passing of the Federal Credit Union Act, an event celebrated by the agency in many ways, including new chartering and total membership goals.
The Conference Launch
On March 14, 1984 NCUA’s press release announced the initiative: NCUA to Hold First Conference of Federal and State Examiners and Credit Union: It read in part:
“This National conference is a unique opportunity to bring together credit union officials, state and federal credit union examiners and regulators and representatives of the credit union trade associations,” said Chairman Callahan. “It will be a chance to discuss current concerns and share problem-solving techniques. Examiners need to be exposed to a wide range of ideas and procedures that will enable them to do a better job of ensuring the safety and soundness of credit union particularly in a deregulated environment.”
We want to make it possible for the public and private sectors to learn from each other and openly discuss the progress, and problems of the credit union movement.”
A registration card was placed in the NCUA’s 1983 Annual Report sent to every credit union in March 1984. It showed the two sessions, the first with examiners, and then followed with all credit unions joining from December 9 through the 14th.
The May 1984 NCUA News reported why registrants said they would be coming:
Don Beall, President of NASA FCU was quoted: I think this is a welcome relief from the past when we had little opportunity for constructive dialogue with the regulatory. The operational types and examiners live in different worlds.
Robert Sorin, Superintendent of the Ohio Division of Credit unions wrote: “The field staff has never had the opportunity to gather with other state or federal examinders to exchange ideas. . . we want to come away with some new friendships and many new ideas.”
And the price was right. NCUA secured the government room rate of $38 for all participants including spouses. Two people who choose to share a room would pay only $19 apiece.
A registration form was included in the June newsletter. A conference registration packet was mailed to all FCU’s that same month.
The form also announced that the agency had negotiated a substantial airline savings with United and gave a toll-free number for credit unions to call for discounts for Vegas flights.
In September the News headline read Two Per Credit Union Attendance Placed on Conference Attendance. The explanation: “Due to heavy demand, registration is now limited to a maximum of two persons per credit union, a move designed to allow as many credit unions as possible to participate.”
On September 28, 1984 the NCUA announced the conference was sold out. Registrations were coming in at 100 per week and the 2,500 person room capacity limit was reached two months ahead of schedule.
“We are thrilled but not surprised by this tremendous response. Credit unions were quick to recognize this will be the kind of learning opportunity they just can’t get anywhere else,” said Chairman Callahan.
The Conference Speakers
The conference schedule offered over 60 different panels, workshops and case studies. The sessions speakers included all three NCUA board members plus Federal Reserve Board Governor Martha Seger; Richard Breeden, staff director to the Vice President’s task Group on Regulations of Financial Services; former NCUA board chair Larry Connell, former FHLB Chair Richard Pratt, former NCUA board member Harold Black and Al McGuire former Marquette basketball coach, and current NBC sports analyst.
When the conference agenda was finalized, more than 300 speakers and panelists were listed including federal and state regulators, leading credit union professionals and trade associations officials.
In posts later this week, I will present some of the content offered and photos. I believe this will illustrate the unique charater and significance of this extraordinary event.
The Conference’s Significance
This National Conference was a celebration of recent success and a dialogue about the future of the cooperative system. It was not an addition on top of NCUA’s traditional roles of examination, supervision and administration. Rather it was a culmination of the values, practices, and common purpose for how NCUA had been involved with the credit unions since deregulation.
Chairman Callahan believed the single most critical responsibility of a leader was communication, both listening and sharing points of view. From frequent press releases, open press conferences, board meetings on the road, transparent dialogue was the foundation for common industry efforts.
This conference was designed as an optimum opportunity for these exchanges. It was the high point for a new relationship paradigm for NCUA with credit unions. This “tipping point” in the positive and constructive relationships between credit unions and regulators would stay in place substantially until undone by athe Financial crisis in 2008 and thereafter.
Recently I asked a person who has worked with credit unions in the past four decades, what she would like to see in the next NCUA Chair.
Her response: “Someone who cares about us.”
That simple statement felt profound. I circled back to ask how she might know if someone met this criteria.
In her words, the person would not be an outsider. Rather someone who has worked in or with credit unions. An example she cited are those CEO’s today who began their careers as tellers or branch managers to become leading CEO’s. They know the operations and culture that create success from the ground up.
Communications
This person, she said, would reach out and talk with, and more importantly listen to, credit unions.
Credit unions would be included as regulatory policy and priorities are developed. Communication would be ongoing and open. The industry would not be preached to. Rather the system’s success would be celebrated especially with examples that make members’ lives better.
Mutual respect would characterize interactions. The Chair would recognize that not all credit unions perform at the same level. For that is how life works. The multiple legacies of personal time, cooperative resources and member loyalties that are the foundation of today’s cooperative system would be recognized.
