Photo from 1971- mom, dad and baby Lara.
On the US Navy pier, Yokosuka, Japan. My ship, the USS Windham County (LST 1170), had just returned from Vietnam deployment. Homecoming. An unbelievable joy.
On Failing Retirement
At a recent class reunion, one of my peers admitted to “failing retirement.” His projects and interests kept him busier than a full time prior job.
It reminded me of this story:
An old physician, Doctor Gordon Geezer, became very bored in retirement and decided to re-open a medical clinic.
He put a sign up outside that said: “Dr. Geezer’s clinic. Get your
treatment for $500 – if not cured, get back $1,000.“Doctor Digger Young, who was positive that this old geezer didn’t know beans about medicine, thought this would be a great opportunity to get $1,000. So he went to Dr. Geezer’s clinic.Dr. Young: “Dr. Geezer, I have lost all taste in my mouth. Can you please help me?”Dr. Geezer: “Nurse, please bring medicine from box 22 and put 3 drops in Dr.Young’s mouth.”
Dr Young: ‘Aaagh! — This is gasoline!”
Dr. Geezer: “Congratulations!
You’ve got your taste back. That will be $500.”
Dr. Young gets annoyed and goes back after a couple of days figuring to recover his money.
Dr. Young: “I have lost my memory, I cannot remember anything.”
Dr. Geezer: “Nurse, please bring medicine from box 22 and put 3 drops in the patient’s mouth.”
Dr. Young: “Oh, no you don’t — that’s gasoline!”
Dr. Geezer: “Congratulations! You’ve got your memory back. That will be $500.”
Dr. Young (after having lost $1000) leaves angrily and comes back after several more days.
Dr. Young: “My eyesight has become weak — I can hardly see anything!”
Dr. Geezer: “Well, I don’t have any medicine for that so, “Here’s your $1000 back” (giving him a $10 bill).
Dr. Young: “But this is only $10!”
Dr. Geezer: “Congratulations! You got your vision back! That will be $500.”
*Moral of story* — Just because you’re “Young” doesn’t mean that you can outsmart an “old Geezer”
When Voting . . .
Virginia’s Fall Colors
An Old Tale, Updated for Credit Unions
Down On The Farm…?
(by Jim Blaine)
George Orwell masterfully described the erosion of values and the rise of exploitation in his classic novel Animal Farm. The book written in 1945 is a satire of the decline in the Russian Revolution from idealism to the overlord State of Stalinism. To Orwell, what the Revolution had become in post-WWII Russia bore little resemblance to the high hopes of 1917.
In case you’ve forgotten the plot; in Animal Farm the slothful, tyrannical human proprietor of Manor Farm is overthrown by his much abused and neglected farm animals. The revolutionary animals quickly come to realize that when united in cooperative effort, they are quite capable of sensibly managing the farm and their own affairs.
Each animal, by nature and design, has different capabilities and unique qualities. Separately they are weak. But, cooperatively, working together; the united effort becomes far greater than the sum of the individual parts. Each animal contributes in full measure, in its own special way, to the overall success of the enterprise.
The cows and chickens provide milk and eggs for food. The sheep provide wool for cloth; the dogs provide protection; and the horses provide strength for plowing. The pigs, who seem to be the brightest, provide direction and management (surprise, surprise!).
Every civilized society, every social movement, every cooperative effort needs and creates a set of guiding principles – a social compact, a credo, a charter which explains shared beliefs and values. The animals of Animal Farm were no different. They carefully crafted rules for their new social order and painted them on the side of a barn for all to see.
ORIGINAL PRINCIPLES:
1. Whatever goes upon two legs is an enemy.
2. Whatever goes upon four legs, or has wings, is a friend.
3. No animal shall wear clothes.
4. No animal shall sleep in a bed.
5. No animal shall drink alcohol.
6. No animal shall kill any other animal.
7. All animals are equal.
Over time, several incidents occurred which seemed to be out of keeping with those original purposes. The pigs were found sleeping in the former owner’s bed; alcohol reappeared at social gatherings of the pigs; an animal who complained about the changing values was killed; and the pigs seemed to be working less and consuming more than their fair share.
