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An Opportunity for the NCUA Board to Do the Right Thing

Over the past two months, the plight of the 3,500 borrowers secured by taxi medallions has been on many political leaders’ minds.

Members of Congress, the New York City Council, the union representing the taxi drivers, CUNA and three credit union leagues have all written or spoken up asking NCUA to do what is in the borrowers’ best interests. They have all sought a collaborative solution with the borrowers, not an outright sale of the portfolio.

In January, several dozen driver-borrowers showed up at the NCUA’s monthly board meeting to present their case firsthand. NCUA has met with the union’s representatives but has given no information about the portfolio’s size and composition, the options being considered and the agency’s criteria for seeking a change from the current outsourced collection effort.

This is the NCUA Board’s Decision

The Federal Credit Union Act explicitly states that the “Administration (of NCUA) shall be under the management of the NCUA Board.” While the current three appointees may prefer to opine about broad policy issues from cyber security to consumer protection, their day job is to ensure the Agency is properly managed.

Most immediately this decision about the fate of the borrower members from Melrose/LOMTO’s liquidations is on their desks. The responsibility cannot be delegated to some staff or committee. The identification of reasonable options and then selecting what is in the members’ best interests for the future of this portfolio loans is in their hands.

A Solution in Everyone’s Interests-Available Now

The credit union press reports that NCUA has put the loans out for bid. It is no secret that hedge funds have been buying up New York medallions at auction for cash. These firms are risk taking vulture investors, bidding at liquidation prices, seeking an extraordinary return. They do this by squeezing borrowers further or by flipping the security to individuals who understand the medallions’ economic value when used to operate a taxi business.

There is good news however. An immediate and proven solution is readily available that if used, would be a win-win for everyone who has expressed an interest. It would give borrowers a chance to earn out the collateral’s economic value, provide significant upside recovery for NCUA, and most importantly, demonstrate the unique capabilities of the cooperative model.

This solution is a CUSO. The entity is 100% credit union owned, a 24 by 7 operation with call center, lending experts and decades long experience in the administration of taxi financing whether on balance sheet or participations. It has the resources and capacity to provide a solution that is visible, accountable and most importantly sustainable, whatever the time period required to work through the portfolios.

For the board not to be aware of or to have a proposal from this proven industry resource would be at best negligent, if not at worst, a total dereliction of duty.

Why This Solution Makes Sense

  1. It is in the borrowers’ interest to have these members’ loan administration overseen by an entity whose sole purpose is serving the credit union system. The unique coop values, capabilities and design are a part of a CUSO’s DNA. NCUA’s responsibility extends to all members not just those with savings. Selling members’ loans to profit maximizing firms violates the board’s fiduciary duties to these member-owners. After all the name of the financial cooperative is CREDIT UNION.
  2. The CUSO approach harvests the financial upside in the situation. Medallions are a license to run a small business. It is an income earning asset for borrowers, not a sterile security waiting for turns in market rates. The last call reports filed by NCUA’s conservators at Melrose and LOMTO showed a combined negative deficit of $150 million. When liquidated in the following quarter, NCUA recorded a $745 million NCUSIF expense against the allowance account. It is fair to suggest the maximum losses have been fully recognized. The potential for recoveries is highly probable if managed by an entity willing to stay the course to do so.
  3. The downside risk is minimal. The argument that the taxi business will exist no longer and instead be overtaking by various ride hailing services is being undermined with each passing quarter. Both Lyft and Uber lose money on every ride today. Neither has ever made a profit and both keep projecting years into the future when that might occur.

Every community in which these services operates now understands they are in the “public transportation business” and is moving to initiate or improve regulation. Licensing fees, taxes, congestion limits and even employment practices are a few of the changes imposed. These regulatory intrusions are eroding the entry pricing tactic of undercutting the regulated taxi pricing used by these market newcomers.

Instead of reducing traffic congestion, ride services are increasing it in city after city. (“Ride-Hail Utopia Got Stuck in Traffic” WSJ Feb 15, ’20, pg. B1) California has passed legislation effective this year that classifies drivers as employees with the accompanying benefits paid by the parent service.

City taxi regulators are modifying their practices on pricing, license fees and other regulations to give their local options a better competitive position. In one city the local drivers created a platform, ride hailing application that mimicked the convenience of the national startups.

The platform, ride share services have disrupted the traditional, locally regulated and metered-set-price approach of the taxi industry. City by city taxi regulators and operators are adjusting to remain viable.

What is not clear is whether the innovating, disruptive, nationally focused ride hailing options are sustainable. As the dominant players are now both public companies with investors wanting to see profitability, their future is uncertain. Could one or both end up becoming more “We Work” reorganization case studies?

The Three Board Members Policy Priorities

Each NCUA board member has stated a core policy/decision making focus in recent public comments.

For Harper it is consumer protection, making sure members are treated fairly.

For McWatters, it is being guided by what the law says. The purpose of the Act states, “credit union means a cooperative organization for promoting thrift and creating a source of credit for provident and productive purposes.”

For Hood it is diversity and financial inclusion. Has he witnessed a more diverse group seeking financial inclusion than the drivers sitting before him at the January board meeting?

The NCUA and credit unions need a positive example of the cooperative difference for the general public. Washington and many outside the city doubt the ability of their DC based leaders to develop collaborative solutions. This is an opportunity to demonstrate the unique capabilities of the cooperative system.