What to Avoid
I believe most would agree with these characteristics. But her concern was if the Chair was “an outsider with an agenda.” That can lead to a tendency is to see credit unions as an “enemy” especially when in difficulty, rather than being part of a common cause.
This person reflected “how can you regulate if you keep credit unions at arm’s length?” Or if the appointee has never managed an organization, how can they be expected to do something they have never done before? Put simply, how can you regulate something you know nothing about?”
A Public Conversation on NCUA Leadership Now
The most consequential action by the incoming administration on credit unions will be the appointment of the next NCUA Chair. Hauptman’s term ends in August 2025.
It is easy to speculate how the broader Trump agenda might impact NCUA. There could be spillover from these efforts. However, the opportunity now is to articulate the factors that would characterize a successful NCUA leadership selection. One that would move the cooperative system forward in its special role addressing the needs of members and local communities.
This dialogue should include identifying potential candidates whose backgrounds suggest both experience and competence in leading an organization that has made a difference during their tenure.
Now is the time for those who believe in the cooperative model, to speak up and ask their affiliated organizations to do likewise. Bring forth names of persons who would bring insight and demonstrated competence to the Chair’s role.
For if credit unions and their affiliated organizations fail to express their views, how can the incoming administration see this appointment as anything other than a job for a loyalist?
If credit unions demonstrate their strong interest in this role, that enhances the chances of a meaningful choice for the next four years. And a more productive relationship between NCUA and all its constituents.
The 1980 election of Ronald Reagan brought a spirit of hope and joy for some. For others , deep concern about the future of the federal government’s role.
Recall Reagan’s policy priorities: Supply side economics-tax cuts, defense spending to counter the Soviet Union, tighter money supply, reducing the rate of government spending and deregulation. In August 1981, one of his first dramatic actions was firing 11,345 striking air traffic controllers and banning them from federal service for life after they refused to return to work following a contract dispute. Federal agencies and employees were worried about their future.
The Private Sector Survey on Cost Control (PSSCC), commonly referred to as the Grace Commission, was an investigation requested by President Reagan authorized in Executive Order12369 on June 30, 1982. In doing so President Reagan used the now famous phrase, “Drain the swamp“.[1] The focus was on eliminating waste and inefficiency in the United States federal government. The head of the commission, businessman J. Peter Grace,[2] asked the members of that commission to “Be bold and work like tireless bloodhounds, don’t leave any stone unturned in your search to root out inefficiency.”[3] (Wikipedia)
A year later when the Commission issued its report it called NCUA Board Chairman Edgar Callahan a “role model” for government agency executives. It noted that, “in one year, NCUA cut Agency staff 15% and its budget by 2.5% while maintaining their commitment to preserving the safety and soundness of the credit union industry.” (NCUA1983Annual Report page 3). What was this transformation like?
How NCUA and Credit Unions Fared During Reagan’s First Term
When Reagan took office, inflation for the prior year 1980 was 13.5%. The short-term Fed Funds rate was 13%. Federal Reserve President Volker’s goal was to drive inflation down by raising rates further if necessary.
The NCUA’s new Chairman was Edgar Callahan, whose immediate prior responsibility was over five years as Director of the Department of Financial Institutions in Illinois. DFI supervised over 1,000 state chartered credit unions. At the February 1982 GAC conference, the primary concern for the audience of national attendees was industry survival. Callahan said the response was to put responsibility for fundamental business decisions in the hands of credit union boards and managers, not the regulator. He called this multi-faceted change “deregulation.”
During the next three years NCUA became what the Grace commission described as a model for effective governmental performance.
The following are highlights of how NCUA changed from a November 15, 1984 agency press release titled: FCU Operating Fee Scale Slashed 24%; Third cut in Three Years
The excerpts from this two-page, detailed release describe how this unprecedented reduction was achieved.
The NCUA Board today slashed by 24% the operating fee scale for federal credit unions in 1985, bringing to 64% the fee scale cuts over the past three years.
The dramatic 24% cut will save federal credit unions more than $4.3 million in 1985 and has saved them $14 million since 1983, the first year in NCUA’s history that the fee scale was cut.
“For the third straight year, the efficient operation of the Agency has allowed us to put money into the pockets of federal credit unions, “ said NCUA Chairman Edgar Callahan. “It’s an impressive track record, one that the agency and entire credit union system can be proud of.”
“NCUA is the only federal financial regulatory agency that is assessing its constituents less this year, than it did three years ago and I think that is a tremendous accomplishment,” said NCUA Board Vice Chair P.A. Mack.