When the animals returned to the barn to review their original principles; they found, much to their surprise, that those principles somehow had evolved into something a bit different!
“EVOLVING” PRINCIPLES:
1. Whatever goes upon two legs is an enemy.
2. Whatever goes upon four legs, or has wings, is a friend.
3. No animal shall wear clothes.
4. No animal shall sleep in a bed with sheets.
5. No animal shall drink alcohol to excess.
6. No animal shall kill any other animal without cause.
7. All animals are equal, but some animals are more equal than others.
The pigs, however, were always there to explain away questions, concerns and objections. Bad became worse at Animal Farm! Eventually, when the animals returned to the barn, they found a whitewashed wall with just one remaining principle.
“CURRENT” PRINCIPLES?
“All members are equal, but some members are more equal than others.”
“Isn’t that what we originally revolted against?,” some quietly asked.
So, what’s the point? In the beginning, there were several essential ideas which formed the core values of the credit union movement: one member, one vote; cooperative; non-profit; equal service to each member; consumer advocacy; volunteer leadership; unstandard answers; shared concerns; us not me.
Have you checked the barn lately?
When did we abandon the average man and woman – the working class; change our focus to the primacy of the bottom line; lower ourselves to worshipping before the false altar of market share; begin acting in the best interest of “the credit union” – not the members !?!; and start offering excuses rather than solutions?
Hey really, what happened…
Who let the pigs in?
A CEO’s Outlook at mid-October
On a recent trip I talked with a CEO to find out how the credit union was responding to four events: Covid, interest rate hikes, liquidity and the regulatory environment. Here are my notes.
On Covid
CU still on hybrid work model. Employer sponsor went all remote, but is now back in person, with little remote. The community around the head office, especially retail shops, became a ghost town. Kept all branches open, but back office staff is still mostly remote.
Expect hybrid work to continue. Commute for head office is a minimum of 30-60 minutes. Labor market extremely tight especially for retail.
Have re-evaluated every customer facing position including salaries, variable incentives, paid lunches and increased job tiers.
Interest Rates
The 30-year fixed rate mortgage is now at 7.5%. Member interest has evaporated and don’t see it coming back until late 2023. Increase in second mortgage demand.
Member spending is still strong and credit card volume has surpassed pre-pandemic levels. Will recession hurt consumer spending? Labor market great for employee, but creates inequities with current staff.
Biggest concern is inflation’s impact on costs and operating expense structure. Large increases in vendor contracts which have the ability to pass through costs based on a CPI index. In some cases this will be 8.5% to as high as 15%. Fortunately, we have caps in our contracts but many credit unions do not.
We are a unionized shop with approximately 70% of employees covered under a labor contract. Sponsor negotiates contract and we will have to see what happens to those costs.
Liquidity
Have difficulty selling to secondary market. Rates are extremely volatile day to day. Our mortgage pipeline is down 60%. Refinancing has all but stopped.
In ’20 and ’21 had share growth of 20% and 13%. Money stayed with us. This year members feel it’s time to spend. Grown only 2% in shares so far, but may end up flat at the end of the year.
Even though originations are lower, loans are staying on the balance sheet because there is no refinancing.
Paying up for CD’s: 11 month at 3.25% and 15 month at 3.5% with a minimum of $5,000.
Actively monitoring our wholesale funding sources. FHLB is about 100 basis points more expensive than CD’s. Also have brokered CD’s with SimpliCD.
So far this year ROA is at 80 basis points down from 92 bps in 2021. But for our 28 state peers over $500 million, the average is closer to 50 basis points.
Our top operational priority will be managing expenses.
Regulatory Environment
State chartered. All exams remote. The beginning of the year I was really concerned about the NEV test that would put us in the extreme risk category. But they have backed off with just a “high” rating.
Definitely a different level of NEV risk now and more pressure on liquidity.
Looking past current events there are two items. Should we move beyond our sponsor’s brand and FOM to open up markets for further growth? We have several special loan programs, credit card and provide financial literacy events. Sponsor brand is ours as well. So not a simple issue.
Secondly, we have always been a state charter; would a federal charter be an option for the future?
However our biggest challenge going forward is to control operating costs.
A 60-Year High School Reunion
The first question in many gatherings is, where are you from?
