GAO’s NCUSIF Study Omits the Most Important Data Point
The GAO released a report in October analyzing the causes of credit union failures from 2010-2020. The news stories and report lead with two facts: 145 credit unions caused $1.55 billion in losses to the NCUSIF in these eleven years.
The full report took 16 months to complete and contains appendices full of math correlations and sophisticated looking analysis.
However it omits the most important fact about these losses. That is the NCUSIF’s 1.30 Normal Operating Level (NOL) is 93 times larger than the rate of insured losses for this period. That is a critical actuarial finding.
The GAO failed to put its analysis in any context or perspective. Any loss is too much. All credit unions operate in a competitive market. As noted by Ed Callahan when Chair of NCUA discussing deregulation, “Some credit unions will do better than others.”
The most important issue is the financial impact of losses on the NCUSIF and credit unions. Using the GAO’s $1.55 bn total, this results in a loss rate on insured savings in this eleven-year period of 1.4 basis points.
The loss trend is also declining as noted in the study. Of this total, the report (page 13) says $831.7 million was from the failure of three taxi medallion credit unions in 2018. That means the 142 remaining credit unions lost $718 million for a loss rate of only .65 of 1 basis point.
In the context of a $20 billion insured fund with total capital equal to 1.3% of insured savings, the fund is 200 times larger than the insured losses if the disruptive event of the taxi medallions is not included. If counted, the fund as noted, is 93 times larger than the eleven-year insured loss rate.
Reasons for Failures
Figure 7 on page 19 is a table labelled: Top Material Loss Review Causes or Contributors to Failure by Number of Times Mentioned.
This is the list of the six causes from most to less frequently cited:
- Credit Union Board or Committee Oversight
- Failure by NCUA examiners
- Weak or missing NCUA Guidance
- Fraud
- Management integrity
- Lack of timely and aggressive NCUA action
All of these six areas are why there is an examination of every insured credit union. These “causes of failure” should be covered in every exam.
The report does not cite economic circumstances or external disruptive events, as in the taxi medallion credit unions, as reasons for losses. The report began after the Great Recession with losses in 2010 when the economic recovery was well underway.
What the report makes clear is that NCUA’s exam program has much room for improvement.
At yesterday’s November board meeting, the CFO commented that the positive NCUSIF AME recoveries from prior loss estimates has continued into November. So the net loss reserving expense for 2021 is, in effect, negative. This means the two most recent NCUSIF loss ratios cited above should be even lower when this year’s results are added to this study’s total.
Leading with Competence, Not Position or Authority
On January 7, 1984, NCUA Chairman Ed Callahan spoke to the Hawaii Credit Union League’s Political Action Conference. This was the predecessor to today’s governmental affairs conference.
He opened by discussing deregulation a term he described as “overused and misunderstood.” “I was not the inventor, but I gave it a good push.”
He then addressed why credit unions had been so uneasy, even fearful with this radical change that would apply to entire financial industry. The fear was whether cooperatives could compete. For on December 14, 1982, in a first step, all rates for all institution’s money market accounts were removed.
He then presented the evidence. Growth in savings showed credit unions, whose liabilities (shares) had been totally deregulated in May 1982, had increased by double digits for three consecutive years, far ahead of the banking industry’s outcome.
The most important benefit of the change was that credit unions would make their own business decisions not government bureaucrats. There was no more “follow the leader” putting all our “eggs in one basket.” He also recognized “some will succeed more than others.”
The Rest of the Story
He then explained the additional changes necessary for this result to succeed.
The agency had approved a “more realistic common bond” which he believed would have the most lasting “real impact in the long run.”
He talked about the agency’s decentralization, putting resources into the field where they were most needed in order to conduct an annual exam program. “We threw out the old cookbook and created a new exam process so we could be “problem solvers” if required.”
The agency needed to be “more efficient” using the resources provided by credit unions. One example was “resource sharing” where the agency would compensate credit unions who would lend their personnel and knowhow to assist other credit unions experiencing difficulties.