Every loan portfolio option will have pros and cons. It may seem easier for the NCUA board to wash their hands, selling out to the highest bidder, who may then ask for a guarantee to protect their downside. But it would seem illogical to convert these long-term, income producing loan assets into immediate cash for an insurance fund already bulging with over $16 billion in liquid investments. At best, these new cash assets might earn 1.5% per year.

All assets go through cycles of value. Some assets such as undeveloped land, or foreclosed business premises and equipment, have no economic upside until someone is willing to invest more time and resources to make them productive.

A loan to an operator/owner of a taxi medallion is an earning asset today. The value will fluctuate depending on many factors, but the income stream can be forecast and monitored monthly or even daily if needed. All that is required is a loan administrator willing to be responsive to changing circumstances so that all parties can contribute their best efforts. For the driver-borrower it is sweat equity.

A Precedent

The September 2019 AME financial statements (latest posted by NCUA) show that there will be a distribution of $3 billion or more to the member shareholders of four liquidated corporates. Only WesCorp members are without recovery so far. This amount is on top of the $3.1 billion surplus NCUSIF took in from the TCCUSF “merger” In September 2017. The NCUSIF also continues to collect the investment earnings on the TCCUSF merged assets as well as the NGN guarantee fees. This $6.1 billion and still increasing surplus is after NCUA has spent over $4 billion in out of pocket expense (not losses on investments) administering the legacy assets.

This $6.1 billion positive net income contrasts with NCUA’s loss projections for credit unions that would exceed $16 billion. A $22 billion forecasting error! Whether there should even have been liquidations of four corporates is a topic for another day. This example does prove the benefits of patient problem resolution versus the costs of cutting and running by disposing earning assets in a fire sale.

The Leadership Needed

The FCU Act says little about the role of the Chairman in managing the Administration (NCUA). It does say that the person “shall be the spokesperson”. . . “shall represent the board in its official relations with branches of government” . . .and “shall determine each Board member’s area of responsibility.”

As Chairman Hood considers his leadership on this issue, he may want to remind everyone of his words in November 2019 on financial inclusion:

When we talk about the need for diversity, equity and inclusion, I want these principles to be viewed as forces that bring us together. Diversity, equity, and inclusion should be sources of enrichment, strength and unity, not division.

Simply put, the commitment to diversity, inclusion, and equity must be part of this industry’s cherished value of “people helping people.”

Peter Drucker believed, and I quote, that “Unless commitment is made, there are only promises and hopes — but no plans.” He said, “Plans are only good intentions unless they degenerate into hard work.”

The next step forward is to affirm that commitment by creating the plans that will bring those promises and hopes to fruition — and then start the hard work of making these aspirations a reality.

Chairman Hood, are you ready to start the hard work of making these aspirations a reality for these member borrowers whose future inclusion comes from driving taxis?

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What Credit Unions Can Learn from the Passage of the 19th Amendment Guaranteeing Women the Right to Vote

The progressive period of American history (roughly 1880-1920) was a time of reform at all levels of government. This exciting era saw the passage of civil service reform, national forest preservation, new bureaus for regulation of business and monopolies, limits on campaign finance, the establishment of the Federal reserve system, and the passage of four amendments to the constitution.

These four authorized the direct election of US Senators, the ability of Congress to levy an income tax, prohibition of the sale of intoxicating liquors, and universal women’s suffrage.

Credit unions also planted their roots in this period. The first credit union St Mary’s Bank was chartered in 1909. The follow-on efforts by Filene and others to build a cooperative credit system were a product of these progressive reform impulses.

There are two critical takeaways from the passage of the 19th amendment that are as vital today, as they were a century ago.

They are:

  1. One person can make a difference.
  2. States are the laboratory for change; Congressional legislation most often follows success from reforms proven at the state level.

Who is Harry Burns?

The final ratification of the 19th amendment required 36 states’ approval for it to be added to the constitution. The final success would rest on one person’s vote in the Tennessee House of Representatives.

The amendment passed the Tennessee Senate in August of 1920 but was tabled in a 48-48 tie vote in the House. Harry Burns, at 24 years old, was the youngest House rep. He wore a red rose signifying his opposition to the amendment. When the vote came up for ratification it was expected to again tie and therefore fail.

Instead Harry changed his vote to Aye, and the 19th amendment was approved. What changed? The morning Harry’s mother, Phoebe, had sent a note reading:

“Hurrah, and vote for suffrage! Don’t keep them in doubt. I notice some of the speeches against. They were bitter. I have been watching to see how you stood but have not noticed anything yet.”

The next day Harry explained his vote for universal suffrage:

“I believe we had a moral and legal right to ratify. I know that a mother’s advice is always safest for her boy to follow and my mother wanted me to vote for ratification.”

Yes, one person can still make a difference. One mother, one son. The efforts of a generation are realized. A reminder for when we might be that one needed vote.

The States as Incubators for Change

A number of states gave women the right to vote before passage of the 19th amendment.

The first was the territorial legislature of the Wyoming Territory which granted women suffrage in 1869. On September 6, 1870, Louisa Ann Swain of Laramie, Wyoming became the first woman to cast a vote in a general election.

Other states included Utah, Colorado, Idaho, Washington, California, Oregon, Montana, Arizona, Kansas, Alaska, Illinois, North Dakota, Indiana, Nebraska, Michigan, Arkansas, New York, South Dakota, and Oklahoma.

The states were the proving ground for women’s political power to get legislatures to enact their suffrage rights.