I answer Springfield, Illinois which is where I finished high school 60 years ago. The class gathered again this past week, the first time since the 50th reunion.
The experience is truly a re-union. I was able to interact with the city, the school and classmates. The event reconnected past recollections and the present. The impressions may even continue to shape the future for some or all.
Michael De Sapio has written about the importance one’s local community:
We spend much of our time concerning ourselves with places and people far removed from us. The things closest to us, by contrast, often become negligible and disposable. If you make an effort to reconnect with your neighborhood, town, and community, you may come to see your home in a new light—hallowed by time and … and history, and perhaps even imbued with heroism or romance.
Reunions remind attendees of the influence of the place we once, or maybe still, call home. It made a difference in who we are today.
The State Capital and Land of Lincoln
Abraham Lincoln defines Springfield’s soul. On February 11, 1861 he delivered a farewell address to his fellow residents. He would never return. His parting words are remembered for their emotional honesty. They illustrate his debt to a place that helped shape who he was.
My friends, no one, not in my situation, can appreciate my feeling of sadness at this parting. To this place, and the kindness of these people, I owe everything. Here I have lived a quarter of a century, and have passed from a young to an old man. Here my children have been born, and one is buried. I now leave, not knowing when, or whether ever, I may return. . .
Springfield is flat, except for the meandering of Lake Springfield at the outer edge. The sky and corn or wheat/hay fields on the way seem to stretch to an endless horizon.
The city’s topography is a geometric with one-way streets to facilitate traffic. But there are few cars, even in rush hour. Downtown is dominated by buildings whose former lives are now lost in their current role as state office buildings. Vacant lots are paved over for parking; but we never saw a lot filled.
(Capital spire and former State Armory)
The city is so level that sounds travel great distance. Amtrak and freight trains still run through the center of town along 4th Street, day and night. The doppler effect of train whistles’ signals this constant coming and going.
We were stopped at a railway crossing for a freight train consisting of only flatbeds carrying one or two shipping containers. I counted a freight car passing every second. The gates were down for over five minutes. And there was even a second engine in the middle of the train for more power. The train extended for at least three miles.
There is a church bell in the center of town that sounds every 15 minutes and strikes the hour. This passing of time is heard throughout the downtown.
The capital building dominates the skyline. Empty lots, some still grass but most paved over, were meant to accommodate people driving to work. But the legislature is out of session. The elected representatives and lobbyists have gone. Offices are quiet and often closed. The town seems empty even on a work day. Is this the mirror side of working from home?
Sixty years ago Springfield was a manufacturing and business center, as well as the state capital. Allis Chalmers and Sangamo Electric had manufacturing plants. Franklin Life and Horace Mann had their corporate insurance headquarters near the city center. Frank Lloyd Wright designed a prairie style home in the same area.
Today state government and the service sectors dominate. A modern downtown brick constructed Methodist church is now the office of the Springfield Chamber of Commerce, complete with steeple. The state capital is across the street.
Tourists trace Lincoln’s legacy beginning with the two blocks reconstructed as they existed in 1860 around his home. The Old State Capital and new Presidential museum and library are major draws.
Health care and new community and college campuses are additions to the city’s evolving economy.
The density and intensity that is characteristic of larger cities is absent in Springfield.
The pace feels more akin to farming than to the modern workday culture. Saturday’s farmer’s market in downtown was the most crowds we experienced. Lots of younger people were here as well, both shopping and making a living. Every stall is carefully ordered in its presentation, except for water color paintings.
Amongst these every day events, there is a feeling of something more consequential about the town. Lincoln’s heritage is central. The spirit of the place which formed him still animates today. Patient and timeless lessons seem to grow in this center of flatland farms of corn and endless, open sky.
The Springfield poet Vachel Lindsay referenced this spirit in his 1914 poem Abraham Lincoln Walks at Midnight. Both the sense of place and Lincoln’s profound insights seem timeless, especially relevant to today’s events.
It is portentous, and a thing of state
That here at midnight, in our little town
A mourning figure walks, and will not rest,
Near the old court-house pacing up and down. . .
A bronzed, lank man! His suit of ancient black,
A famous high top-hat and plain worn shawl
Make him the quaint great figure that men love,
The prairie-lawyer, master of us all. . .
