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Notes on Ukraine’s Fight for Freedom

President Zelensky’s response to US offer to airlift him from Kyiv:

“The fight is here.   I need ammunition, I don’t need a ride.”   (NYTimes Feb 26)

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From the staff of Music Mission Kiev, a nonprofit charity serving musicians, widows and orphans in the city:

Here is the word today from our VP of Operations, Serhiy Basarab: “We definitely do NOT feel safe. There is fighting where Oksana and Pastor Ruslan live. I just spoke with Oksana and other people. We clearly feel betrayed by the West. Pastor Ruslan is already at the drafting board with his unit. There are no weapons for us, he is writing to me in despair.    (February 25)

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Victor Havel, the first President of a free Czechoslovakia, a playwright and long-time dissident against Soviet rule:

Hope, in this deep and powerful sense, is not the same as joy that things are going well, or willingness to invest in enterprises that are obviously headed for early success, but rather the ability to work for something because it is good not just because it stands a chance to succeed.

The more unpropitious the situation in which we demonstrate hope, the deeper that hope is.   Hope is definitely not the same thing as optimism.   It is not the conviction that something will turn out well, but the certainty that something makes sense, regardless of how it turns out.

In short, I think that the deepest and most important form of hope, the only one that can keep us above water and urge us to good works, and the only true source of the breathtaking dimension of the human spirit and its efforts, is something we get, as it were, from “elsewhere.”  

It is also this hope, above all, which gives us the strength to live and continually to try new things, even in conditions that seem as hopeless as ours do, here and now. 

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Why Ukraine Matters to America

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. . .  And for the support of this Declaration, with a firm reliance on the protection of divine Providence, we mutually pledge to each other our Lives, our Fortunes and our sacred Honor.

 

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Military Credit Unions in Wartime

War has broken out in Ukraine.  All of Eastern Europe is on alert.  Some credit members are on the move.  Others wait to learn what’s next.

When a geo-political crisis occurs, America will be involved.   How much and when depends on events.

One sector of our society at the leading edge of these situations are military credit unions.   Many have spent years planning to help their member’s financial preparedness for whatever comes next.

Frontwave Credit Union’s Military Relations Team

The credit union’s self-description: There aren’t many communities like this one. One foot in the Pacific, the other in the desert. Home to the world’s greatest fighting forces — and a community of blue-collar fighters.

Five years ago, CEO Bill Birnie established the Military Relations Team.  He hired Chip Dykes and two other former marines to lead this group which focuses directly on the financial well-being of military members and their families.

Over 50% of the credit unions 117,000  members are current or former military members and family.

Front wave has been the credit union on base at Camp Pendleton since 1952.   It also serves at three other bases in the area.

Camp Pendleton is the location for all initial basic training on the West Coast for over 17,000 new marine recruits each year.  Bill was concerned about retention of these new military members, many of whom would be assigned out of the area after training.

Chip’s team are all certified financial counselors.  Their purpose is education  on all aspects of money management and financial planning for the new recruits and during every phase of subsequent training.

This counseling is especially important prior to deployment.  For example how do you follow your finances when in an area with no Internet?

The team focuses on member’s financial needs at all levels of the service at each of the four bases where they have branches.   In 2021 they provided over 10,000 marines and family members with basic and more advanced financial courses.

Helping Credit Union Staff Understand the Military Member

Just as important is helping credit union staff understand the needs of the military member with whom they work with daily.

Bill and all three team members are marines.  Many staff have had little direct experience of military life.  The team’s internal mission is to help customer service personnel understand needs from the military member’s perspective.

The Ukraine Crisis

When events such as the Ukraine invasion occur, “our ears perk up,” says Dykes.  The European theater is served from units located on the East Coast, so it may not immediately affect West coast units.

When there are relocations,  the team works directly with  all units on the ground to ensure their financial and personal affairs are in order.  And to offer help to family while the service member is away.

Following Events in Ukraine

This article provides a current visual map of Ukraine and the population of its major cities which are now referenced in hourly news updates.  Facts on the country’s demographic trends, its major natural resources and a short history of its relations with the Russian Bear are summarized after the large scale country portrait.