Where Change Starts

One of the recurring themes in the 110 years of the cooperative system has been innovation implemented first in states, sometimes decades before adoption at the federal level. The 25-year head start in state credit union chartering gave Filene “facts on the ground” to convince Roosevelt and Treasury Secretary Morgenthau to support passage of the Federal Credit Union Act in 1934.

Other significant innovations begun in the state credit union system include:

  • Share drafts which were authorized for Rhode Island credit unions, as NOW accounts, a decade before the Monetary Control Act gave all credit unions the authority to have transaction accounts;
  • Share insurance was begun in Massachusetts and expanded to at least 16 state sponsored programs. The NCUSIF was legislated in 1971. Moreover, it was the state’s cooperative financial model, with the 1% deposit requirement, that was the basis for the capitalization of the NCUSIF in 1984;
  • Corporate credit unions evolved out of state “chapter” credit unions long before NCUA passed its first corporate rule distinguishing between a corporate and natural person charter;
  • Mortgage lending was permitted early on In multiple state credit union acts. Senator William Proxmire from Wisconsin noted in a hearing in 1984 that he received his first mortgage from a credit union in 1948. This power was not authorized for federal credit unions until 1977.
  • Credit union owned banks, needed for access to the country’s financial clearing and settlement networks, were formed in both Wisconsin (WISCUB) and Kansas.
  • The first CUSO’s were approved at the state level. In Pennsylvania, the data processing firm Users, owned by its member-users became one of the first large multistate CUSO’s
  • Most field of membership evolutions have been tested and proven first in the states. For example, every Rhode Island state charter could name a primary sponsor, but then add a catch all sentence to admit anyone who lived, worked or worshipped in the state.
  • From 1977 through 1981, the Illinois Director of Financial Institutions Ed Callahan implanted the policy of deregulation and overhauled the examination and supervisory capabilities to transition the state’s credit union system to the market driven world of today. In October 1981, Callahan became the NCUA Board’s second Chairman. The NCUA was the first federal regulator to embrace complete deregulation of savings in April 1982. Additionally, he reformed the agencies administration and activities to support the new supervisory challenges in this chapter of cooperative expansion.

The list goes on. Today, the importance of innovation in the state system is more vital than ever.

As NCUA seeks to dominate all credit union regulatory options via NCUSIF insurance, the one area pioneering new approaches are state licensed CUSOs. All CUSOs are organized under state law and, where applicable, regulation. Whether the firm’s structure is an Inc., a cooperative, an LLC, or even a non-profit, the “chartering’ is done by the state. While NCUA can limit investments in or loans to CUSOs, the state prescribes the organizational opportunity.

That is why in the current credit union system, the CUSO option, especially multi-owned CUSOs, are proving to be one of the most important arenas for startups, fintech initiatives, and third-party partnerships.

Cooperative history is filled with examples of industry leadership arising from the state system. In addition to the initial pioneering charters, other organizations include state associations and leagues, share insurance options, and the corporate network. As these onetime innovators lose momentum, new efforts provide renewed leadership.

Today it is CUSOs who capture the passion and entrepreneurial spirit every industry needs to continually reinvent itself. Going forward it may well be CUSO creativity that renews the cooperative charter so credit unions can again be seen as progressives known for leading in solving members’ most important needs.

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“I Won’t Die of Old Age”

These words are hand written on placards at a public demonstration. They are carried by children concerned about the future of the planet. Children crying out for our attention to confront the growing environmental crisis.

When our first child was born, I promised my wife that I would share the nighttime feeding duties. Every morning I would wake up and she would ask, didn’t you hear Lara crying? I had slept soundly; it was her mother who responded to the crying and got up. An event I seemed incapable of hearing.

Today children are crying out to the adults in the room about the most urgent crisis they perceive in their young lives. They are not encumbered by comfort and fruits of success. They bring a future perspective not clouded by present accomplishments.

They have become the salt of the earth and a light for many adults “in the room” but will we hear their call?

P.s. Have you ever wondered what your “carbon footprint” is?

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An Example of Regulatory Leadership in the 1977 MCU Conservatorship

In a recent blog reviewing the latest events in the May 2019 NCUA conservatorship of MCU, I suggested that the real problem was the failure of regulators, especially NCUA, to publicly explain their actions and intentions. The lack of transparency means that no one is taking responsibility for decisions made. Contrast this approach with the 1977 New York Times report on this earlier Municipal conservatorship.

Although insured by NCUA, Muriel Siebert, the banking regulator publicly stepped up and took charge of the situation.

In the excerpt from the New York Time’s article below, note her directness and actions with the credit union including:

  • Her transparency discussing the situation, including citing delinquency and board “struggles”
  • Her statement of full cooperation from the NCUA, including funding, if necessary
  • Her assurance of continuity of operations including paying a 6.5% share dividend
  • Her on site visit to the credit union’s main office and statement that the Department did not intend to retain possession
  • Her assurance there would be no wholesale layoffs of staff
  • The statement by New York’s mayor Beame extending his appreciation to the Regulator for protecting members interests

This is what leadership looks like: collaborative, goal specific and backed by personal commitment. The turnaround succeeded!

New York State Is Taking Over Municipal Credit Union in the City

(November 3, 1977)

Superintendent Siebert asserted that the credit union “is not insolvent and it has sufficient liquidity for us to be able to run it.”

She said that the union would be open for business as usual at 9 A.M. today and that “we will accept deposits, permit withdrawals and make loans to members as in the past.”

The Banking Superintendent said that the National Credit Union has assured her of full cooperation and that the national group would provide additional funds to run the Municipal Credit Union “should ;hat become necessary.”