His head is bowed. He thinks on men and kings.
Yea, when the sick world cries, how can he sleep?
Too many peasants fight, they know not why,
Too many homesteads in black terror weep. . .
He cannot rest until a spirit-dawn
Shall come;—the shining hope of Europe free;
The league of sober folk, the Workers’ Earth,
Bringing long peace to Cornland, Alp and Sea.
This reunion reconnected us with a momentary phase of our lives. Springfield’s special history sits amidst an ever evolving generation of new enterprises. Revisiting our one-time home sparked new insights. A place alive with past and present activities busily weaving a new future.
In later blogs I will share how my high school has changed, yet still remains the same, and impressions from former classmates.
What Large Credit Unions Might Learn from Elephants
The largest, most powerful land animal is the elephant. In many of their traditional habitats in Asia and Africa, their numbers are falling due to the loss of their traditional habitat and poachers.
The Elephant Whisperer is the story of a person who lived with elephants on a game preserve to try to preserve a “rogue” herd.
The author Lawrence Anthony devoted his life to animal conservation protecting the world’s endangered species. He was asked to accept a wild elephant herd on his Thula Thula game reserve in Zululand. His common sense told him to refuse, but he was the herd’s last chance of survival: they would be killed if he wouldn’t take them.
To win the herd’s trust, he had to convince the Matriarch of the herd. The eldest female is the leader, until she relinquishes it. He slept in his Land Rover near them until they accepted him.
In the years that followed he became a part of their family. In creating a bond with the elephants, he came to realize that they had a great deal to teach him about life, loyalty, and freedom.
He learned elephants mourn their dead , and recall the time lapse of a year to the day of death to assemble round the remains. When Lawrence Anthony died in 2012 , they gathered to mourn him.
The Instincts of the Herd
Elephants care for newborns together. When one is unable to stand up to nurse, they surround to help lift her up to the mother. Sometimes realizing the infant needed more nutrition, they would seek out Lawrence and his team.
The elephants thrive very much together, protecting and playing with each other but ferocious if threatened. They will accept help from humans they trust.
An iconic picture of this group effort is when the herd will lie down to sleep for several hours each day. As shown below the matriarch is at the top, the smaller, younger elephants protected by the older ones. Most importantly, the picture shows how each member stays touched by another as they sleep.
Is there a lesson for cooperatives from this natural behavior of the world’s largest land animals?
What is the “New Normal” Interest Rate Curve?
The recent Federal Reserve increase in short term rates to fight inflation, is seen by some to be a “temporary” increase. At some point when relevant price indices have fallen into an acceptable range, the Fed will settle back to some lower initial reference point such as 1%. Interest rates will then revert to the pattern of the decade of the 2010-2020 pre-covid era.
But what if that assumption is wrong? What if the Fed’s definition of normal, a 2% real rate of interest on top of an assumed 2% long term growth rate, means the overnight baseline is closer to 4%?
Today the overnight rate is 3%. The Fed is promising at least two, maybe three, more rate hikes this year? How would a “new” 4% normal affect the rest of the curve? What pricing and investment assumptions from the most recent decade would have to be rethought?
What If Recent Past Rates Are Abnormal?
A commentator on MSNBC observed this past week, that interest rates have not been “market determined” since at least 2008. He commented that the Fed policy of low overnight rates and quantitative easing created an artificially low interest rate curve to respond to economic crisis and to get the economy growing. Some would move the starting point back to the post 9/11 era of lowered rates to avoid a recession following the attack on the World Trade Center.
Two analysis can help address this question of what the “normal” post Covid, inflation fighting yield curve might be like.
One is a May 4, 2022 article by Tony Yiu, which asked Why was there Basically No Inflation in the 2010’s? Here is part of his analysis.
Why did inflation not arrive earlier during say 2014? Or 2017? After all the Fed had been stimulating the economy and markets using easy monetary policy and QE since 2008. So why did inflation not spike until a few months ago?
So back to the question of where was all this inflation in the 2010s? My theory is that during most of the past decade, the stock market (both private and public), the real estate market, and new markets like crypto acted like a massive sponge that soaked up all the money that could have otherwise gone towards pushing up the prices of goods and services.