Finishing the Job
He closed asking support for a new design for the NCUSIF. The Fund was “not competitive” relying on double premiums to try to meet the 1% of shares objective set in the Act.
The new design would be “less costly, puts control of funds in your hands, and makes the fund all yours when you put up the money.” This change would “complete the system.”
Leadership Change that Lasts
Ed took questions at the end of the talk replying to attendees’ concerns about “overlapping FOM’s, competition for members,” and the threat of taxation.
He closed with the thought that he did not want to be remembered for what he had done as NCUA chair but rather for “being part of the future.”
His ending rouser challenged credit unions: “You’ve been a model for your members; now become an even better one.”
What Sets a Leader Apart-“Feeling Safe”
Ed did not lead change by preaching fear. Instead in this speech and many others he directly addressed the “fears” that credit union leaders shared. Fear of the unknown future, competition from without and within the industry, or the lack of expertise and navigating an economic recovery with members.
Hearing him speak, credit unions “felt safe” with his proposals for the future. They had confidence not just in current results, but in the way the agency presented the context for change-the transparency, the joint efforts, and the shared belief in the unique value of the cooperative system.
In 1984 credit unions supported Congress’ change of the NCUSIF to a 1% deposit-based system, bringing all the benefits described in the plan. This was critical for credit unions to have a sound, unique and competitive future in the newly deregulated financial markets.
Ultimately the trust in any organization depends on those who interact with it, “feeling safe” with its leaders. That belief is real; it is earned not granted by position; and it is the fundamental confidence required for any system’s success.
One of Ed’s gifts was instilling confidence in others and their ability to succeed. Every coach knows this reality if there is to be a winning team. An example that is much needed today in DC.
When Words Matter Most
On November 5th, Pomona Postal FCU, founded in 1964, became NCUA’s fifth conservatorship of 2021.
The Credit Union Times story contained this standard explanation:
The NCUA issued a media release and other information, showing the agency took possession and control of the insured credit union to conserve its assets, protect the National Credit Union Share Insurance Fund, and resolve operational problems that could affect the credit union’s safety and soundness.
At September 30, this $4.2 million credit union reported a net worth of 6.86%–down .01bps from a year earlier; an ROA of .48, delinquency of $33,184 covered by an allowance of $41,000.
The Critical Question
This action raises again the ultimate question, Why? The $20 billion NCUSIF had to be “protected” from the deprecations of this $4.4 million monster disguised in tiny sheep’s clothing?
Or, as typical of other small credit union seizures, will we learn from court records (years from now) that there has been a long, on-going pattern of misdeeds in this two-employee firm, overlooked in multiple past annual NCUA exams?
Or, perhaps it is just examiner and regional office frustration that their supervision has been unable to stabilize a slowly declining financial picture?
Both options are troubling. The failure of NCUA to be transparent in the use of its most absolute authority is itself a symptom of the real issue.
If NCUA is unable to supervise this credit union speck in the $2.2 trillion system, how can anyone have confidence in their oversight of a $40 or $400 million, let alone a $4.0 billion entity.
The irony of NCUA’s explanation is stunning. For if true that this $4.4 million was taken over to protect the insurance fund, the greatest danger to the system is not from credit union malfeasance or failures; rather it is NCUA’s incompetence.
It is time for the agency to drop the bureaucratic doublespeak and start giving straight talk about its actions. For the issue is not what happened at Pomona Postal but why the agency feels so compelled to cover up its most important responsibility.
Two CEO’s Experiences with NCUA
From a retired 30-year CEO commenting on NCUA’s oversight of loans to credit union executives and directors- (2021).
“I hope NCUA has improved their guidance for loans to Management and the Board of Directors. We merged with a credit union that had a policy that Board members, management and their families could borrow $100,000 each unsecured. When we merged with them we found the Manager, his wife and two sons each borrowed $100,000 as well as the Asst Manager and two directors.