She said also that the deposit insurance of up to $40,000 per account would continue “in full force and effect.”

The 60‐year‐old Municipal Credit Union has deposits of more than $120 million and has been paying its members quarterly dividends of 6½ percent. Miss Siebert said it was her intention “to correct the institution’s operating problems” and to continue to pay the usual dividend for the quarter ending Dec. 31.

In explaining the events that led to the takeover, Superintendent Siebert said that Ian examination of the credit union by her department early this year “disclosed an increased rate of loan delinquencies” and that “little was being done by the M.C.U. to collect these delinquent loans.”

Fights for Control Cited

Miss Siebert said the credit unions operations were also jeopardized because a struggle had been waged since 1972 for control of its board of directors. She pointed out that lawsuits had been brought by dissident members of the board and that all this had created problems involving the “effectiveness of management, personnel and various financial controls.”

Late yesterday, she visited the credit union in the Municipal Building at 156 William Street and told the staff there that her department “does not intend to retain possession of this credit union indefinitely.”

“We do not plan any wholesale layoffs of employes,” she said, although we do plan to make some reductions in staff which have already been recommended by our auditors.”

Mayor Beame issued a statement last night, which in part said: “I wish to extend my appreciation to the State Bank ing Department for moving promptly in this matter to protect the interests of the city employees who are members of the credit union.”

The Municipal Credit Union was chartered by the state in 1916 with 19 members.

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Municipal Credit Union (NYC) Reports $30 Million Net Income Gain in 4th Quarter

In a dramatic turnaround Municipal Credit Union (MCU) reported a $30 million reduction in its 2019 final year to date loss compared with its reported September 30 financial position.

$40 Million Improvement in Six Months

In the September 5300 call report, MCU’s bottom line was a $113.1 million loss. As of December, there was an improvement with a reported loss of only $82.7 million. This was on top of a $10 million-dollar gain from the June 2019 year to date loss of $123.3 million.

How is this dramatic $40 million turnaround in just six months possible? Is it too good to be true?

The short answer is Yes. It is neither true nor good.

Some Background

A brief summary of MCU’s situation from a November 2018 news article outlines the CEO’s embezzlement starting in 2013 to pay for addictions, his total compensation of $5.8 million in 2016, the removal of the Supervisory Committee and Board in 2018, followed by the appointment by New York’s Department of Financial Services of a former bank President and CFO Mark Ricca as CEO in October 2018.

At year-end 2018 MCU, led by the new CEO, reported a positive bottom line of $11.4 million, a net worth of 8% and a stable balance sheet with delinquency of 0.85% more than covered by an allowance account exceeding 228% of past due loans.

NCUA Conservatorship in May 2019

Then on May 17, 2019, NCUA took over the credit union and appointed Kay Woods as the CEO. Forty-five days later the credit union announced a year to date loss of $123 million versus the first quarter’s net income of a positive $2.9 million under the prior CEO.

There was no public discussion by the credit union or NCUA explaining this catastrophic loss. The lack of any reasons raises the question whether this was a hasty judgment or a predetermined action by NCUA. The result reduced the credit union’s 2019 mid-year net worth ratio to critically undercapitalized at 3.4% from well capitalized over 7%, 90 days earlier.

Even without any explanation, it did not take a forensic analyst to determine that NCUA’s new conservator had ended MCU’s defined benefit retirement plan and fully expensed the potential accounting deficit shown on the balance sheet as a negative $114 million at March 2019. This entry shown as other comprehensive income/loss has been reported on MCU’s balance sheet for over a decade.

The labor union representing 450 of the credit union’s employees confirmed this benefit cancellation had occurred and been replaced by a 401K defined contribution program in Local 153’s 2019 winter newsletter. The union’s contract had expired in January 2019. There has been no announcement of a new one.

How to Stage a $40 Million or More Turnaround

One way of capping a defined benefit plan’s future liability is to close it. This action will cause all employees covered under the plan to be 100% vested regardless of their vested status at the time of the closing.

The actuarial estimates of a plan’s future funding requirements do not require cash outlays until employees begin to draw benefits, which may be years or decades into the future. Closing the plan however, makes all covered employees fully vested in all earned benefits, regardless of years of service. This vested amount can be paid out if they leave employment instead of drawing the plan’s benefits for years after retiring.

Since the plan’s termination, employment has declined from 688 FTE equivalents to 523. In addition, the credit union announced in December that it was closing six more branches reducing total locations from 23 to 16 as of January 31, 2020.

As more employees will be asked to leave, each will be eligible to receive 100% of vested benefits in cash for rollover into another retirement program or an IRA. Individual lump sum payments will depend on length of service and level of compensation. However, the year-end average salary and benefit of $310,481 per employee (where the payout expense is recorded) suggests the average vested amounts are in excess of several hundred thousand per departure.

Every time an employee leaves, the payment reduces the actuarially projected shortfall of $114 million shown at March 31, 2019. That total assumed the plan’s on-going nature with liabilities projected from current employee staffing, their accumulated tenure and plan vesting schedules.

The $114 million write-down in the June quarter was an accrual estimate, presented as a loss using plan assumptions that were no longer valid since the plan had been terminated.

By presenting what is at best a misleading, and possibly false financial narrative, the credit union created a source to pay laid off and departing employees a “severance” (their 100% vested amount), a rationale for pushing back union contract demands, a reason for closing branches, and an urgency to dismantle the credit union’s operating capabilities, plank by plank.

