Category: NCUA

Every organization will experience problems. Some imposed by external events. Others by internal failures because all are run by imperfect human beings.

Internal performance shortfalls occur even with the strongest, well-documented corporate cultures: harassment, inappropriate comments, disdain for conflicts of interest, performance failures, improper expense claims or even showing up on time.

Unfortunately, the instinctive response by government is to spend more resources. Moreover, the situations are addressed in secret with no explanations or analysis, except for after the fact announcements of a “solution.” With no transparency, there is no accountability.

A classic example is NCUA’s approach is the response to the recent revelations of a corrupt General Counsel and an earlier IG report on questionable travel reimbursements for senior staff.

Throwing Money at the Issue

Instead of addressing issues head on, the NCUA Board reacted to the public revelations of these in-house shortcomings, by creating a new position: Chief Ethics Officer.

The salary range: $227,113 to $263,000 per year. However, this may be just the initial increased cost as the person’s duties include “direct(ing) the activities of the office, and assisting and advising subordinate attorneys and/or other staff on assignments”

A Leadership Failure, Not a Resource Problem

The Chief Ethics posting above also lists the follow requirements:

EXECUTIVE QUALIFICATIONS: you (must) possess all the executive qualifications listed below. (details omitted)

Leading Change.
Leading People.
Results Driven.
Business Acumen.
Building Coalitions/Communication.

These would be superb qualifications for a Board member. It is instructive that the Board did not believe these qualities existed within its own body or within the staff of the agency. One has to question whether these capabilities can be imported if they are not part of the culture.

Spending more resources when problems occur is a mindset that provides a façade but not real change. The “ethics issues” or other challenges will just come back in another guise. For effectiveness has to start at the top. It cannot be delegated. In most organizations it is called leadership.

 Print This Post

Like Dracula in a horror movie or Covid outbreaks, risk-based capital (RBC) keeps showing up on NCUA’s agenda.

It is again on this Thursday’s June 25^th NCUA Board meeting. No details are provided, but hopefully this will be the decision to finally kill this burdensome, ineffective and most importantly, wrong-headed effort

Banking Regulators Repeal RBC

The most important FACT is that RBC does not work. Just ask the FDIC, FED and OCC which unanimously ended RBC requirements and all related calculations.

On September 17, 2019, the Federal Deposit Insurance Corporation passed a final rule providing community banking organizations under $10 billion in assets a simple, single capital standard. The new adequacy standard is the bank leverage ratio.

As stated in the press release: “The leverage framework will greatly simplify regulatory determinations regarding capital adequacy and eliminate the need for qualifying community banking organizations to calculate and report quarterly risk-based capital ratios in their Call Reports.”

Bankers Adopt the Credit Union Capital Adequacy Measure

This singular, clear banking capital adequacy standard is the same calculation credit unions have used in their 100 plus years of existence.

Since 2014 NCUA has brought this proposal forth, time and again. The final rule adopted, but implementation postponed several times, runs over 400 pages.

Credit unions have universally found fault and opposed it. One board member, McWatters, has questioned the legal basis for it. It will be important for Hood and McWatters to be aligned as board member Harper has defended the RBC rule in the face of all contrary evidence.

Now is the time to completely withdraw this totally flawed, burdensome and useless concept.

The banking regulators unanimously concluded there is no benefit, even in calculating the multiple ratios.

What more evidence does the Board need to end this costly effort? It has too long distracted NCUA and its examiners from the real work of helping credit unions better serve members.

 Print This Post

Short answer: He is President Trump’s nominee to replace Mark McWatters on the NCUA board.

Real question: Why him?

Chairman Hood’s description: “Kyle has significant experience in the financial services sector as well as the public policy arena.”

Hauptman’s Resume

His politics: Currently he works for Senator Tom Cotton (R-Ark.) as the Staff Director for the Economic Policy Subcommittee of the U.S. Senate Committee on Banking, Housing, and Urban Affairs. He was a voting member on the U.S. Securities and Exchange Commission Advisory Committee on Small and Emerging Companies from 2016-2017. He served on President Donald J. Trump’s transition team in 2016.

Previous professional responsibilities: Executive Director of the Main Street Growth Project and Senior Vice President at Jefferies & Co; a bond trader for Lehman Brothers in New York City, Tokyo and Sydney.

Education: A master’s in business administration from Columbia Business School and a Bachelor of Arts from University of California, Los Angeles.

Personality: Insight to his interpersonal style and philosophy can be found in this Public Square Broadcast from 2016 discussing the book Confessions of an Economic Hitman.

