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The Hamilton Question and New York’s Municipal Credit Union’s Conservatorship by NCUA

The last song in the runaway hit musical Hamilton ends with a question:

Let me tell you what I wish I’d known
When I was young and dreamed of glory
You have no control
Who lives, who dies, who tells your story?

On May 17, 2019 NCUA was appointed conservator of the $3.03 billion state-charted Municipal Credit Union. The March 2019 call report data shows 588,000 members, a net worth ratio of 7.6%, delinquency of .77%, and an allowance account funded at 150% of total delinquencies. No taxi medallion loans.

The New York regulator had previously removed MCU’s supervisory committee in May 2018 and the full board in June 2018. It designated an “on premises administrator”, Mark Ricca, to oversee the general management. Mark had no credit union background.

When appointing NCUA conservator, the state also removed its chosen administrator. NCUA provided no information about who will be running the credit union and under what guidance since there appears to be no immediate financial safety and soundness issues, but a leadership transition event.

The impetus for state action was the arrest in May 2018 of the former CEO Kam Wong. He pleaded guilty in November 2018 and in June 2019 was sentenced to five years in prison and ordered to forfeit $9.9 million to pay restitution to the credit union for the amount he had defrauded. The misuse of credit union funds extended from 2013 through 2018. The credit union has received a bond settlement for loss as well.

What’s next for the members?

On January 10th the Brookings Institution hosted a conference entitled Ten Years Later: Lessons from the 2008-09 Financial Crisis. One speaker was Lawrence Summers who was Treasury Secretary from 2009-2011, a PhD economist and former president of Harvard University,

During the Q&A he was asked why the government did not take over the direction of the troubled banks and insurance companies instead of TARP funding, much like the conservatorships of Freddie and Fannie. His answer was succinct: “it is my experience that government intervention in banks is a major destroyer of asset value.” He further commented who wants to run or do business with a conserved government-directed institution?

NCUA’s track record as a conservator is extremely mixed but on balance proves out Summer’s conclusion. NCUA’s conservatorship of the two largest corporates and then takeover of three more in a mass liquidation process destroyed solvent institutions that according to NCUA’s own numbers today have estate surpluses of over $5.6 billion, of which $3.1 has been transferred into the NCUSIF.

By setting itself up to run a credit union as a conservator, NCUA has a conflict of interest. Does it act in the members’ best interests or does it act in its own self-interest? As in all conservatorships, the members have no voice. The board is gone, and often the person appointed to lead has little or no background in the credit union, and is little more than a hired gun until some external resolution can be reached. Restoring the credit union to self-sufficiency rarely occurs, because in so doing it contradicts the logic that government takeover was necessary in the first place. Moreover as in this case, the NCUA and the state had examined the credit union annually from 2013 to 2018 while the misappropriations occurred, and apparently found no wrong doing. So the tendency is to shift the responsibility for the situation to the bad actor and the lack of board oversight, not the possible shortcomings in the exam process.

The Key to Success

Conservatorship or even replacing a CEO while leaving the board in place to ensure members’ interests are represented, can be done successfully. During the financial crisis several noteworthy turnarounds were engineered by John Tippets at North Island Credit Union and Bill Connors and Andy Hunter at Silver State Credit Union in Nevada.

The key success factor is finding and supporting the right turnaround leader. The challenge is simple: Any jackass can kick down a barn, but it takes a carpenter to build one.

Will NCUA appoint a jackass or a carpenter? Someone to play caretaker until the agency elects a merger partner to resolve a leadership transition? Certainly there will be vultures a plenty looking to take the “problem” off NCUA’s hands.

Or will the NCUA find someone with the experience, political skills and leadership to restore the credit union to its pivotal role in the New York and broader credit union community? The possibilities are out there. These could include proven, retired leaders such as Rudy Hanley, Gordan Dames, Gary Oakland, Jeff Farver, Steve Winninger or other equally capable and astute individuals whose reputation and knowledge of credit unions and the system would give them a running start. They would not be seeking another job, but have the energy and foresight to bring the credit union members confidence that their future was in good hands.

NCUA has provided no updates on this unprecedented conservatorship of a solvent credit union. But one will know the future when the next acting CEO is named. Will it be a caretaker following direction from examiners who are anxious to get rid of a problem, or will it be a proven credit union leader who can restore the credit union for its members? Chartered in 1916, Municipal is the oldest state charter in New York. Can NCUA make decisions that will sustain this cooperative now serving its fifth generation of members, or will it just fulfill Summers’ bleak assessment of what happens when government takes over a financial institution?

Municipal Credit Union faces Hamilton’s challenge: You have no control, who lives, who dies, who tells your story? Every credit union today should care about this situation.

If a sound, long-established, and well-capitalized credit union can be dissolved without any role for members, what prevents the regulator/insurer from doing the same when your credit union faces a transition?