Six months after the $123 “loss” was reported, the reversal of the accrued liability, appears to be $40 million and rising as layoffs continue. In fact, the $30 million 4th quarter improvement is due almost entirely to a correction of the earlier significant incorrect presentation of a future liability.

Downsizing Goes On

Currently MCU lists over 25 vacancies on its web job site. Branch closings continue. One has caused a landlord to initiate legal action against early termination. Korn Ferry has been hired to recruit a new Chief Human Resource Officer with “10-15 years’ experience” and one who is “willing to roll up their sleeves as needed.” The union’s latest newsletter said negotiations are still ongoing with no contract.

Lending to members has slowed by 40% from $773 million in total 2018 loan originations, to $465 million in 2019. Loan quality remains strong and delinquencies are still covered by more than 200% in an allowance account reserve. However, this lending slowdown could impair revenue for years to come.

What is the Real Problem?

If the $123 million “loss” was not really a loss, then what is the reason for the accounting manipulation?

Financial reports from prior years portray a credit union that on the surface was doing OK. The credit union avoided both the taxi medallion problems (2017-2019) and mortgage backed security crisis (2008/09). It had a balanced, growing loan portfolio and was serving many blue collar, middle income, civic and nonprofit employees in the New York City area. Chartered in 1916, it is New York’s oldest credit union and had previously survived a previous conservatorship in 1977.

However, news accounts stated that the CEO been supporting addiction habits via embezzlement since 2013. A supervisory committee member, board member and prior human resource executive, have been accused of helping with the wrongdoing.

In early 2018, the MCU board took the lead role for terminating MCU’s CFO, CHRO, and CEO based on investigations following receipt of DOJ subpoenas that alerted the directors to problems. After the board acted, and the investigations completed, they were then removed by the regulator.

The allegedly underfunded defined benefit plan was never an issue in these 2018 events. It had been openly shown in call reports for over a decade. MCU’s executive salaries and benefits, including the $6 million paid in 2016 to the CEO were disclosed in the required IRS 990 filings year after year. Both of these accounts should have been thoroughly reviewed by examiners.

The news reports and 5300 call reports suggest that the core issues, whether in 2018 or 2019 were in plain sight all along. Every year NCUA and DFS conduct joint exams with dozens of trained personnel on premises over many weeks. The credit union’s board and supervisory committee records are read, CEO compensation and any loans to executives/board members examined, MCU’s internal audits and the external CPA audit (including the future funding projections for the defined benefit) are all part of the exam process.

External Audit Issued During the Board’s CEO Investigation

The external audit as of December 2017, dated April 11, 2018 from Eisner Amper LLP provided the normal “clean” opinion of MCU’s financial position:

“In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Municipal Credit Union as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2017 in accordance with accounting principles generally accepted in the United States of America.”

Annual regulator exams cover all aspects of financial reporting, loan analysis, reserve adequacy, compliance and IT security, just to name some of the areas in a normal on-site review. As a $3 billion credit union, MCU should have been assigned NCUA’s most experienced examiners.

Either NCUA had not identified the CEO’s five-year scheme or was unable to resolve it. The MCU board’s removal occurred only after they terminated the three suspected “bad actors” in 2018. And it was one full year later that NCUA’s current conservator reported the “surprise” loss from the benefit plan termination.

Was the exaggerated loss, currently $40 million, NCUA’s way of creating a “financial emergency” to force their changes on the credit union? Was this an after the fact effort to divert attention from years of regulatory oversights enabling the CEO’s defalcations to go unnoticed?

Silence Creates Uncertainty, Erodes Confidence

What compounds the impression of accounting manipulation, is the continuing vacuum about NCUA and the conservator’s plans. Both have declined to talk to the press. Without transparency, anything goes. There is no accountability, no need to justify actions, no explanations of alternatives. Everything is done by force majeure, justified by an inflated expense recorded a full year after the board is removed with the regulator 100% in charge.

NCUA’s nineteen-month silence during these two separate events, and failure to provide a public spokesperson willing to take responsibility for the conservator’s actions and purpose, suggests that it is avoiding any discussion of its supervisory responsibilities. Instead it wants to point to a $123 million shiny object and reprise a two-year-old act of a confessed CEO embezzlement scheme. An embezzlement loss that should be fully recoverable from bond claims and restitution.

What’s Next?

The easy part is over. Anyone can knock a barn down. It takes a carpenter to build one. Restoring employee and member trust and morale is not achieved by merely showing an improving net worth or high ROA. A wrecking crew approach may remove obstacles to change, but it will also lead to unforeseen consequences when seeking persons to build a resilient future for MCU.

MCU’s financial progress is inevitable, for the credit union was showing ROA and reasonable growth before using the defined benefit plan cancellation as a hammer to justify downsizing and layoffs. Financial results matter, but the critical processes that will show if the situation is on the right track include:

  1. Restore meaningful input from the membership, both employee groups and individuals;
  2. Find long term senior managers/leaders who understand the requirements to build a sustainable organization with what is left of operations;
  3. A frequent and open reporting to all public stakeholders, with timely updates from both those running the credit union and NCUA/DFS who outsourced their oversight to those now operating in secret.

Why Transparency Matters the Most

This final step is in fact the most critical. NCUA has aided and abetted a false narrative of the credit union’s financial situation begun with its purported loss in June 2019.

Cooperatives are very different from for-profit financial firms. Ownership is held in commonwealth, not by individual stockholders. When regulators act without presenting their goals for public understanding, there is no accountability for those exposable for the situation.