Each went bankrupt and the loans were never paid. When I challenged NCUA, CUMIS and our lawyers, they all said since they went bankrupt, we could not collect from them as long as the Board approved the policy allowing them to borrow up to $100,000 each unsecured. NCUA should have a policy that officials cannot have special terms that the members do not have. “
Changing Role of the Regulator: A Relationship That Should Be Based on Mutual Respect (1984)
“. . . it seemed as though we would never escape the attitude that the regulator knows best. . . A dramatic change has taken place in the last few years. We now have a federal regulatory agency which openly concedes that credit union people know more about running credit unions than the agency does. . .
The relationship between credit unions and the regulatory agency is one founded on mutual self-respect, and on the realization that both sides share equally in the responsibility for the survival and future development of credit unions. . .
The nature of the federal bureaucracy being what it is. . .there will be a great amount of inertia to cause it to revert a less creative and less cooperative approach to regulating credit unions.
I would not like to see that happen.”
Frank Wielga, CEO Pennsylvania State Employees credit Union. Source: NCUA 1984 Annual Report
Missing Voices
NCUA’s New Logo
“I wish I had kept the phone numbers and emails of CEOs that are now gone from view. Ex-CEOs that could tell me what they had wished they had done when they faced downward curves on the way to the end.
I worry that lessons lost and archived outside our industry are what is needed now.
What did we miss when we justified the NCUA or regulators’ actions to end an organization? What did we miss when no owners really dug into a vote to end a charter? What did we miss when the life-cycles of leaders and volunteers were more important than CUs needing young blood?
What did we miss when we followed models based on scale that left local communities and individuals on the sidelines? What did we miss that are the keys to turning a losing streak back towards winning?
Some might say we missed nothing, we witnessed progress and the natural march towards an industry’s maturation. But that sounds to me like short term winners talking.” (Randy Karnes, 2018)
Tens of Thousands Fewer Voices
NCUA was converted to an independent agency with a three-person board in 1977.
The results include 12,000 fewer charters and the elimination of 12,000 CEO’s and volunteer board’s leadership platforms. Their employees lost independent career opportunities as these organizations were shuttered.
The movement’s human capital–enthusiasm, insights and entrepreneurial spirit–has been lessened.
Communities have fewer options. As charters are pulled up by their roots, the movement becomes less diverse, less democratic, more concentrated and remote.
Credit unions are being depleted. No movement can sustain itself built on subtraction rather than addition and multiplication.
In the end there will be no need for an NCUA or logo.
NCUA’s Is Falling Down on its #1 Actvity
In Illinois, the initial state credit union act prohibited officers and directors from borrowing from their own credit union. The act authorized chapter credit unions to meet those official’s needs as well as serve members of any groups too small to form their own credit union.
When I became Illinois credit union supervisor in 1977, this restriction had been removed. However the concept that persons managing money should be subject to special scrutiny remained. As one colleague noted, one aspect of our job was to keep honest people honest.
Examiner Norman Glazer
Illinois conducted an annual exam of its 1,000 plus charters. An important part of the onsite visit was reviewing all official family loans, their relatives and the travel and other expenses they charged the credit union.
Examiner Normal Glazer looked like a bookkeeper. He wore wire rimmed glasses, was slight of stature, talked in subdued tones and was a long-time state employee. He was a very thorough examiner, who knew accounting and more importantly, the many ways that humans might conceal wrongdoing.
I asked him how he reviewed the loan and savings verifications looking for fictitious accounts. It was simple-he selected a sample of each, and then looked up the names in the phone book. If there was no name, he dug further.
Among Norman’s discoveries was a $1.0 million embezzlement from the Scott Foresman Credit Union where the manager kept a double set of books and accounting ledger cards. When Norman’s tape of the individual ledger cards did not match the GL total, he sensed something was wrong. He refused to accept the “missing cards” explanation and found a completely separate set of ledgers with which he documented the full amount of the loss. CUMIS paid the claim he substantiated.
Human Nature Has Not Changed
I cite this Illinois examination practice in support of Board member McWatters and others who have publicly observed that fraud is the most common cause of NCUSIF’s losses.