Solzhenitsyn on Ukraine-Russia Relations

(from an essay written June 2014 when Russia annexed Crimea)

“It pains me to write this as Ukraine and Russia are merged in my blood, in my heart, and in my thoughts. But extensive experience of friendly contacts with Ukrainians in the camps has shown me how much of a painful grudge they hold. Our generation will not escape from paying for the mistakes of our fathers.”

There are several terrific English language websites which provide news directly from Ukraine, which are updated frequently.  One is Kyiv Independent and the second the English section of the Ukrainian Information Agency.

The Independent includes minute by minute stories from across the country.

I will share other examples of credit unions serving their members who are or will be on the front lines of this crisis.

 

 

 

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Musings from Books on a Shelf

This poem by Johnson captures that phase of life when we realize our powers are failing.

The author’s eye travels along a shelf of books not to be read, or records not to be heard, again.

Aging entails leaving behind earlier capabilities.

I’m not sure the  voice is one of regret or just acknowledging the loss of past joys.

We will all come to this point where we “can’t all buy them again” unable  to fully experience life’s richness as we once intended.

Standing by a Shelf

Brandon  D. Johnson

When he looks at the edges,
The covers of books and records,
He remembers when and where
He got them, how it felt.
Everything’s a testament
To life lived on the fringe
Of some sense of sanity.All the vehicles for imbibing
These treasures are obsolete.
Even his eyes and ears, as their
Function fades under each year’s
Mud and tussle to stay aliveThe damned fine few who know
Try not to lose the memories,
Talk as if each was there
For the other, laughter supplants tears.
If he can, a story gets written
About each song, how a chord
A lyric, the last line of a book

Make more sense, the same as the
Warnings his mother threw
at fledgling feet like seeds in soil.

He wishes he could buy them all again,
Heed the messages, grow as if
Each signpost was a vitamin
Make what became a recollection
A catalyst for pathfinding and strength.

 

Brandon D. Johnson is the author of Love’s Skin (The Word Works, 2006); The Strangers Between (Tell Me Somethin Books, 1999); and co-author of The Black Rooster Social Inn: This Is the Place (Spike and Pepper Books, 1997). He lives in Washington, D.C.

 

 

 
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A Potentially Pivotal NCUA Board Meeting

Last Thursday’s NCUA monthly board agenda seemed light.  It started at 11:30 and lasted less than an hour.  But the ultimate outcomes could be consequential.

The main topic required no action: the report on the NCUSIF 2021 yearend audit by KPMG. And an extension of PCA covid waiver.

However I believe seeds were planted that could have a significant impact on credit unions and the NCUA’s management of the NCUSIF for credit unions. Here’s why.

The NCUSIF Dialogue: Planting seeds for Change

Chairman Harper opened the NCUSIF review with these words:

For nearly 40 years now, the NCUA has earned an unmodified opinion for the audits of its funds. This sustained achievement underscores the NCUA’s commitment to transparency, accountability, sound financial management, and the careful stewardship of the resources entrusted to the agency.

NCUSIF is the only federally managed insurance fund to require an outside independent CPA audit.  GAO audits the FDIC and the FSLIC– when it existed.

An important difference is the establishment of a loss allowance account following GAAP accounting standards.  The process took three years (1982-1984) for NCUSIF’s reserving process to be independently  validated by the auditors with a clean opinion.

Harper then stated: As a regulator, we need to hold ourselves to the same standard that we expect of the credit unions we oversee.

The Chairman’s commitments to “transparency” and following “the same standard we expect of credit unions” could be critical if followed through with actions on topics raised by his fellow board members.

Hauptman on Investment Policy

After noting the NCUSIF’s sound performance, he made the following comment:

The National Credit Union Share Insurance Fund is a mutual asset — both reported and controlled by the NCUA and an asset reported by the credit unions. Credit unions are required to supply the majority of the fund’s equity through a 1-percent contribution of their insured shares. Just like any credit union board, the NCUA Board has the responsibility to regularly review its investment strategy . And for the sake of transparency and clarity, to do so at an open Board meeting.

He asked questions about the fund’s current investment approach and how to respond to “critics” of recent decisions.   The NCUSIF investment policy last updated in 2013,  is  now being posted with the audit. Hauptman committed to “working with my fellow Board Members on reviewing and updating the investment policy soon.” 