When problems occur from external events or internal failings, all cooperative parties have an equal responsibility for resolving them: the credit union leadership and board, the regulators and third parties such as auditors and bonding companies all share oversight responsibility. Effective solutions require collaboration and respect for everyone’s role.

When one party operates unilaterally in secret, or attempts to put blame on another, then collaboration and positive resolution is replaced with scapegoating. Vital information and capabilities are lost. Options are unexamined. And the situation can quickly descend into a failing spiral that no person or team can reverse.

For what employee would want to trust their career prospects to a firm without a leader, with no governance process in place, no stated plan or goals, continuing uncertainty and loss of market confidence? But this is becoming the situation today. Instead of preserving value, NCUA’s actions are destroying the prospects for recovery. It needs to make its case otherwise in public as soon as possible, if it has one.

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Two Past Regulatory Reforms That Are Foundational Today

In 1905 President Teddy Roosevelt met at the White House with a future President, Woodrow Wilson. At the time Wilson was President of Princeton University and had yet to embark on his political career.

But there was a serious national problem: that year 19 football players had died as a result of injuries. The game was brutal and filled with unsportsmanlike conduct (see excerpt included below). Roosevelt was a graduate of Harvard. Princeton and Harvard were two of the most powerful Eastern football programs at the time. Influential alumni and members of the faculty and administration of colleges were calling for the sport to be banned.

The two men met along with other college officials who wanted to see change. Roosevelt, ever the pragmatic reformist, worked quietly to form a new group to oversee a revision to the game’s rules and the sport’s conduct. The body created to do this was the Intercollegiate College Athletic Associating, known today as the NCAA.

Reforms took time, but football’s future was saved in a mutual effort by all parties, some of which held very divergent views. They collectively agreed to take a new regulatory approach outside of government, yet accountable and independent of any one college’s control.

This model of bipartisan, pragmatic progressive change was part of an era of governmental reforms.. These included regulations on interstate commerce, establishment of national forests,  direct election of US senators to name a few.  And there would be no Super Bowl without college football.

Fast Forward: Reform and Government in 1982 Led by a Former Football Coach

When newly appointed NCUA Chairman Ed Callahan spoke to the CUNA’s Governmental Affairs Conference in February 1982, the President of CUNA, Jim Williams, said there was only one topic on credit union attendees’ minds: survival.

Double digit unemployment and inflation had led to the election of Ronald Reagan. Short term interest rates were in double digits. One of Reagan’s core political goals was deregulation, reducing government’s role in many areas of the economy.

All insured depository institutions were suffering from disintermediation of their deposits by money market mutual funds which passed through market rates that greatly exceeded what credit unions, banks and S&L’s were allowed to pay by government regulation. Industry growth was at a standstill. NCUA was still trying to establish itself as an independent agency, with a three-person board, instead of a bureau within Treasury run by a single administrator.

In that maiden speech, Callahan, who had been the Illinois Director of the Department of Financial Institutions the prior five years, gave the audience a vision for the future. Business decisions about who to serve and the rates and services offered would now be in the hands of the boards and managers, not the government. Deregulation meant putting the responsibility for operations and success, or otherwise, with those who knew their members and communities best;

Just  as importantly, Callahan knew there had to be institutional reform at the NCUA to properly oversee this newly, deregulated market-driven industry. The former football coach created a new “game plan” for the system.

The two most important institutional changes were solutions designed with, and capitalized cooperatively by, credit unions. First the Central Liquidity Facility (CLF) was fully funded in partnership with the corporate network.  All credit unions had access to a liquidity lender that would be a source of “unfailing reliability” in a crisis. This self-financed, joint partnership expanded to a backup line in excess of $40 billion with Treasury during the 2008/9 Great Recession.

The second reform was to redesign NCUA’s insurance fund. The old FDIC/FSLIC premium based model was transformed into a cooperative structure in which credit unions would maintain 1% of deposits as the financial core. Earnings from the deposits and  reserves should create sufficient income so there would be no more premiums as the primary revenue source. Credit unions should even expect a dividend in normal times.

But more importantly the redesign created an ever expanding source of cooperative capital. The NCUSIF became a credit union “sovereign wealth fund” financed solely from the industry whose members would be the beneficiaries of this collective resource. The NCUSIF was repositioned as a vital industry partner for a credit union system that has no access to external capital.

Reforms From Mutual Understanding and Interests

What ties these two reform examples together is that they occurred through teamwork. All interested parties saw a need for change and agreed on immediate steps to make it happen. The institutional changes were voluntary and embraced by all the participants.

The problem of a game that had gotten dangerously out of hand, or an industry faced with unprecedented financial pressures, could have led to total failure for either.

Fortunately, these events had leaders in place who were knowledgeable , could think clearly and give direction and hope to all by identifying a path forward. Both crises were overcome by these decisive actors, determined to work through them by collaborating  with those who had most at stake in the outcome.

These leadership examples provide a reminder of the effectiveness of team work when affected parties are empowered to resolve the problems confronting them. These solutions  endure and indeed may be more relevant than ever for today’s cooperative industry.

Excerpt from “Political Football: Theodore Roosevelt, Woodrow Wilson and the Gridiron Reform Movement“:

Since the 1890s, the term “put out of business” had referred, in a football context, to intentional injuries of key players. Needham gave the example of a black player for Dartmouth who suffered a broken collarbone early in a game against Princeton. When the guilty Princeton player was confronted by a friend on the Dartmouth team, he denied that the injury had anything to do with race. “We didn’t put him out because he is a black man,” he replied. “We’re coached to pick out the most dangerous man on the opposing side and put him out in the first five minutes of play.