The historical concern about senior managers and directors engaging in self-dealing has a 5300 call report “echo.” Account codes 995 and 996 show the number of loans and total dollar amount to this leadership group. The table below lists the top 20 credit unions by highest average loan balance with total loan numbers and balances as one way of reviewing the data.
This table shows wide variations in this activity even among these 20. The list by itself might prompt some obvious questions; however, the point is NCUA still believes this is an activity for ongoing monitoring—or is it?
Job # 1
NCUA’s largest budgeted amounts and the majority of its workforce are dedicated to on-site exams. One assumes all loans, family related transactions and the expenditures charged by senior staff and directors to the credit union would be reviewed as normal exam protocol.
Reporter Peter Strozniak of the Credit Union Times regularly follows NCUA’s legal filings and court documents. From these records he describes the details of these internal thefts and other employee/director wrongdoing, unfortunately years after the credit unions’ failure. These detailed accounts show that examiners have overlooked extended periods of self-dealing.
A recent example is from the Time’s report of NCUA’s suing CUMIS for recoveries from Melrose Credit Union’s CEO. His October 15, 2021 story described one NCUA claim:
Prior to his 1998 retirement, Herb Kaufman, Kaufman’s father, was Melrose CEO and served as the board’s treasurer. In May of that year, Herb Kaufman became an independent consultant to Melrose under the terms of what the NCUA described as an unusual three-page agreement, which was signed by only one member of the board who turned out to be a life-long and close friend of Herb Kaufman.
The agreement contained a one-year renewable term that paid Herb Kaufman $5,600 a month for his services.
“Despite his obvious conflict of interest, Kaufman aggregated solely to himself the over site within the Melrose Consulting Agreement with his father,” the NCUA lawsuit reads. “Thereafter for more than 18 years, Kaufman covertly caused the renewal of his father’s Consulting Agreement without ever informing the Melrose board or otherwise bringing its continued existence to the attention of the Board.”
According to the NCUA, Herb Kaufman was paid $1,239,795 over 18 years and failed to generate any business for Melrose or provide any meaningful consulting services to the credit union. What’s more, Melrose also paid Herb Kaufman’s travel expenses of more than $26,000 even though his consulting agreement stipulated the travel expenses were to be paid by Herb Kaufman.
The facts offered by NCUA say the Melrose President paid his father (the retired CEO) for 18 years without a fully approved contract.
Assuming an annual NCUA and state exam, this arrangement went un-noted for almost two decades. How could this be? Same last name, monthly checks, a written agreement-it raises the question of what do examiners look at? And NCUA is asking CUMIS to pay up because the bond company should have detected this?
This is not the first time NCUA has sued CUMIS for credit union failures.
On April 23, 2010 NCUA placed the East Lake, Ohio-based St. Paul Croatian FCU in conservatorship with an estimated loss of $170 million, or almost the entire amount of insured shares balance. Loan fraud was among the primary reason for the CU’s collapse.
The IG significant loss report stated:
At St. Paul Croatian FCU, examiners didn’t assess the weakness of the credit union’s internal controls and failed to ensure that the credit union took corrective action on document of resolution issues.
How does NCUA atone for its exam failures? The CU Times report: The NCUA filed a proof of loss claim with CUMIS for nearly $72.5 million (St Paul Croatian FCU). However, because CUMIS’ fidelity bond has a $5 million coverage limit, the amount of money in dispute would be less than 7% of that figure, said Phil Tschudy, a CUNA Mutual Group spokesman.
Between this 2010 St. Paul failure and the October 2021 CUMIS suit for Melrose recovery, there have been repeated cases of significant examination failures over multiple exam cycles. Three of these are described in this post. The information, all from court proceedings, documents CEO embezzlements lasting years. In the CBS Employees FCU case, the CEO fraud extended for two decades resulting in an estimated $40 million loss to the members.