I believe credit unions should also comment on the policy, especially the fund’s duration management.  In the last seven years the NCUSIF portfolio’s weighted average  life (duration) at yearend was reported as follows:

2021 – 1,306 days

2020 – 1,204  days

2019 —   971   days

2018 —   901   days

2017 —   951   days

2016 —  1,864  days

2015 —  1,815 days

Under one policy, these numbers show a 100% change from the lowest 2.5 year duration, to 5.1 years.  Staff maintains this was just maintaining a consistent ladder, not timing the market.

In 2021 the investments robotically followed a seven-year ladder that extended the duration when the interest rate cycle was at an historically low point.

Effective investment management is critical to the fund’s operational design, but also, as Hauptman noted, for credit union confidence in NCUA’s oversight of their 1% asset.  If the policy is updated for more effective monitoring and performance, this could be an important improvement. The sooner the better.

Hood on Accounting Options and Understating the NCUSIF’s NOL

In Hood’s remarks he addressed the fund’s NOL (normal operating level ratio) “true-up” at yearend and its impact on the equity ratio.  He pointed out a “timing difference” in that the 1% share deposit is from June 30, but the insured shares and retained earnings in the ratio are from December 31 numbers.

If the ratio used the same balance sheet dates, the NOL “pro-forma” would be 1.29% not the reported 1.26% at December 2021.

Each basis point (.0001%) is $166 million.  This “timing difference” understates the actual financial position of the NCUSIF by $500 million at yearend.

In the dialogue that followed,  the CFO said this understatement averaged 2 basis points over the last ten years, and has been as high as 6.

Hood then quoted from a memo by Cotton and Company:  the memo produced by the outside accounting firm states that the timeliness and accuracy of data is required in the Federal Credit Union Act so this provision in the law “may provide some latitude from a strict interpretation that the equity ratio must be calculated based on the financial statements amounts, particularly given the knowledge of the timing effect on the calculation of the equity ratio…. Accordingly, it may be permissible to use the pro-forma calculation of the contributed capital amount, when calculating the actual equity ratio.”

When Hood remarked that he would like to see the full Cotton memo published, the CFO replied, “Okay.”

Two Commitments for Greater Transparency

Improved investment transparency and management and better presentation of the NCUSIF’s financials would greatly benefit credit unions.   Moreover, the NOL “true up” is just one of several changes that would make the financial reporting more useful.

In 2010 NCUA changed the accounting standard for the NCUSIF from private GAAP to federal GAAP practice.   There are numerous presentation differences that make the federal approach more difficult to understand because that format was intended for entities that rely on federal appropriations.

Each of the other three funds managed by NCUA report their financial performance and audits using private GAAP.  Given Chairman Harper’s intent  that NCUA follow the “same standard that we expect of the credit unions we oversee,” changing the NCUSIF to the practice followed in its first 30 years would certainly be appropriate.

Sounds of Silence or What was Not Said

The context around the NCUSIF’s financials was all positive with the overall CAMEL ratings showing improvement.

After Harper’s opening recognition of the NCUSIF’s and credit union soundness, he ended with his obligatory theme of future fears:  Nevertheless. . .

  • If the elevated growth of insured shares continues, we can expect a further erosion of the Share Insurance Fund’s equity ratio;
  • the emergence of inflation—something many Americans have never experienced at this rate before—means that the interest rate environment is uncertain.
  • Additionally . . . in my view, the system has not experienced the full extent of the pandemic’s financial and economic disruptions just yet.

Yet despite these uncertainties none of the board members, including the chair, made any mention of assessing a premium which the board had authority to do as long as it did not raise the NOL above 1.3%.   Given Chairman Harper’s previous statements about the fund’s adequacy, this is an interesting silence.

Moreover, the board’s acknowledgement of the yearend NOL at 1.26% (or 1.29%) shows their recognition that the NOL is a range with a low end of 1.2% and a high end cap, currently 1.33%.  The NOL is not a single magic number, but rather an outcome with a “buffer” above 1.2%  that varies depending on current assessments.