Two Takeaways: Questions and a Lesson Repeated

1. The Questions: Kyle is intelligent, a free market proponent and familiar with the Wall Street financial world. His republican orthodoxy includes low taxes, skepticism of government, and strong belief in the role of the free market.

He appears to have no experience with cooperatives or credit unions. An important purpose of cooperative design is as an antidote to market shortcomings.  How will his market orthodoxy align with credit unions’ unique role? Will he see them as just another species of financial institution with only a different pedigree? How will his worldly experiences and intellectual skills mesh with NCUA’s bureaucracy? How will he interpret the Board’s “management” responsibility of the Agency as stated in the FCU Act? What does his Main Street slogan “It’s time for Washington to do its job” mean for NCUA?

2. The Repeated Lesson: At a time of multiple national crises, the trades and credit union system again failed to support a candidate with experiences and knowledge of the industry. The NCUA Board will have another stranger to the history, personalities and institutions that make credit unions who they are. Also lacking is any exposure to NCUA’s multiple institutional responsibilities and its track record, both good and bad, in carrying these out.

At a time when the three Washington DC based trades are sending daily emails about all the hard work they perform representing credit union interests, this appointment is a reminder of how limited their influence is.

The Need to Speak Up

The NCUA Board will still be composed of three persons whose appointments look like filling “jobs for the boys.” It would be refreshing if just once, the NCUA board had an executive who knew something about the industry, believed in its singular role and was committed to seeing it thrive no matter the circumstances. Until credit union people learn to speak up, their “representatives” in DC will continue playing their insider games.

 Print This Post

I have read the prepared testimonies of the FDIC Chair Jelena McWilliams and NCUA Chair Rodney Hood presented to the Senate Banking Committee.

The FDIC’s response to the coronavirus pandemic was clear. McWilliams’ summary:

“As it became clear that the public health emergency caused by COVID-19 would lead to a significant economic disruption, the FDIC took swift, decisive actions to (1) encourage banks to work with affected customers and communities, (2) increase flexibility for banks to meet the needs of their customers, (3) foster small business lending, (4) protect consumers and increase financial options, and (5) actively monitor the financial system.”

A Missed Opportunity

Chairman Hoods’ remarks listed every action and program that NCUA has undertaken during his tenure. These included not just responses to the supervisory and legislative COVID-19 changes, but also cybersecurity programs, diversity initiatives, the sale of taxi medallion loans and legislative changes the Agency would like to see. Not included in this legislative wish list was a request for NCUA vendor oversight, perhaps a positive indication of regulatory self-restraint.

While the focus on NCUA’s numerous rule making and emergency supervisory accommodations is understandable, I was also looking for a shout out for what credit unions were doing for members. Stories that would illustrate the cooperative difference. Numbers that would demonstrate how credit unions use their tax free capital accumulation to help members. There were only brief mentions of two credit unions’ loan volumes under the PPP program which is on point, but not unique to credit unions.

Crises are a time of heightened attention for financial services because of the vital role credit plays for members, small businesses and communities. Credit is credit unions reason for being. Retelling that story when people are listening, asking for updates, is a special moment to once again explain why cooperatives exist.

The three regulatory functions under the NCUA board are means to enhance safety and soundness. The goal of these tools is to enable each credit union to make a difference in members’ lives. The industry is doing that daily. But it didn’t get reported.

Tuesday’s virtual oversight financial hearing before the Senate Banking Committee will be a dramatic way to demonstrate the credit union difference.  

For NCUA Chairman Rodney Hood represents all the cooperative system’s regulatory and supervisory roles as a single witness. It takes three bank representatives to cover the same responsibility for that industry.

These three are:

Cooperative Design’s Simplicity

The credit union system built its federal regulatory structure over five decades (1934-1984). As credit unions evolved, their supervisory system followed the same cooperative principles. The NCUSIF is a collaborative fund where each member contributes 1 cent of every share dollar as a capitalization pool. The CLF is a mixed ownership corporation whose credit union funding is the basis for liquidity borrowings from the federal financing bank.

The advantages of an integrated, collaborative based regulator which covers all three functions are obvious. Greater efficiency, coordination, and single point of policy and oversight at the federal level.

The Drawbacks

But the potential downside of one organization is that there is no check and balance from other expert agencies. The effectiveness of the single regulator’s role depends on one board with the Chairman as spokesperson.  

If the board’s leadership  is not familiar with cooperative design and credit union differences, there will be the temptation to look to their bigger regulatory kin, who have a longer, different history and a lot more resources. When that approach is used to justify an action, NCUA can get off track.

What to Watch for in the Hearing

Because the hearing is virtual, the side by side visual of one versus three may not be as dramatic were the hearing in person.