NCUA’s Two-foldProblem
These recurring, costly examples, suggest that NCUA is not doing well its number one job of examination. Examiners should be given a whole new process and trained on reviewing self-dealing activity.
But it is hard for NCUA to fix a problem that is hidden from public scrutiny until years after the fact.
A second challenge is NCUA’s lack of transparency. It provides no information on its supervisory actions. The agency has said nothing about its current conservatorships, one of which is over $4billion in assets. But then years later court proceedings show how extensive and elongated the pattern of misconduct and coincident examination shortcomings were.
Generalized IG critiques of exam failures provide no details of the examiner oversights or any mention of accountability. The response to IG findings is by the same people responsible for the entire process in the first place.
Accomplishing Job # 1
With all the recent public remarks by NCUA leadership about cyber ransomware, cryptocurrency, DEI, climate change and other current “risk” topics, the agency seems unable to perform its most important, historically necessary, oversight function effectively.
Examinations produce pages of financial statements, ratios and trends, and checked boxes for policy adequacy. Almost 97% of credit union assets are held by Code 1 and 2 rated credit unions. The biggest risks are internal, not on the balance sheet.
Examiners should be training for conversations about all forms of self-dealing to see who approved what, when and why. These discussions should be part of the exam record. The topics should be raised and documented in the board exit conference. Without putting these activities in the light of day during exams, everyone presumes it’s OK to keep questionable activities in the dark, and out of the record.
Where is Norman Glazer when credit unions need his sixth sense, or rather common sense? For example he might look at the table above and ponder why are real estate loans to senior credit union personnel so much larger in the lower priced Midwestern states than in any of the more expensive big city coastal markets?
I know he would have challenged a $35 million dollar sinecure committed to a newly organized non-profit by two merging credit unions to support the “advocacy” activities of the CEO who arranged the merger.
The fiduciary concepts of care and loyalty would appear to have been erased from NCUA’s examination and supervision process a long time ago.
Credit union members pay the costs of these failures. However in the long run its is the public reputation of NCUA and the system that is at risk when examinations miss the obvious.
NCUSIF Investment Decisions Are Hurting Credit Unions
Several days ago, NCUA posted the August financial results for the NCUSIF.
The good news is that the fund continues to show positive net income. For the first 8 months the year-to-date net is $122.2 million versus $45.4 for 2020.
However, only 13% of the fund’s $19.2 billion portfolio matures in less than one year.
In contrast, at June 30 credit unions reported 53% of their total investments were under one year. Of that amount over half, or 38% of all investments were in cash and overnights.
Both credit unions and NCUA have access to the same economic forecasts. Why is there such a dramatic difference in how investments are being positioned in this part of the rate cycle?
At the September board meeting CFO Schied promised to publish the NCUSIF’s investment policy in response to a question from a board member. The $1.2 billion reported in new August investments shows why this transparency is so urgent.
The most important monthly decisions by the fund are selecting investment maturities. The board and credit unions should know the assumptions committee members used when making these decisions.
The NCUSIF’s August Investments
As listed in the NCUSIF financial report:
8/16/21 T – Note 600,000,000 $ 8/15/2028 1.01%
8/26/21 T – Note 100,000,000 $ 8/15/2026 0.84%
8/26/21 T – Note 100,000,000 $ 8/15/2027 0.97%
8/26/21 T – Note 100,000,000 $ 8/15/2028 1.11%
8/26/21 T – Note 100,000,000 $ 8/15/2025 0.66%
8/26/21 T – Note 100,000,000 $ 8/15/2023 0.22%
8/26/21 T – Note 100,000,000 $ 8/15/2024 0.45%
I calculate an average weighted life of 5.7 years and a portfolio yield at .943% for these seven investments.
The critical question is what were the committee’s assumptions that caused them to lock up $1.2 billion for 5.7 years at a yield under 1%. These actions also reduced the overnight account of over $1.0 billion in June to just $230 million in August. It lengthened the portfolio’s average maturity by over 100 days.