This silence after so much talk in early in 2021 about a possible premium, is hopefully a recognition of the flexibility and resilience of the fund’s design.   When combined with enhanced board reporting of NCUSIF investments and a reexamination of accounting presentation, credit unions could be a much better position to understand their fund going forward.

The Board’s public commitments to transparency of the fund’s modeling, the Cotton accounting memo and its presentation options, and the investment policy enhancements would be vital steps to bring the NCUSIF into full cooperative sunlight.

 

 

 

 

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A Credit Union Archetype

Last Wednesday (February 16)  in their 2021 yearend industry analysis Trend Watch, Callahan & Associates included a 12 minute case study of  a credit union’s strategic transformation.

The CEO’s presentation  was one of the most concise, informative and inspiring I have experienced.

He describes this effort as a two-phased journey. The second phase transformed the  credit union’s performance  on three critical dimensions:  purpose, scale and financial performance.

The final slide shows how this strategic approach is both powerful and inherent in credit union design.

Please listen now.

https://iframe.dacast.com/vod/c94cf664f6abb2621f07f249b463a648/e05560a9-729c-7118-b2ac-4a2c170f0e8d

My Reaction

Everyone will listen from their singular perspective.  Takeaways may be different.  I would add two thoughts to ones you may have.

The first: a good example can be very contagious.

It’s hard to get a feel for the cooperative difference until we have met a person grounded in that effort.    When we see purpose enacted, we become more purpose driven. When we learn the impact of values on employees and community, we become more value centered. When we hear someone discern clearly, we become clearer about our own metrics. 

Secondly, powerful communication is more than a good story.  It requires radical transparency.  No topic is off limits. There is respect for differing views when values shared by all become the focus of common effort.

Clearwater’s results validate its vision, What We Believe.

Together, we own

Together, we empower

Together, we include

Together, we matter

Examples matter.  Good examples inspire more. Great ones are rare.

They reawaken us to what can be accomplished- together.

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PS: This post from October 2021 tells the story of Clearwater’s role assisting the refugee community coming to the community.

One Photo, Hearts on Fire, a Credit Union and Community Respond to a Vital Human Need

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Presidents and Credit Unions

There have been two noteworthy moments when Presidents have saluted the credit union movement.

One was by democrat and the second a republican president, 46  years apart.

“We might do something to push this. They are popular”

Here is President Roosevelt’s “shout out” in 1936:

From 1934 through 1940, there were 4,793 new federal charters issued.  A rate of 600 per year.

Since NCUA’s three person board was established in 1978, there have been 1,958 additional charters.  A rate of only 45 per year.  In the last decade that number has fallen to  two per year.

“I want to congratulate you. .. “

The White House,

November, 17, 1982:

Dear Ed:

I want to congratulate you on the progress  you have made as Chairman. . .

It was refreshing for me to learn of the accomplishments of the Board and the 17,000 federally insured credit unions across the country. . .there has been remarkable progress toward self-help solutions to the problems facing the credit union industry.   I applaud your efforts to meet the growing competition among financial institutions through the reduction of unnecessary regulations, decentralization, and improved communications.

I especially want to note the way your were able to guide the credit union movement toward restoration, on its own initiative, of the financial health of the National Credit Union Share Insurance Fund. . .  (emphasis added) This effort illustrates a basic tenent of our administration, that, given the leadership and the opportunity, individual citizens acting together can often find solutions to their problems and need not turn to the government to bail them out.

Keep up the good work.

Sincerely,

Signed Ronald Reagan

Source:  NCUA’s 1982 Annual Report page 4

In April 1982, NCUA had completely deregulated the savings rules controlling all federal credit unions.  From 1982 through June 1987,  the credit union system’s share growth exceeded 15% annually.

In this same six years, 511 new federal charters were granted, a rate of of almost two per week.

The rules controlling bank and S&L deposit products were not fully ended until June 1987.  The April 1982 NCUA board action gave credit unions a five year head start competing in the new era of deregulation.

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Friday Nite Film Time

Redeeming Uncle TomI follow   Jared Block’s blog.  He was involved in the documentary described below.   Looks like a special event for this evening.  Let me know what you think.

Hey friends,

In addition to my thrice-a-week Surviving Tomorrow column, I also publish booksand direct documentaries.