This created a positive feedback loop where:
- Stock prices and home prices go up incentivizing people to put more money in the stock and real estate markets.
- Money going into asset markets instead of chasing goods and services keeps inflation low (home prices are ironically not a part of CPI).
- Low inflation allows the Fed to keep interest rates low, which stimulates credit growth (along with rising collateral values).
- Credit growth causes even more stock and home price appreciation as significant amounts of the newly borrowed money gets plowed back into asset markets. And back to step 1 to repeat the cycle all over again.
Notice two things about this. First, this feedback loop results in the financial economy getting increasingly bigger than the real economy as money keeps getting sucked into well-performing assets like stocks and real estate.
And second, it’s not just low inflation and low interest rates that cause asset prices to go up. But because of feedback, there’s a causal effect in the other direction as well where increasing asset prices help soak up money keeping inflation low.
This positive loop obviously can’t go on forever. At some point, like the players in the casino, people will start to realize that there’s just not enough real stuff to go around (and not enough future earnings to justify the valuations). People seem to be finally realizing this based on the massive declines of stocks like Zoom and Netflix.
This realization kicks off a rush for the exits and a decline in asset prices. And because rising asset prices helped keep inflation low, the reversal into a negative feedback loop forces all that soaked up money to pour back into the real economy to chase goods and services, thus higher inflation (and higher interest rates).
Finally, a unique aspect of this current selloff is that where Treasury bonds are usually a place that investors can escape to during a market downturn, they’re part of the problem this time. Near zero nominal yields (and extremely negative real yields) mixed with high inflation makes Treasury bonds all risk and no reward (I first wrote about this here).
Long-Term Mortgage Market Rates
The decade of 2010 also saw the lowest 30-year mortgage rates ever, fueling a housing boom with double digit price appreciation.
Jim Duplessis of Credit Union Times published a September 26 article which examined the outlook as current mortgage rates hit a 20-year high. His analysis with the relevant data link follows:
Rates in the 7% neighborhood might feel high for those who started buying houses in the last 10 years but they are on the low side for the past 50 years, based on Freddie Mac data published by the St. Louis Fed.
For more than half of the 2,687 weeks from April 1971 through Sept. 22, the rate was at least 7.4%. The median was 9.1% from 1971 to 1999 and 4.8% from 2000 to the present.
Rates peaked at 18.63% for the week ending Oct. 9, 1981 when the Fed under Chair Paul Volcker was battling inflation that had started during the Vietnam war. Volker’s aggressive rate hikes sent the nation into a recession, but knocked back inflation.
The lowest rates from 1971 to 1999 were 6.49% for the week ending Oct. 9, 1998, when the nation was in an economic boom. The lowest over the past 51 years was 2.65% for the week ending Jan. 7, 2021 at the peak of the refinance boom that vanished as rates rose this year to tame inflation.
A “New Normal”
Both analyses suggest the most recent two economic decades are an aberration in terms of a significantly lowered interest rate yield curve.
The efforts to reduce inflation will be a central part of where current rates end up. But then what?
History suggests that the yield curve will shift to a higher level versus what many consumers, businesses and investors grew accustomed to since 2008.
There are other factors as well. There is increasing evidence that lower rates while seemingly consumer friendly, do distort the allocation of economic gains disproportionately to higher income individuals while incentivizing multiple forms of financially driven wealth (speculative) strategies.
Anyone can predict the future. No one knows it. But believing that recent experience is the best or only guide to future rates, would appear a much too narrow perspective.
Karl Hoyle and His Powerful Cooperative Talent
Last week Karl Hoyle (1943-2021), a credit union advocate, was interred in Arlington Cemetery.
There are 450,000 other graves, an honor earned, not bought.
The ceremony starts with a brief service in the Old Post Chapel. The Honor Guard brings in the urn. The Chaplain reads the 23rd Psalm; the attendees say the Lord’s Prayer. The organ plays America the Beautiful and On the Wings of Eagles.
Following the service the congregation goes with the honor guard to the gravesite. The American flag is meticulously folded in a triangle.
There is the seven gun salute, the bugle playing taps and the sacred moment when the flag is presented to Kathy Hoyle, Karl’s wife, by an officer on bended knee.