The decisions show a seeming absence of any market awareness. Two investments have the same seven-year final maturity. However between the August 16, $600 million first note purchase, and the August 26 $100 million second note at exactly the same maturity, the yield rose 10 basis points!
This 10 basis point lower yield on the first $600 million will cost the fund and credit unions $600,000 per year for seven years, or a total of $4.2 million over the life of the note. How did the committee make such an obviously untimely decision? Why has the committee continued to invest further out the yield curve when the consensus of most economists is that rates will be rising?
Shouldn’t the fund instead be rolling over these notes in 13 week, 6 month or one year Treasury bills yielding .05% to .15% in order to reinvest these funds as the markets move? For example the two year treasury bill has more than doubled in yield from the .22% return NCUA received in August.
I know of no credit union that would have made these investments with this average maturity and this yield with member funds. But that is what the committee did.
At the markets close today, the seven-year treasury note yielded 1.414% and has traded as high as 1.5%.
If the $600 million had yielded 50 basis points higher, this would generate $21.0 million over next seven years for the NCUSIF.
Going Forward
For the quarter the major topic on the economy has been inflation. Is it transient due to temporary structural issues or shooting way beyond the Fed’s 2% target?
The economy’s continued supply shortages are now estimated to extend into mid 2022. Today the Fed will release its interest rate and monetary policy steps going forward. The tapering of bond purchases is expected and many forecasters foresee a Fed rate increase sometime in 2022.
Unfortunately recent NCUSIF investments will be a drag on its revenue for years to come. Continuing to invest in a period of historically low interest rates using the same ladder approach as in years of more normal rates makes no sense. These unusual investment decisions hurt credit unions and their members by causing revenue shortfalls for the fund.
The NCUSIF’s incremental investments should instead be rolled over in very short maturities and then re-invested as rates move into ranges consistent with the yield requirements for the NCUSIF’s operations.
The investment committee is presumably the same senior NCUA officials who oversee examination and supervision priorities. What would their response be to a credit union making these investment decisions?
Timely and transparent presentations of the cooperatively-owned NCUSIF financials is a commitment made by the agency when the 1% underwriting deposit was implemented. Fund results should be posted as soon as they are ready.
There needs to be a discussion in the published report of the investment actions, or none, made during the month. That is one critical way to build confidence in the management of this unique credit union resource. And to insure decisions are made in credit union members’ best interests.
NCUA’s 2021 Year End Forecast for Credit Unions
At the September Board meeting, CFO Eugene Schied presented the forecast for the NCUSIF’s year end NOL. The ratio he gave was 1.28%. The slide showed the outcome and the formula, but not the numbers used to calculate the ratio.
NCUA’s public affairs officer Joseph Adamoli has provided that data.
Large Slowdown in Share Growth Last Six months of 2021
NCUA staff projected yearend insured shares totaling $ 1.597 trillion. This would be an 8.8% growth from 2020’s yearend total of $1.468 trillion.
Since we know the midyear insured shares were $1.580 trillion, this indicates NCUA believes credit unions will add just $17 billion more in the second half of the year.
The 2020 yearend share growth was 20.9%; the 12-month growth at June 30, 2921 was 15.4%. Therefor NCUA foresees a significant decline in new deposits from these actual double digit trends.
Net Income for the NCUSIF
The yearend retained earnings are estimated to be $ 4.701 billion which would be a decline from the NCUSIF’s July report of $4.739 billion. In other words, NCUA projects an operating loss for the final five months of approximately $38 million versus a positive net income through July of $118 million.
There was no information to explain the decline in net income. Since monthly investment income more than covers all operating expenses, the agency must be projecting an increase in the insurance loss expense.
2021 NCUSIF Equity Ratio
NCUA’s two yearend forecasts of $4.7 billion of retained earnings and insured shares of $1.597 trillion, results in the fund’s equity ratio of .294%, or almost at the 1.3% historical NOL level.
This forecast shows the importance of the NOL cap. For if retained earnings exceed the NOL, then any overage must be paid in dividends to credit unions.