One of those films is about an unbelievable hero that almost no one knows about:

  • The Prime Minister of Great Britain threw him a surprise banquet.
  • Earl Grey offered him a job.
  • The Archbishop of Canterbury wept after hearing his story.
  • President Rutherford B. Hayes entertained him at the White House.
  • Queen Victoria invited him to Windsor Castle.
  • He won a medal at the first World’s Fair in London.
  • He was the first African American to appear on a Canadian stamp.
  • He was a Methodist Episcopal elder with a 300-mile district under his care.
  • He rescued 118 slaves, including his brother.
  • He helped build a 500-person freeman settlement, called Dawn, which was known as one of the final stops on the Underground Railroad.
  • Inspired by his story, Harriet Beecher Stowe wrote a novel that helped spark the Civil War and led to the Emancipation Proclamation.

But before all that, Josiah Henson was a slave for 42 years.

The film is called Redeeming Uncle Tom, and it’s narrated by Danny Glover.

This Friday night, the Indiana State Museum’s Levi & Catharine Coffin House is hosting an online digital screening of the film on Zoom. I’ll be introducing the film and doing a director-led Q&A afterward.

Register: Right here

Cost: $8

Date: Friday Feb 18th

Time: 6:00-8:30PM EST

Zoom link
Meeting ID: 857 5744 1006
Passcode: 326677

See you there!

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Bon Mots V: Human Motivations

Whole bank purchases:

“We’ve heard from clients that the offers from credit unions are better in many cases,” Silvia says. “One of the most important things to think about is what is the best thing for the shareholders, which is generally getting the highest price.”

Not only do credit unions often offer the highest price, he says, they will likely pay in cash.” Garret Reich The Financial Brand

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Buying things is an installed habit, especially for Americans. I have friends who use shopping as a kind of therapy, and their homes are filled with trash.

And, as a result, we have a lot of stuff, stuff we really don’t need.

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Ockham’s razor (rule): Given multiple choices, the simplest explanation is usually the correct one. It’s also known as the principle of parsimony and is an academic’s way of saying, “When you hear hoof beats, don’t think zebras.”

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People can foresee the future only when it coincides with their own wishes.” George Orwell

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We are all quite capable of doing “horrid things,” especially in horrid situations. But before we do a horrid thing we must be quite certain that we actually are in a horrid situation.

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I’m convinced all of us, in one way or another—have an intense resistance to change. We like predictability and control. That’s one of the reasons addicts find it easier to have a relationship with a process or a substance rather than with people. Unlike objects, people are unpredictable.

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“The human person grows more, matures more and is sanctified more to the extent that he or she enters into relationships, going out from themselves to live in communion with God, with others and with all creatures.”  Pope Frances

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“I write entirely to find out what I’m thinking, what I’m looking at, what I see and what it means.” Joan Didion

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This Weekend’s Reading:  The story of why the Howard Johnson (28 flavors), America’s most popular roadside restaurant company, disappeared.

 

 

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RBC/ CCULR: “The Fruit of a Poisonous Tree”

One commentator on the rule which went into effect on January 1, wrote me:

“Regulatory net worth is a tax on asset growth. It requires resources be directed to reserves held idle on the balance sheet, instead of being used for investment in credit union products and services. . .

Increasing the regulatory capital erodes competitive positioning opportunities and makes it harder for credit unions to fulfill their chartered mission.

The other factor is the low interest rate environment.  You can’t accrete capital fast enough by just growing assets anymore. . .   This regulation is a death warrant for credit unions between $400 million and $1 billion.  . . .”

How much is this initial tax to be CCULR compliant?

Between $30-40 billion  of sequestered existing reserves or required new capital to be at 9%.  That assumes no capital buffer is added.  This total will be approximately double the industry’s total net income in 2021.

Two others wrote after reading Three Strikes a RBC/CCULR Should be Out:

Why didn’t someone sue?

I’m not hearing a peep out of CUNA or NAFCU over this change.

The Grass Roots Effort in 2015

The December 2021 RBC/CCULR rule was the fifth formal rule-making effort spanning an eight-year period.  The initial proposal was so badly put together the agency concluded that: After carefully considering the comments of stakeholders, Chairman Matz in September (2014) announced that the agency would make significant structural changes to the proposal and issue a revised proposed rule for a second comment period.” (NCUA 2014 Annual Report pg 12)

The final rule was proposed in January 2015.  At that year’s GAC convention, credit unions were urged to Raise Their Voice in opposition to the rule.