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Credit Unions and Farming: What we can learn about business sustainability

Clichés are frequently based on an element of fact. But that does not mean they are the truth.

One of the most persistent clichés that drives credit union thinking is that bigger is better. That is, only credit unions with $10 million or $100 million or a $ 1 billion in assets will survive. The consequence of this assertion is that many viable, well-run and long-serving credit unions believe their only future is to merge.

The truth is the cooperative model fits all sizes but especially smaller, niche players. Locally managed, focused, relationship-based financial institutions are needed in large and small communities across America. All credit unions start small, some grow and many remain “undersized” versus the largest few. Size doesn’t determine viability. Rather it is leadership’s understanding of the their business model that creates sustainability.

Living in a small farming community

Several recent conversations about farming and the minimum amount of acres needed to make a living echoed this size fixation in credit unions.

Certainly “conventional” or industrial agricultural models dominate farming in America today. A college classmate recently lamented that the 160 acres of southern Illinois farmland his family inherited was just not financially viable. “We would have to have at least 1,000 acres to make a real profit,” he asserted.

In grades one through four, I lived on a five acre farm outside Divernon, Illinois; a town of just over 1,000 population, about 20 miles from Springfield, the state capital.

We had three ponies, played cowboys and Indians all summer long with our homemade bows and arrows from the stand of poplar trees. Every morning my older sister would milk the cows by hand, my mom would pasteurize and bottle the milk and my dad deliver into town. We raised fruits and vegetables which we sold on the roadside in all growing seasons. We bred and raised our own pigs and several times a year would send a hog to be butchered for meat. We kept the meat supply in a frozen locker in town. The rabbits we raised were for eating, rolled in flour and pan fried just like chicken.

My dad wanted to be a farmer and buy more land but America was literally feeding the world in the 1950s. Five acres provided a rich experience, as long as we understood the best way to use our limited resources.

Community Supported Agriculture

Last month I visited Caledonia, Michigan (pop 1,600) for dinner. As we walked down the two block main street I saw a Schuler Farms poster in a store window selling “shares.” The business offer was full shares for $600 or half shares for $400. This Community Supported Agriculture (CSA) farm model is described as a “micro farm with vision and planning:” I went to the web site for more information.

A CSA honors a commitment between the farmer and the share holders. The members pay the grower in advance for a weekly share of the harvest. The shareholder receives a crate of fresh, local, naturally grown produce from a source they know and love.

The 2019 Membership Agreement reads in part:

In the community supported farm structure, every member of the relationship benefits, the share-holders, the farmers, the farms (the earth), and the greater community.

Each member will receive a weekly share of organically grown gourmet produce, that varies throughout the growing season. The product is expected to be available by mid-May and end in October. We farm with all natural organic methods . . . Our vegetable selections are for the most part based on taste and experience with various varieties, as well as trying new varieties all the time. . . .

Our plan is to start small and develop a core group of members that buy into our philosophy and quality. We are looking for families who have a high vegetable intake, culinary skills, and the time to prepare the food and eat within the season.

This locally focused farm model has become more relevant as a broader change is occurring for direct distribution of farmer’s crops. Since 1994, the number of farmers markets has grown from 1,755 to over 8,700 today. Communities large and small are supporting the need for fresh and local produce.

My current hometown Bethesda, MD has a cooperative Women’s Farm Market where Jean Paul sells plantings and vegetables from his 43 acre farm three days a week.

I believe this growing model of local farming has direct meaning for credit unions.

The diversity of credit union size is a source of system strength. Some small credit unions today will be the seed corn for larger ones in the future. But not all firms or farms can be large scale-whatever size that might mean. Credit unions of any size work well when they focus on the needs of their member shareholders. When that connection gets lost, then scale cannot replace relevance and relationship.

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Habits Never Die, They Just Recycle

A colleague of mine used to describe human nature thusly: People do what they do. Or the traditional observation that a leopard cannot change its spots.

The benefits of bureaucratic organization are many. Structured processes, experience and expertise, and explicit design. These organizational advantages replaced the arbitrary and unpredictable rule by all powerful leaders in authoritarian regimes. Bureaucracy is an essential component of government activity in a democracy.

But the strength of bureaucracy is also its weakness. It is stable, but rarely innovative; it is predictable, not situational in response; it is self-perpetuating even when the original circumstances may have long ago disappeared.

I was reminded of this bureaucratic paradox  when I received the Weekly National Rates and Rate Cap Report from the FDIC seen below.  After deregulation in the 1980s I thought government got out of the business of setting deposit rates.

No, as shown below, when the next big crisis came in 2009, the FDIC reactivated old habits. It passed a new rule setting the maximum rates that any FDIC insured institution could pay that was deemed to be “less than well capitalized.” Every kind of account at every level of maturity is listed. And the rate caps are reset weekly!