In September 1905, Roosevelt received a plea from, his friend Endicott Peabody, the headmaster of Groton School. On behalf of a group of eastern private schools, Peabody asked the president to intervene. The headmasters were concerned that the behavior on the college gridiron was corrupting their own athletes. The plea to a chief executive who had graduated from Harvard and took an interest in college athletics might not have been unusual. That the president who had just resolved Russo-Japanese War and had earlier intervened in the far more crucial coal strike in 1903 would commit himself to football reform was unprecedented.

Yet Roosevelt may have had reasons that went beyond the public criticisms of college athletics…

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The $530 Million Gift of a Credit Union’s Legacy

The 2019 financial year of Schools Financial CU’s (Sacramento, CA) operating performance is impressive. Loan growth of 10.4% to $1.6 billion with delinquency of only 0.26% and an allowance account of more than double all past due loans. ROA of 1.55% building net worth to 12.3% . Member growth of over 4% adding up to a year-end total of 160,00 member-owners.

As of January 1, 2020, Schools Financial CU, chartered in 1933, no longer exists. Its total assets of $2,150,075,670 including net worth of $264 million were transferred via merger to the control of the Board and executives of SchoolsFirst FCU ($16.8B) in Santa Ana, CA.

The Gift That Doubles in Value

The total gain for SchoolsFirst FCU however is $530 million in this generosity from the members of Schools Financial CU.

The $265 million in reserves will be transferred intact as “equity acquired in merger” to SchoolsFirst’s balance sheet. And following the accounting requirements for business combinations, the assets and liabilities of Schools Financial CU will be marked to market, creating an excess of assets over liabilities of a similar amount. This second gain will be called “negative goodwill” and recognized as income on the books of SchoolsFirst FCU for a total gain of $530 million.

The Immediate Benefits of the Merger for Members of Schools Financial

As described in the Schools Financial Chairman’s letter to members recommending they approve the merger, the two largest financial “benefits” disclosed as part of this transaction were:

  1. A one-time special year-end $4.0 million dividend (an average of $26 per member) , if they approved the merger, to be paid from Schools Financials’ 2019 results above;
  2. The opportunity for Schools Financial CEO, who arranged this merger, to increase his existing compensation by over $8.0 million

The details of this event and possible consequences have been described in three prior blog posts.

How Can This Merger Be in the Members’ Best Interest?

Part I: The Half-Billion Dollar Wealth Transfer in the SchoolsFirst FCU Merger

Part II: The Half-Billion Dollar Wealth Transfer in the SchoolsFirst FCU Merger

The only question remaining: Is this example what the credit union cooperative system was intended for?

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A Picture Worth a Thousand Words

A Call to Action and a Test of Who Credit Unions Are

This photo is shared with permission from the January 23, 2020 NCUA board meeting courtesy of the New York Taxi Workers Alliance. http://www.nytwa.org/

What are these members telling us? Why has no one listened to them before? More crucially, why did these borrowers show up at an NCUA board meeting?

Member frustration and hope are on display. Throughout the taxi medallion disruption NCUA from top to bottom has turned a deaf ear to the needs of the member-borrowers.

This neglect has been pointed out time and again in letters to the NCUA Board, in articles in the New York Times, and in the stories from members to the press. Now there is a last opportunity to do the right thing. And to demonstrate the credit union difference.

A Thousand Words

A Feb 5, 2019, an article on creditunions.com described NCUA’s ineffectiveness in its oversight of the taxi medallion disruption. The article asked: The Taxi Medallion “Resolution” Works In Whose Interest? Following are excerpts from one year ago:

. . . .The critical question is not what the normalized the value of the medallion asset might be, but how does a credit union manage through a business disruption to sustain operations? The NCUA’s response was to eliminate the impacted credit unions through liquidation, purchase and assumptions, and forced merger. And in the end, to charge credit unions $744 million for “washing its hands” for oversight.. . .

This raises two questions: Did the NCUA act in members’ best interest? And is the $744 million liquidation expense the wisest use of credit union money?

Who Is The NCUA Really Helping?

The traditional approach of share insurance is to ensure the safety of member savings for all amounts less than $250,000. But in a credit union, the interests of the borrowers should also be considered and treated with the same or even greater respect as those of savers.

Credit unions were not designed primarily as savers clubs. Consumers have multiple options for safely saving money, insured and uninsured.

Credit unions were formed to address borrowers’ needs. Taxi medallion financing was not only a community service but also an ideal example of cooperative finance. A lot of people — many of them immigrants making their way in a new country — financed their American dream through taxi driving and then medallion ownership.

When the security that underwrites a loan is devalued, both the borrower and the institution suffer. When the security is an income-producing asset, such as a taxi medallion, the impact on both is even greater. Both income prospects and accumulated value are hurt. 

Whatever the security for a loan, a lender’s successful transition through a crisis depends on its willingness to rewrite terms, lower payments, and recognize the borrowers’ efforts to find other income and/or to persevere in current circumstances. This is what credit unions did repeatedly for home and auto borrowers during the recent Great Recession. Cooperative design makes this patient, member-focused adjustment process possible.