Afterwards, roses are placed on the grave next to the urn where the only identifier on the wooden box is Karl’s military medals.
The Air Medal and Purple Heart
I learned during the reception that Karl had been awarded the Air Medal. This Medal recognizes military and civilian personnel for single acts of heroism while participating in aerial flight in actual combat. It is the equivalent of the bronze star.
Karl was deployed to Vietnam as part of the 9th Infantry Division. At the support base, a call came for helicopters to medivac the wounded from a platoon still in the midst of battle. He volunteered, got on the chopper and went straight into the firefight to evacuate his fellow soldiers.
As his military colleague stated: “Karl was the guy you wanted on your team.”
His life subsequently expanded to be much more than that moment of choice marked by courage and duty.
Joining the Cooperative Team
Jim Barr and Karl were the top lobbyists in CUNA’s Washington Office when Ed Callahan, Bucky Sebastian and I arrived at NCUA at the end of 1981. Both had worked together in the late 70’s at the newly organized NAFCU.
Karl would sometimes remark that his profession’s reputation was not always the highest. His favorite line was, “If you run into my mother, tell her I am just the piano player in a whorehouse.”
However when mentoring many others on the Hill, he counseled that : “To be a professional with integrity, know that everything you say will be remembered.”
Three Personal Contacts
Of the many occasions Karl and I spoke, three stand out.
- Karl learned that I had moved to Bethesda, MD in 1982 to be near NIH because my wife was being treated for breast cancer. We hoped to get accepted in one of their special cancer studies, but had no idea how to begin. Karl offered to call and see what might be possible. Shortly he informed us that because Mary Ann had already been on several chemo therapies, she was not eligible for their new protocols. The studies were limited to patients with no previous treatments.
- In 1984 NCUA and the entire credit union system endeavored to find a Congressional bill in which to insert wording to redesign the NCUSIF in the Federal Credit Union Act. Democrat Bill Bradley was a key player on the Senate Banking Committee. Karl was aware that Bill and I had played basketball together.
He brought me up to the Hill and sent a messenger into a banking hearing saying Chip Filson wanted to talk to the Senator. Bill came out, motioned me into an elevator with him. Lobbying Congress was not something I did for a living. I don’t remember what was said, although I suspect Karl gave me the points to make.
Later that year Congress passed the Deficit Reduction Act, with bipartisan support, creating the NCUSIF’s new cooperative financial structure based on credit union’s 1% deposit perpetual underwriting.
- In May 1985, Ed, Bucky and I left NCUA to set up Callahan & Associates with a first office in the Triangle Towers building in Bethesda. Initial capital, $1,000. The location allowed me to be close to home, since I was a single parent with two teenage girls.
Shortly after, Karl called and asked if we needed any furniture. CUNA was moving offices and had several old desks and chairs which we could have if we moved them ourselves. We did.
He also asked if we needed any staff. All three of us had worked in state or federal government for the past decade and were used to having support. We said yes. He said his wife Kathy, a superb office manager, was looking for a new opportunity. She became Callahan’s first hire.
Karl’s Essential Cooperative Skill-Connecting
Karl’s special talent was facilitating the power that results from connecting people for common purpose. Connections are what tie us together in community or when confronting personal circumstances.
Bucky said Karl’s success was the result of his building relationships with the staff in Congressional offices.
A former hill staffer at the reception knew Karl. Her husband had been killed in the Air Florida crash in the winter of 1982 when the Potomac had frozen over. She said Karl’s way of helping was: “Don’t call. Just show up.”
Tawana James, Karl’s deputy when he was Executive Director at NCUA, said “he cared about people.”
Credit unions’ competitive advantage is at its strongest when leaders collaborate. Karl’s talent for connection came naturally, it was not an artifice.
Staying Connected
Two examples of his talent are in the pictures below. One was a note to Bucky when Karl was in Madison at CUNA’s headquarters. The second, a photo with the coach of the credit union team at the time, on which Karl was such a vital player.
Kathy like Karl has filled many roles within the credit union system. This year she will retire after working more than a decade at InFirst Federal Credit Union.
Kathy and Karl: A relationship bound by common purpose and service.