I’m listening to see if Chairman Hood presents the credit union role from a cooperative point of view. Are there reports of the unique initiatives credit unions have taken to assist members? Or will the ever-present temptation of “bank envy” characterize his comments?  

Credit unions were not meant to be banks. Level playing field arguments or changes because the banks can do it, are not the reason the cooperative option exists.  

Hopefully the Chairman will show the difference not just in the 1 vs 3 setting,  but also by presenting the member focused accomplishments the industry has achieved in this crisis.

What does it say about a federal government agency whose leadership collectively confesses to the inability to tell right from wrong, legal from illegal, good behavior from disreputable? Especially in the middle of a national crisis.

That was the stunning admission revealed by the NCUA last week as it announced a new personnel decision made at its March 19 closed board meeting.

Appointing a Chief Ethics Counsel

On April 22, NCUA announced the Board’s decision to hire a “chief ethics counsel.” Supervised by the chairman, the press release stated: “The Office of Ethics Counsel will certify the agency’s compliance with relevant federal ethics laws and regulations, promote accountability and ethical conduct, and help ensure the success of the NCUA’s ethics programs.” This had been a role of the General Counsel.

Senior federal executive appointments are traditionally selected based on candidates’ experience, convictions and proven character. Ethical obligations and moral behavior are presumed. This Presidentially appointed, Senate-confirmed NCUA board trio has now conceded the Agency is failing in this basic discernment ability.

So, in addition to three board members, their personal policy advisors, senior staff including an executive director and deputy, a general counsel and deputy, and the full organizational capabilities of human resources department, the agency is unable to make ethical decisions.

It makes the story of the Greek philosopher and cynic Diogenes’ quest for an honest and truthful person more than prophetic.

A Partial Record of Agency Leadership Failings

The litany of disastrous and self-serving actions by senior agency personnel in just the past three years is lengthy.

1. A March 2020 IG report: Misuse of Official Time, Illegal Drug Use, Time and Attendance Fraud) It described how NCUA General Counsel Michael McKenna (appointed 2011) and his deputy, Lara Daly-Sims, had visited strip clubs, consumed alcohol and possibly marijuana, while on government time.
2. The betrayal of 4,500 credit union borrowers’ whose loans were sold to a hedge fund in February 2020 in a secret bidding process.
3. The January 2019 release of a 25-page investigation by NCUA’s OIG of then Chairman McWatters and Chief of Staff Sarah Vega’s excessive travel expenditures.
4. The May 11, 2018 Washington Post report of Chairman McWatters overseeing the NCUA from his home in Dallas: “almost unheard of for an agency leader, to routinely work from home.”
5. The seizure of $3.0 billions of TCCUSF surplus due credit unions via merger with the NCUSIF.
6. The lack of transparency in the management and expenditures of billions in liquidations of the five corporates.
7. The operating loss reported in the December 2017 NCUSIF audit, the first since the fund was created in 1971.

Compounding Error with Folly: A Self Promotion Campaign Paused

As if this admission of collective moral bankruptcy was not itself damning, the agency on April 24 further proved its leadership vacuum.

On that day the credit union press reported NCUA’s contracts with three public relation firms’ for more than $500,000 to assess, compare and then rebrand the agency signage and logo. Deliverables also included responding to agency media requests and preparing testimony.

When the December 2019 contracts became public on April 24 through FOIA requests, the agency immediately said it would postpone, not cancel, the contracts.

The agency’s operational hold of this four-month effort was explained by the need “to spend more time addressing the coronavirus crisis.” This covering story fabrication is underscored by the fact that the President declared the coronavirus national emergency six weeks earlier on March 13.

Serving Members: We’re In This Alone

NCUA’s actions, putting its interests first, accumulating greater and greater credit union resources, and making unilateral decisions, erupted in the 2008-2009 financial crisis. And the tide never reversed.

In this crisis, the lesson for credit unions serving members tirelessly under the slogan “We’re in this together,” is that they are also in this alone.

The most important authority of any government leader is moral, not rules and regs. Without this “compass,” the regulatory instruments and collaborative resources at NCUA will not be directed to enhance credit unions’ fundamental values or purpose.

Instead, NCUA’s pattern of actions betray the basic values that make credit unions different. Cooperative success relies on self-help, mutuality, burden sharing and community well-being. These values, more than unique processes and services, make credit unions who they are.

The Challenge

Daily, credit unions are carrying out this cooperative philosophy and their “essential service” designation for millions of members—many laid off, most uncertain about their future, and everyone anxious for their personal safety.

The good news is that we have been here before, and the collective changes undertaken in 1980-1984 for example, served a whole generation that followed. How will this generation of credit union leaders fulfill its destiny?