If instead of negative net income for the final five months, the NCUSIF were to report a gain of just $52.8 million, the equity ratio would be right at .3%. Even that result would be less than half the net reported in the first seven months.
Transparency and Responsibility
No matter how close NCUA’s estimates prove to be, the first conclusion is that this will be a good year for the NCUSIF, even if share growth ends up higher than the forecasted 8.8%.
The estimates also demonstrate the importance of resetting the NOL based on actual historical performance versus hypothetical scenarios with no objective validation.
We don’t know if there will be an NCUSIF update during today’s Board meeting. If there is, the credit union owners have the data necessary to track performance which is one of credit union’s most important responsibilities.
For if the owners and contributors of the 1% perpetual underwriting show little interest in the NCUSIF’s performance, the prospect of a dividend or effective use of the fund’s investments, then the accountability for oversight built into this unique co-op model will break down.
The transparency from NCUA is helpful, but only if credit unions use it to monitor the fund and provide comments to the board. For the next big NCUSIF decision will be setting a new NOL level (currently 1.38) at one of the two monthly board meetings remaining this year.
Harper’s NCUA Priorities: “Fiddling While Rome Burns”
Chairman Harper’s Senate hearing for a second term confirmed his intentions for NCUA. In his opening statement and when answering questions, he reiterated his regulatory to-do list. Along with prior speeches and proposals these include:
- Establishing a separate consumer examination force (he stated NCUA is working on a white paper to validate this need).
- Eliminate all current legislative constraints on NCUSIF funding and premium assessments.
- Seek authority for examining and supervising third party vendors serving credit unions.
- Climate change risk must be included when evaluating safety and soundness.
- And the need for multiple agency investments to “continue prioritizing capital and liquidity, cybersecurity, consumer financial protection, and diversity, equity, and inclusion.”
His opening Senate statement reflects his experiences as entirely within the “legislative, regulatory and policy” arena. He sees the scope and purpose of his role as running a government agency, not facilitating the relevance, role and reach, i.e. the sustainability of the cooperative system.
Since the late 1990s, I have worked as an advisor, manager, and executive on banking, insurance, and securities legislation and regulation. These jobs have given me broad knowledge of financial services policy and a deep understanding of the many issues facing our nation’s $2 trillion credit union system.
One Vote Short to Enact Harper’s Agenda
Sooner or later all of Harper’s desires to expand NCUA’s authority and resources will receive a second board vote. Either by convincing a current member that “bipartisan compromise” is the correct leadership response, or due to the expiration of one of the other board member’s term.
Harper’s positions are not driven by facts, data analysis, or even trends. He has been advocating for risk-based capital (now linked with CCULR) since 2014 despite all the factual evidence that it is both unneeded and does not work. He persists in immediately imposing this 400+ page rule even in the face of statements such as this by former board Member McWatters at a June 2019 board meeting:
Board Member McWatters: Okay, so there’s work to be done on the rule. And I should also note that when this rule was proposed and finalized, I dissented from it. And I dissented from the rule because in my view, as a lawyer for over 37 years, the rule violates the Federal Credit Union Act. I said that twice in written dissents in some detail in some legal analysis.
Now, I understand that reasonable minds may differ. Other people, other people in this room have a different view. I respect those views, but I also think that if this delay passes, we should look at that. We should go through that analysis again. I don’t want a rule on the books that in my view as a lawyer dealing with issues like this for a long, long time simply does not comply with what Congress told us to do. So I hope that, I hope that we can do that.
The Danger of a Misguided Regulator
We all see what we want to see.
Harper has spent most of his professional life working on legislative and regulatory policy. His goal is to enhance government’s role, not sustain the cooperative movement that created the agency in the first place.
His position on issues is to promote a regulation- heavy outcome.
His lack of credit union experience, knowledge and operations is a serious blind spot.
Today the credit union movement faces growing challenges. They have nothing to do with Harper’s understanding of safety and soundness, forecasting the next recession or even competitors overwhelming the movement through innovation or scale.