With a booth encouraging action:

Despite widespread, continued credit union opposition, the Board approved RBC in a 2 to 1 vote  in September 2015 with McWatters opposed.  Ironically, NCUA’s 2015 Annual Report’s theme, “The Year of Regulatory Relief” was a PR fantasy.

So onerous was the rule that implementation was deferred  for more than three years until January 1, 2019 to: “provide ample time for affected credit unions to choose to generate more capital while continuing to maintain their current portfolios, reduce risk, or execute some strategic combination of the two.”

In October, 2018, the Board approved a one year further delay in implementation. It raised the definition of complex in the rule from $100 to $500 million in assets, removing 1,026 credit unions from its requirements.

In 2019 the Board passed another delay of two years until January 1, 2022, described as a “win for credit unions.”

The fifth time was the charm.  By a vote of 3-0 in December, 2021, the board passed RBC and CCULR with only a nine-day lead time before becoming effective on January 1, 2022.

The Illusory Truth Effect

One of the realities of public discourse is that when something is repeated often enough, people begin to think it is true.  Especially if the misstatements are by persons in authority.

Credit unions filed 2,056 comments in opposition to the 2014 proposal. They filed just 21 responses to the new CCULR/RBC rule.

Was the low response due to regulatory fatigue?  Did NCUA just outlast the widespread industry opposition? Perhaps.

I believe the pattern of reissuing, modifications and extensions all created the impression that the rule was both necessary and legal.  It was neither.

It is an example of an “illusory truth effect” created by NCUA’s off and on again eight-year rule making campaign.

The agency had five different chairs in these eight years with no consistent policy process. This elongated effort created a regulatory “myth” distorting credit unions’ true capital adequacy and  full compliance with  PCA requirements.

Under 22 years of RBNW guidance, the agency summoned credit unions’ self-determined capital management,  The  result was a 3.5% average net worth ratio above the 7% minimum.  RBC/CCULR imposed a new, higher 9% standard by fiat.

The New Rule’s Failings

  • The agency provided no “substantial objective evidence” that the system’s capital levels were inadequate under RBNW. Staff admitted that only one failed credit union in the past ten years would have been subject to RBC’s additional capital.
  • The agency wrongly used the “comparable” standard to implement a clone of bank regulations. This approach clearly contradicted the statutory intent that RBNW cover only a select small group of credit unions that represented unusual risks. As staff stated in its board memo: A special note that most, if not all, of the components of the CCULR are similar to the federal banking agencies’ CBLR.
  • There was no statutory authority for a CCULR option.
  • Nine days for implantation violates the “reasonable period of time” requirement for a change in PCA capital levels.
  • Harm to members will be real. Over 500 credit unions will now be burdened with immediate RBC compliance.  They must limit asset growth or charge members more to take the so-called CCULR “off ramp.”
  • The compliance burden is immense. Completing the final five pages of information in the revised 32 page quarterly call report is required to compute this one RBC ratio.

Who Will Raise the Issue Now?

Credit unions’ initial response could be to give up any effort to change.  Just attempt to live with it.  Or merge.  The reporting and tracking burden is so intense that NCUA has launched a 90-day period of  industry webinars, examiner training and printed guidance.  It has waived late filing fees for March.

At a time of rising interest rates, inflation, cyber worries, members’ economic uncertainty and continued technology disruption, credit unions are learning to fill out a new form.  Five pages of data to calculate a single ratio.

Once this one ratio result is known, credit unions must then decide how to conform all of their decisions to this rule that rates the risk of every asset choice they make.

This rule was a leadership failure from the top down. To change will require action from the grassroots up.

First Stop: GAC

A rule promulgated  to enhance the future viability of the credit union system will have just the opposite effect.  It reduces competitive options immediately.

Every credit union attending GAC can inform and rally peers, trade spokesmen, congressional contacts and the press about this unwarranted burden.  Examples are critical; do the homework. Know your ratio and the choices you now must make to counter the rhetorical myths others may use to support the rule.