The Broken Bonds Costing $500 Million

Conservatorship is an important regulatory option for sustaining the institutional framework as a credit union works through problem assets (loans or investments) whose future value is uncertain. But if regulatory problem-solving becomes merely a “fire sale” to dispose of problem loans, then the bond between the borrowing member and the credit union is broken. The future for both becomes problematic and the options for positive, mutual solutions much reduced.

The NCUA conserved Melrose and LOMTO credit unions in February 2017 and liquidated them 18 months later. When these conservatorships were terminated, the opportunity to preserve value, and assist members, was destroyed..

LOMTO and Melrose reported their June 30, 2018, financial condition under NCUA management as a combined deficit capital position of $155 million. When liquidated within months of that filing, NCUA recorded a $744 million expense. This $500 million difference shows the cost of giving up all future value from working with members. Resolution becomes “cutting and running” away from members’ problems rather than using cooperative design advantages to resolve them.

A Request to the NCUA Chair

NCUA’s ineffective oversight undermined the relationship between the credit unions and borrowers so much that the president of the Committee for Taxi Safety wrote NCUA chair McWatters on May 12, 2017, about the agency’s shortcomings: 

“For the most part medallion owners are not seeking to walk away from their loans. They are not seeking to walk away from personal liability. Recognizing this, lenders have stepped up to meet this challenge and work with medallion owners. … The only lender that is refusing to work with medallion lenders is Melrose, under the control of NCUA. Regardless of each owner’s outstanding debt, the NCUA has taken a hard-line, one-size-fits-all approach that demands massive up-front principal pay downs of several hundred thousands of dollars and/or mortgages on residences to renew loans. 

“Even if the borrower complies, the NCUA then seeks to substantially increase the interest rate on the loans. Melrose has taken borrowers who want to pay and placed them in a position in which they know they will be put in default, thereby forcing them to face financial ruin. …

“The NCUA’s position is so extreme that it has told borrowers who are current on their loans and still making all payments, that if a medallion is in storage for any reason, temporarily or long term, that it will immediately commence foreclosure proceedings. … 

“All we are asking is for the NCUA to act reasonably and allow struggling medallion owners some flexibility in paying off loans. … The NCUA’s behavior has been that of a bully. … It is time for the NCUA to end this assault on our industry and show leadership and human decency.”

Transferring Loans to an Outside Servicer

The best estimates implied by call report data are that all credit unions now hold more than 8,000 member loans secured by taxi medallions. The average outstanding loan is between $250,000 and $350,000. Many of these borrowers will be financially challenged as self-employed driver/ debtors. Like others working in the so-called gig economy, their future is not certain. Will credit unions work with these borrowers as members, or will the regulator and its agents try to rid themselves of any responsibility for these member-owners?

The NCUA transferred Melrose’s medallion loans to an outside servicer. . . The borrowers now have three options: pay, go delinquent, or walk away via bankruptcy. Without an interested lending partner holding the loan, rewrites or other refinancing accommodations are lost. There is no prospect of a future relationship. The credit union promise to member-owners is non-existent. Selling problem loans is how banks, not coops, routinely solve their problem credits.

Although written one year ago, the article shows why the borrowers came to the NCUA, not the FDIC’s board meeting last week.

Where We Are Now: NCUA Largest Holder of Taxi Medallion Loans

Newspapers reported NCUA’s intent to sell in the open market its portfolio of loans acquired from its liquidations. Last week a New York city councilman announced a multi-pronged effort to stabilize the taxi industry including creating a mission driven, nonprofit entity to purchase the loans at a discount and then pass the lowered obligation through to borrowers CUNA and three leagues wrote NCUA on January 22 requesting that NCUA delay a liquidation sale due to harm it would cause borrowers, even those who are current in payments, and to credit unions still holding loans but whose collateral would be devalued in a fire sale.

NCUA working in collaboration with credit unions, leagues, CUSOs and New York taxi regulators, has the chance to create a cooperative solution that would help thousands of member-borrowers and set break from its past neglect. One NCUA board member called the drivers’ attendance “democracy in action.” But democracy only works if those in positions of authority respect their constituents by supporting collaborative solutions, versus selling out to financial bargain hunters seeking to maximize profits out of the misfortunes of others.

A Message: Who Does the Credit Union System Serve?

Read more:

CU Times: Amid Urgent Calls for Help, NYC Taxi Medallion Task Force to Meet With NCUA Officials

NY Times: New York Is Urged to Consider Surge Pricing for Taxis

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From the Field: “Takes Away Choice” – One Member’s Comment on Proposed Chesterfield FCU Merger

The Board wrote in part to justify the merger:

Your Chesterfield FCU Board of Directors . . .has approved and is seeking a merger . . .It is the role of the board to look ahead and make decisions that we believe place our credit union in the best position to serve you. As we look to the future, we recognize the potential for economic challenges ahead. The last recession was very difficult for our credit union and we are not confident that we could remain well-capitalized through another economic downturn. We believe the time to take this step is now while our credit union remains financially strong.

The member responds:

I have been a member of Chesterfield F.C.U. for over 17 years. I do not support this merger and ask that all members vote against it. I have looked at the Financials for Chesterfield F.C.U. and in my opinion, the credit union is stable and is meeting its financial commitments.

It is well known that large majority of the members of Chesterfield F.C.U. can already qualify for membership at VACU due to being part of the Virginia Retirement System. This merger only takes away a choice from the current Chesterfield F.C.U. membership and future employees of Chesterfield County government and the Chesterfield County Public Schools. Less consumer choice is not a good thing. For this reason, I ask that the NCUA not approve this merger.