There are two wildfires burning uncontrolled throughout the cooperative environment. Both were started internally, and each is continuously fed by NCUA’s actions.
Not “Mergers” but “Collective Euthanasia”
The first wildfire is the increasing use of self-interested mergers, allegedly for economies of scale by managers of sound, stable and long-standing credit unions to become part of a larger one. The increasingly brazen appropriation of credit union members’ common wealth is exemplified by a CEO’s arranging $35 million in funding for the non-profit organization he will run after his $650 million credit union is merged.
These acts of the CEO and senior leadership cashing out via merger are not new. But they are increasingly promoted by third parties who draw up “change of control” clauses for CEO contracts. Then the same CEO’s go out and negotiate their own change to collect the bonus.
NCUA routinely signs off on these self-serving charter cancellations. The problem is more than self-enrichment. Every merger of these long serving credit unions rips out roots feeding the cooperative model. Members’ accounts, loyalty and common resources are transferred to a third party which has little to no relationship to the community which loses their decades old local financial institution.
These mergers destroy the credit union system at its roots. Members leave and the entire basis of the credit union’s soundness, the member relationship, withers and dies.
The continuing credit union may seem strong, but that is a temporary illusion. Loyalty, trust and confidence cannot be bought. They are earned via long standing service relationships.
The common bond which first brought the credit union to life is now transformed into an act of cooperative euthanasia in these merger manipulations.
The rot then shows up in the continuing credit union even when it tries to regain former member’s allegiance. The roots have been severed. As a result the solution is sometimes to ask its own members to approve this collective merger death ritual by the continuing credit union— the story of Xceed CU.
Using Member Reserves to Buy Banks
The second challenge is credit unions using members’ accumulated reserves to buy banks. Often these are outside the credit union’s existing network and market influence. The reasons are to grow faster than might otherwise occur, especially in new markets.
However, paying $1.50 to $2.00 for each $1.00 of book assets sooner or later will lead to a financial dead end. Unlike mergers, these purchases are for cash. There will have to be a return over years to support the premiums being paid for these assets. The results of each purchase will not be known for some time. Meanwhile, credit unions will have to convert new employees, customers and products and services in a process different from the credit union’s traditional member-chosen relationships.
The jury is out as to whether these financial investments will ever payout. But one trend is apparent. Bank purchases to pursue growth becomes a narcotic. It is like an opioid that a CEO and board become addicted to when their own efforts at internal expansion no longer seem enticing. Some credit unions have completed more than one bank purchase. It is not unusual to see a credit union undertake two transactions back-to-back or in a current case, two at once.
The Common Source for these Growing Cooperative Wildfires
Both of these activities are failings of fiduciary duties. The common characteristic in both is credit unions have lost touch with their own members. Their leaders believe the credit union is their personal fiefdom to do as they like, even when the decision is to ask members to commit cooperative suicide by giving up their generations-old charter.
As institutional growth and performance is prioritized over member well-being, the credit union model becomes more and more like the competitors’ it was meant to replace.
In both activities members are kept in the dark- told nothing about bank purchases. Or in mergers, members are given a series of assertions about better products and services that omit significant information or misrepresent the entire situation—and given less than 45 days to act before voting. Few vote, rightly sensing the system is rigged against them, which is often the case.
The solution to these two failings is as straight forward as the cause—empower members to be truly informed and engaged about their credit union’s activities. Transparency is critical whenever members’ collective wealth is used outside the normal business model.
In mergers members are given nothing more than PR cliches. Should ending a successful, sound charter be so much easier than what is required for a new charter in the first place?
Harper sees “consumer protection” as crossing every “T” and dotting every “I”. That approach is fiddling while the cooperative industry burns down. In the meantime, members’ collective legacies are stripped away by their boards and managers.
Sound, well run credit unions are losing their cooperative roots and purpose. No one is willing to address the situation for what it is and stop these extermination. Unfortunately, we know how this movie ends. The original version was called the S & L industry.