Press your case publicly-see the booth picture above.  Privately, ask NCUA board members to see the consequences and change the rule before more harm is done. Board members Hood and Hauptman stated their responsibility for the rule’s consequences:

Hauptman: The Board intends to monitor the impact of CCULR and RBC on credit unions and the Share Insurance Fund going forward. I look forward to working with my Board members next year and the year after on quantitative analysis on a cost and benefits of our current approach to RBC and CCULR.

Why not begin this year?

Why This Matters

One of the unique features of credit unions is their democratic governance. Whether in the oversight of the credit union via the board or in interactions with the regulator, democracy is fragile.  It requires constant practice, renewal and involvement.

This rule is so obviously wrong from  many perspectives that it is hard to understand how it got this far.  But the internal appeal of governmental authority is strong, especially clothed with good intent.

The authority asserted in this rule is total, every asset and maturity decision now comes with a regulators’ risk rating.  NCUA staff and board seem blissfully unaware of how this will impact credit unions.  Somehow it is supposed to make the insurance fund stronger!

Changing this outcome will require an all hands and all voices effort.  But then democracy was never meant to be a spectator sport.

And I will continue to do so!

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Uber and Taxis: Competitors or Partners?

The first question Hawaiian League President Dennis Tanimoto  asked following  my zoom speech to a conference in late November, had nothing to do with my talk.  It was about an event two years earlier at NCUA.

His question:  Do you think NCUA’s sales of the taxi medallion loans was a fortuitous decision?

NCUA had announced the sale pf the medallion  borrowers’ loans on February 19, 2020 to Marblegate Asset Management LLC a hedge fund specializing in buying  “distressed assets.’

I called the sales of these 4,500 loans a betrayal of  the borrower-members in a post four days later.  NCUA refused multiple FOIA requests for information the board claimed to have used when approving the decision. The cash payment for the portfolio’s book value I estimated at 31 cents per $1 from  numbers in a WSJ article.

Marblegate received the discounted loans, NCUA got cash, the NCUSIF (credit unions) were charged for the difference ($700-800 million) and the borrowing members, nothing.  Just more payments, at the loans’ remaining value.

NCUA’s McWatters said the agency would follow up to make sure the “winning bidder works with the taxi medallion loan borrowers in a transparent, good-faith manner and in full compliance with all applicable consumer protection laws.”

McWatters is gone. No such efforts were reported.   NCUA declined multiple FOIA requests to provide the documents used in  their decision.  One month later,  March 2020,  Covid closed down the economy and  with it virtually all transportation needs.

I assumed that was the context for the question.  Did NCUA in retrospect make the right decision?

My response had two parts.  The first was from whose point of view was it fortuitous?  NCUA’s in exchanging cash for assets of uncertain value in the insurance fund?  The borrowers, who were hit by the economic shutdowns?  Marblegate, the purchaser?

I also responded that any assessment depended on what period of time you evaluate the outcome ?  Here’s why.

In early November 2021 an agreement between the city, taxi owners and Marblegate was reached as reported in the press:

NYC taxi workers celebrate after medallion debt relief agreement reached; hunger strike over

Under the new agreement, Marblegate will restructure existing loans to a principal of $200,000, with $170,000 as a guaranteed loan and the remaining $30,000 as a grant from the city and a 5% interest rate. The restructured loans will be on a 20-year plan with scheduled monthly payments, which will be capped at $1,122 for “eligible medallion owners.” The city has said they will act as a guarantor for the principal and interest — a longtime demand of the NYTWA — and will negotiate with other lenders to work out the same agreement.

The bailout applies to owners of fewer than three medallions.  For those, Marblegate has gained an earning asset worth  at least $200,000. This consists of a New York city guaranteed loan for $170,000, a $30,000 cash payment, and a fully collateralized earning asset at 5% for 20 years.

NCUA refused to disclose any details about the portfolio’s sale, but a Wall Street Journal article suggests the loans were sold at an average price between $75 to $100,000.

If accurate, Marblegate doubled their money in about 18 months while earning some interest and principal pay downs on top of this in the meantime.

These  borrowers now have a reasonable opportunity to pay off their loans and own the medallion outright.