Regulatory responses to new events is to reprise old habits. This is definitely not isolated to the FDIC. The same is true of the NCUA. The difference should be that in a cooperative democratic system, the response should always be driven by what is in the members’ best interest, not the bureaucracy’s instinctive recall based on self-preservation.

Weekly National Rates and Rate Caps – Weekly Update

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On May 29, 2009, the FDIC Board of Directors approved a final rule making certain revisions to the interest rate restrictions applicable to less than well capitalized institutions under Part 337.6 of the FDIC Rules and Regulations. The final rule redefined the “national rate” as a simple average of rates paid by U.S. depository institutions as calculated by the FDIC. The national rates and rate caps for various deposit maturities and sizes are provided below.

For more information. see Financial Institution Letter FIL-25-2009

Weekly rate cap information for the week of June 3, 2019.

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Venture Capital Approaches to FinTech Investing

At the April FDIC sponsored conference on FinTech, a panel of three venture capitalists discussed how they evaluated their investments in this area.

The first firm said they look for opportunity that supports an already existing capital commitment. That is, they prefer that fintech’s partner with established firms to make their services better.

This approach requires a “partnering mindset.” This means knowing a real problem to solve that is scalable and could become an industry standard.

An example of this approach was the potential to transition in credit underwriting decisions from local “soft” knowledge to “hard” information, that is, how I type in my web browser.

A second speaker said their approach was about the “perimeter” of financial services. Was it best to be a “landlord” offering all lines of business? Or is it better to be best in class and then integrate across different financial “verticals.” The example given was the evolution of Credit Karma’s business model.

The third approach was data-centric. The firm looks at investments where there is a data cluster (generic or proprietary) and an algorithm (AI process) to analyze the information for solutions. The ideal business opportunity is generic algorithm on top of a proprietary database.

The three questions the venture funds would use to evaluate a pitch are:

  1. Are you an expert in the problem? If so, what would a customer, with the problem, say about your solution? Go and ask.
  2. Is your business model credible: what is the quality and speed of the product launch? Is it scalable? What are your sales and market skills?
  3. Can you distinguish between a differential “promise” and differential “execution”? The firms want both to be present.

As a cooperative member, my question was whether credit unions should develop and own their own fintech innovations, or whether they should buy or partner with others where they do not own the intellectual property? How that question is answered, would determine how one works with new startups.

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Why I Blog

Every so often, institutions become rigid and need to be revived, reformed, and reborn. When coops become institutional machines more than movements, it’s a sign that they must shake off their historical and bureaucratic calcification to continue evolving as a living movement.

Just as in our own lives, growth is never in a straight line; it is often three steps forward and two steps backward.

This feels like a good time to again inspire motivation “from the bottom up.” Rather than coming from those in power, the most effective and lasting change happens at the grass-roots level.

Being on the “edge of the inside” means not being dependent on the status quo.

What are the essential elements of the cooperative tradition? By asking right questions, one can attempt to clear away the rubble of unhelpful strategy, low-level thinking, abuses of power, and convenient truisms.

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A FinTech Prospecting Tool: Product Hunt

How do venture capitalists, or more importantly designers of new products, determine market interest in their idea or innovation—without going broke?

At the April FDIC sponsored FinTech conference, one approach to this learning was presented. The website Product Hunt was created in November 2013.  Users submit products which are listed linearly (https://www.producthunt.com/newest)  every day.

These designs are voted upon by viewers with those ideas receiving the most votes rising to the top.

Since launch the site has listed over 40,000 products in categories such as mobile apps, hardware, games, books, podcasts.

The voting is simple and transparent.  It provides entrepreneurs and investors an initial public reaction.  The voting and comments provide signals for both investors and founders about potential market demand.

The FDIC presentation focused on the topic of voter bias and whether a simple addition of votes is an accurate means of getting unbiased feedback.  In other words, how representative of market interest are the vote tallies?

The site overwhelms one on first visit. Multiple articles, multiple product concepts, and an endless inventory of articles for anyone thinking of launching a business.

What did impress me was the effort to “democratize” product and business development.  Might this approach have an application for cooperatives? Every year boards and CEOs make business investments with members’ funds.  These include distribution commitments (virtual, mobile, branches, call centers), service options, product, pricing and fee adjustments.

However well researched, the member or market reaction is determined after the investment is made.  Or more likely, the investment is copying what other firms are doing in the market.

Might credit unions seek member reaction as a part of the decision making, design phase to underwrite more effective service and product changes?

As a member, this approach would provide insight into what management is thinking as well as a channel for “grass roots” reaction. Would a Product Hunt application help credit unions identify the most helpful innovations that members value?

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The Source of Credit Union Greatness

“Cooperation made the movement great. Yet many do not realize that there are still as many ways to cooperate as there were in the past. . . what I mean is going beyond the attending of meetings and sharing of ideas, but instead pooling of resources, mainly in the form of CUSO’s.”