Federal credit union operating fees, which are pegged to a sliding scale based on federal credit unions’ assets, are the primary source of funding for the Agency’s operating budget. The fee pays for the Agency’s annual examinations of each federal credit union as well as its chartering, supervisory and administrative activities. NCUA receives no tax dollars. Operating fees, the earnings on the investments of those fees, and insurance premiums are the sole sources of funding for the agency.
(The next six paragraphs show the specific dollar impact on credit unions of different asset sizes including Ft Shafter, Hawaii Federal and State Employees and Navy Federal Credit Unions.)
Continued cost cutting efforts at NCUA, coupled with a projection for robust federal credit union asset growth and increased earnings on NCUA investments are the key elements that made a third consecutive operating fee scale cut possible.
The NCUA board attributed the Agency’s success in keeping costs down to high productivity by NCUA staff, personnel reductions and the shifting of resources from the central offie to the field where they are needed most.
For example, NCUA for the second consecutive year has completed an annual examination of each federal credit union, and achievement not seen since the mid-1970’s. Although total agency employment has been reduced by 15%, the number of examiners has increased to an all-time high (369). Getting back to a once-per-year exam cycle exemplifies the Board’s desire to promote safety and soundness while leaving the management decisions in the hands of each credit union.
The resulting gains in efficiency enabled the Board to reduce the Agency’s fiscal 1984 budget by 4.9%-the biggest cut in the Agency’s history. It was the third straight year the Board approved a total agency budget that was below the previous year’s request.
Federal Credit unions in the six months ended June 30, 1984 had grown 12.5% from $55.5 billion to $61.3 billion.
Taken together, the budget cuts, investment income and credit union growth are expected to leave NCUA’s operating fund with substantially more than it needs to meet its expenses. By slashing 24% from its operating fee schedule, the board is effectively eliminating a $3.4 million surplus. “We believe in returning as much as possible to credit unions,” Chairman Callahan said.
This action is another in a series fiscal and operational improvements the NCUA Board has approved of in the past three years. . . most recently the adoption of rules to revitalize the National Credit Union Share Insurance Fund (NCUSIF) transforming it from the lowest reserved to the strongest of the three federal deposit insurance funds. (End quote)
Some of the Lessons
Chairman Callahan’s leadership at the agency was based on professional competence, experience and pragmatic solutions. Some of his colleagues had worked with him on credit union issues for over five years. Internally Callahan placed responsibility for problem solving with the six regional directors. The agency had become top heavy in D.C. where issues got bogged down between 16 separate offices. He streamlined this structure into two primary responsibilities: an office of administration and the office of programs.
Resources were moved to the field so that an annual exam became the minimum standard for performance. Competence, not seniority or appointment status, were the criteria for responsibility. Mike Riley went from head office to become RD of the largest and most problem challenged region as the youngest RD ever. Rosemary Hardiman was board secretary and Joan Pinkerton, and Sandy Beach led public information and congressional affairs—all were appointees chosen by the previous Chair Larry Connell.
Money was not the most critical resource; it was management talent and willingness to innovate to resolve problems with effective supervision. Staff was provided enhanced training that included Video Network recordings such as Rex Johnson of Lending Solutions, leading sessions with examiners to identify sound and unsound loan underwriting. Another video session was a case study of an actual credit union problem for the agency led by a business school professor.
These efforts were supported by disciplined research, constant dialogue with credit unions and open, frequent communications. New data analytical tools (financial performance reports) from the call report were provided for both examiners and credit unions. NCUA board meetings were taken on the road so credit unions could attend and speak directly with senior staff and board members.
NCUA and credit unions worked collaboratively to transform both the agency-the CLF, the NCUSIF and the exam program-and the credit union system to the new world of open market-based competition. These institutional changes have endured even when subsequent Chairman were chosen from individuals with no coop experience, and several who had just lost a recent election (Senator Jepsen and Congressman Norm D’Amours). The agency staff and administration were comfortable working with the industry even when board members had little or no relevant credit union, regulatory or leadership experience.
Celebrating Success
The high point of this collaborative approach was the largest ever regulator-credit union conference held in December 1984 in Las Vegas, organized by NCUA. All state regulators and examiners and NCUA staff met with over 2,500 credit union attendees to hear from experts and debate the future. I will write more about this seminal event that has never been repeated.
The conference demonstrated the power of cooperatives to share and learn from each other. This was a summit that ushered in over three decades of credit union expansion and resilience as the S&L industry failed and the banking system and FDIC went through multiple bailouts.
The bottom line: as shown by this 1981 transition, new faces can be opportunities for creative leadership and strategic change. The 1981 selection of Ed Callahan as chair enabled NCUA and credit unions to become financial pacesetters for their members and the country. It is the quality of the appointee, not the party, that matters.
One should advocate for a similar considered appointment and proven leadership in this coming transition.