Only NCUA and credit unions are left with no upside. The NCUSIF  loss remains fixed at $750 million in return for $350 million in cash earning  25 basis points (.25%) for assets with a face value of over $1.1 billion.

The hedge fund owners, not the members, received the benefit of this discounted loan sale.

The NCUSIF  underwrote the deal in which the Wall Street purchaser more than doubled their money while putting  member-borrowers’ fates  in the hands of the same for-profit firm.

Credit unions had asked to manage the portfolio on behalf of borrowers, the industry and  NCUA.  McWatters response:  The agency carefully considered a proposal for a public-private partnership to purchase the loans; however, with a firm offer already in-hand and no assurance when, if ever, the proposed partnership might be able to act, the agency could not risk losing its qualified bidder.

Credit unions have seen this picture before.  It is direct from the corporate credit union playbook.   The industry was denied the chance to resolve its problems as NCUA sought Wall Street financiers to take the responsibility off their hands.

 Why Review This  Decision Now?

Credit union and NCUA can learn how ignoring options can cost hundreds of millions in recovery potential when selling at the bottom of a market.  NCUA continues to miss out on the critical advantage of cooperatives when resolving problems.

Cooperative structure allows time and patience so  better options can be developed as markets change and cycles of value recover.  As Warren Buffet noted:

“The true investor welcomes volatility. A wildly fluctuating market means that irrationally low prices will periodically be attached to solid businesses. It is impossible to see how the availability of such prices can be thought of as increasing the hazards for an investor who is totally free to either ignore the market or exploit its folly.”  (emphasis added)

But if we extend the window out farther, might taxi owners still lose the “solid business” battle and the medallion ownership still remain devalued?

The competition in the on-demand public ride and delivery market is intense. Taxis are in a market disrupted by UBER/Lyft,  among others. Can medallion owners compete with these billion dollar unicorns, venture-backed technology platforms relying on hundreds of thousands of gig workers to produce revenue?

One long time CEO medallion lender said the issue will be decided by the drivers, not institutional financial power.  He suggested a way to think about the future is to ask: if given a choice between being an owner or an employee, which option would you choose?

UBER’s Yearend Financial Report

His question resonated as I reviewed the latest Uber financial updates as of December 31, 2021.

Uber’s mission statement is now generic, not just ride share: “to create opportunity through movement.” The following are some operating and financial highlights from the report:

  • Cannabis pick-up: Announced an exclusive partnership with Canadian cannabis retailer, Tokyo Smoke, to provide consumers with the ability to place orders from Tokyo Smoke’s catalog and unique accessories on the Uber Eats app. Tokyo Smoke is the first cannabis merchant to list itself on the Uber Eats platform.
  • Membership: Officially launched Uber One in the U.S. in November as our single cross-platform membership program that brings together the best of Uber. For $9.99 per month, members have access to discounts, special pricing, priority
  • Monthly Active Platform Consumers (“MAPCs”) reached 118 million: MAPCs grew 8% QoQ and grew 27% YoY to 118 million.

While interesting examples of the firm’s operating efforts, UBER has never made a profit and accumulated total operating losses of $23.6 billion.

From the company’s unaudited December 31, 2021 Balance Sheet

Accumulated deficit:  $23.6 billion

Stockholders equity:    $14.5 billion (total stock issued $38.6 billion)

Goodwill as an asset:    $ 8.4 billion

Loss from operations in 2021:  $3.834 billion

And one of UBER’s latest  innovations to reach profitability?

Uber Taxi

Local taxis at the tap of a button

 No need to try to hail a taxi from the curb. Request a ride from your phone with Uber Taxi.

  • Licensed, local taxi drivers
  • Pay with cash or card
  • Track your ride

That’s right, they now want to partner with the taxi drivers in various cities.  I clicked on the button to see if any of the over 100 cities listed included a taxi option.  I could not find an example.  Or maybe they are just trying to hire the drivers, and lure them to abandon the quest to own  their own medallion.

So if you can’t beat them, why not join them?

One further thought with this taxi  partnering  effort.  To whom do you think Marblegate will try to sell their fully performing, guaranteed 3,000 to 4,000 medallion loans, to make another quick gain on the restored book value? UBER still holds over $4.0 billion in cash.