Many have observed, “crises do not create character; they reveal it.”

Recently a CEO asked if I had heard about PPF funding for credit union entities such as CUSO’s or foundations. Credit unions are not eligible. He heard reports that several entities had applied. That worried him. The concern was that such efforts compromised the claim that we take care of our own, the self-help basis of cooperative design.

I replied that if the economy continues to falter requiring hundreds of billions more of government grants, a much bigger challenge will confront the country and credit unions. Specifically, how will the government pay for all this additional spending and debt issuance. The answer is obvious: new taxes.

Therefore, credit unions must demonstrate and document our self-reliance, self-funding mutuality with members during this time. Did we use our tax-free net income and capital to benefit members, or did we just hoard it?

A Skeptical Take: Fake It Till the Fourth Quarter

Another view is that some will cry NCUA made them so dependent on “help from on high” that they could not stand alone with any integrity. Can this generation of credit union leaders rekindle the spirit of cooperative innovation and entrepreneurship? Or, will they be tempted to seek “paint by the numbers” handouts from bureaucrats who never met a payroll or face-to-face with members?

Is it possible to at least fake it until the fourth quarter and the clock runs out?

The Cooperative Way Forward

Credit unions’ purpose is to use each day as a day to do something better for members. It is reasonable to see the crisis as bigger than any one of us, as individual members or credit unions. But it is not bigger than all of us together.

That confidence arises from knowing we were created to do things that had not been done before. We do not shy away when that challenge comes again. That is why we are here.

NCUA’s actions in a crisis matter–for good or ill. So far, its efforts have ranged between two poles. On the one hand there are moves to lessen regulatory and compliance restraints to enable credit unions to respond to member needs with innovative, non-traditional practices.

This instinct is excellent. For it recognizes two realities:

1. Effective responses for members’ problems occur locally. The discrete, granular circumstances of each member are resolved best, on site, credit union by credit union. No national policy can substitute for the speed and wisdom of local responders.
2. Nothing of consequence in a crisis can be accomplished alone. When NCUA has taken over credit unions through conservatorship or examiner dictates, this principle of collaboration is nullified. Cooperation and patience are uniquely credit union strengths.

One credit union veteran described effectiveness this way: “Government is too far away and too late to help one’s neighbor. Right now, it is our neighbor to neighbor approaches that auditors, regulators, and bureaucrats need to template. This is what makes future government responses relevant, or even come close to working. We, the citizens and community actors, must be the template for the approaches we hope to have and live with from government .”

The Second Response, Also Instinctive

The other extreme of “we’re all in this together” is the inevitable bureaucratic reach for more power and money. This has resulted in two legislative suggestions by board members at opposite ends of the ideological spectrum: Harper and McWatters.

Both endorsed new NCUA authority to examine third party vendors, a request rejected repeatedly over the past decade in Congress.

The second was to expand the cooperative system’s CLF liquidity options. Although unclear, the suggestion appears to be that liquidity should be on call, solely at NCUA’s behest. The current mixed ownership structure requires credit unions to subscribe capital shares to create the 16 times borrowing capacity at the Federal Financing Bank. Now, credit unions are the direct funders, agents and users of the system.

Contrary Crisis Response

The go-it-alone, we’re in charge approach, was disastrous in the Great Recession. NCUA’s unilateral actions destroyed the CLF’s three-decades long role as the cooperative system’s liquidity safety net. NCUA requested a special $6 billion borrowing line from Congress at same time the CLF had an unused $49 billion capacity.

In the 2009 crisis NCUA took over the daily management of $100 billion dollars in corporate assets without a plan or knowledgeable leadership. Today the $6 billion AME surplus from the liquidations of five corporates, shows the catastrophic misjudgment which NCUA estimated would cost credit unions $13-16 billion dollars.

The misjudgment was not just a dollar and cents forecasting error. Rather the fundamental mistake was that NCUA took over total control. They failed to work collaboratively and respect the expertise and experience in the corporate system. Instead NCUA bought plans from outsiders who failed to understand both cooperative strengths and the crisis itself.

Chairman Hood’s Silence

One reason for Chairman Hood’s silence may be he recalls his past tenure on the NCUA board. And he has reflected on the lessons from that time.

The beauty of the cooperative model is when consumers and leaders believe they can be owners of solutions and get to it. In any crisis we must use that spirit to be first to respond, solid in our belief we can overcome, and hopeful in the fact that things that work will be documented as historical markers for future actions.

Leadership in a crisis offers the chance to build a better system. This occurred in the 1980-1984 transition to deregulation. For that outcome to occur, the NCUA board must work collaboratively with those who man the front lines with members.