(Ed Callahan April 1988, Callahan Report)

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The Origins of Mother’s Day

The beginning of Mother’s Day goes back to 1870.  Julia Ward Howe – an abolitionist remembered as the poet who wrote “Battle Hymn of the Republic” worked to establish a Mother’s Peace Day.

In 1914, President Woodrow Wilson declared it a national holiday and a “public expression of our love and reverence for all mothers.”

The goals of Ward’s original proclamation in 1870 were about peace.  More importantly that women must take the lead-in an era when they had no vote and no offices or formal roles in public life.  A true grass roots movement.

The Proclamation

Arise, all women who have hearts, whether your baptism be that of water or of tears! Say firmly: “We will not have great questions decided by irrelevant agencies, our husbands shall not come to us, reeking with carnage, for caresses and applause.

“Our sons shall not be taken from us to unlearn all that we have been able to teach them of charity, mercy and patience. We women of one country will be too tender of those of another country to allow our sons to be trained to injure theirs.”

From the bosom of the devastated earth a voice goes up with our own. It says, “Disarm, disarm! The sword is not the balance of justice.” Blood does not wipe out dishonor nor violence indicate possession.

As men have often forsaken the plow and the anvil at the summons of war, let women now leave all that may be left of home for a great and earnest day of counsel. Let them meet first, as women, to bewail and commemorate the dead. Let them then solemnly take counsel with each other as to the means whereby the great human family can live in peace, each learning after his own time, the sacred impress, not of Caesar, but of God.

In the name of womanhood and of humanity, I earnestly ask that a general congress of women without limit of nationality may be appointed and held at some place deemed most convenient and at the earliest period consistent with its objects, to promote the alliance of the different nationalities, the amicable settlement of international questions, the great and general interests of peace.

Change, even when well-founded, can take time. But ultimately the grass roots prevail.  The key:  keep the vision alive.

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A Top Priority for New NCUA Chair Hood: Lead the Way in Setting a New Tone

While NCUA Chairs have different leadership approaches, all share one common challenge: setting the “tone” for the relationship between the regulator and the regulated.

Whether a chair is a hands-on manager or distant from operations, the chair’s attitude toward the industry will be seen and heard by all within and without the agency.

For the past decade the relationship between NCUA and credit unions has varied from openly adversarial to indifference to credit union knowledge and judgments. There has been a lack of respect for the experience, capabilities, and analysis of credit union professionals. This attitude is still present in some exam confrontations, and at the board level, in the total dismissal of required credit union commentary on issues such as the merger of the TCCUSF and NCUSIF.

The Relationship Needed

Chairman Hood enjoys opera. He is not tone deaf. His professional experiences focus on outreach efforts. The tone needed between NCUA and the regulated is one of mutual respect.

This is more than public speeches or a specific set of policy initiatives. NCUA should acknowledge the overwhelmingly positive track record of credit unions and their leaders’ deep, proven, expertise: wisdom and commitment to cooperative evolution.

A Place to Start with a New Tone

On May 7, NCUA released the names of nine credit unions who were fined a total of $4,069 in civil money penalties for late filing of the September 2018 call report, which was due at the end of October.

For nearly four decades NCUA had never fined a credit union for a late call report. During this time the report was extended semi-annually to quarterly, and the data requested increased exponentially.

NCUA’s rationale for public fining was in part because the late filers were holding up the timely release of all credit union data.

So, six months after the deed has occurred, NCUA releases the names for public shaming and sends the pennies collected to the US Treasury.

Timely submission of call reports is critical. But instead of fining shouldn’t the agency just send to all examiners the day after each filing deadline all reports not received? Examiners make a follow up phone call, and if not filed promptly, that would warrant a special visit.

Why the delay? Is it due to bookkeeping shortcomings (no timely cash reconciliations), personnel issues, or even operational problems?

How much staff time and effort has been wasted analyzing each late report with the three criteria below—and how many were not fined as a result of these investigations?

Mutual respect would direct that the agency use any report delay as a signal for examiner follow up. Get the data, forget the shaming and get on with the process of ensuring a safe and sound credit union operation.

Stop the penny ante, power trip of imposing a “parking ticket” fine. Treat credit unions with respect knowing that problems occur all the time that should be looked into.

Putting a CMP scarlet letter stamp and publishing the name of credit unions as an example of effective regulatory oversight is not professional. Some in authority may believe acting tough makes them effective. Most will see it as lacking grasp of the situation.

Regulators live in a glass house. Until McWatters became Chair, NCUA had failed to meet the statutorily deadline of April 1 for submitting its Annual Report to the President and Congress for decades–even missing the filing entirely in one year.

Chairman Hood, take away the CMP stamp and ask examiners to do their job. It would be a small, but important first step, in making the system more cooperative.