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Experts Views on Why Risk Based Capital Fails

Following the 2008/9 Great Recession and financial crisis,  many commentaries and studies asked why the risk-based capital requirements did not prevent severe losses in banks.

The following are the conclusions from several regulators and studies.

 

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Risk Based Capital’s Basic Flaw

Credit unions were very critical of both NCUA’s risk based capital proposed rules  in 2014 and 2015.   Among the major objections were:

  • Failing to document any objective need for the rule
  • Creating multiple shortcomings and inconsistencies in asset risk weightings
  • Establishing a competitive disadvantage  versus bank capital options
  • Undermining member value in  both costs to implement and higher capital levels
  • Providing open ended examiner authority to interpret circumstances and override the rule
  • Imposing a one-size-fits-all national formula for risk and capital adequacy for over 5,000 diverse institutions serving thousands of different  markets
  • Ignoring banking regulators’s experiences which led them to drop RBC in favor of a simple leverage ratio
  • Overlooking the negative impact of  RBC on the corporate system’s ability to serve members

The concept of RBC can be useful at an institutional level because decisions and reserves are based on specific experiences (delinquencies and returns) for an asset’s known historical performance.

However, what works locally does not scale up to a single national formula.

The Fundamental Flaw of The RBC Concept

No team in any sport would try to win a contest by only playing defense. To compete in any activity, an organization must have both offense and defense.

But a one-sided approach to financial soundness is what RBC mandates. It requires credit unions to reserve based on a formula for risk and ignores all factors for income or return.

Every cooperative succeeds by pursuing,  sometimes seizing, opportunity. Credit unions were begun as a solution for consumers that were not well-served by existing choices.

A formula that attempts to measure only risk means examiners and credit unions will be inhibited or even restricted in  responding to individual or unusual circumstances.   Especially members in a crisis.

Every credit union monitors risk daily when it prices loans or evaluates investment yields.  The projected return is balanced with an asset’s risk whether duration or credit, and in the context of the balance sheet’s overall ALM position. Using a single formula to evaluate these decisions distorts everyday business practice and experience.

Risk for an individual credit union is more nuanced than a simple formula that assigns  relative risk weightings for almost 100 asset classes. As any board or manager knows,  such an approach is not how asset strategies are developed.

RBC does not reflect pricing  to pursue market opportunities.  It imposes a single national risk profile to replace the accumulated financial experiences and judgments which managers now use in each of their  institutions.

Risk is not a bad thing. Risk is considered whenever a credit union makes a loan, a CUSO or other investment, or a fixed-asset purchase. The judgment in the decision is the opportunity to help a member or enhance the credit union’s financial management,  not how it conforms to a one-size-fits-all  rule.

Risk Based Capital Is A Tool, Not A Rule

The risk based capital rule is a mistake.

If there is any benefit in a single formula to assess a cooperative’s financial soundness, then NCUA should validate that  by using the risk-based analysis as a tool in examinations.

Imposing  a one-size-fits-all rule denigrates the knowledge and experience of credit union managers across the country. It is contrary to the purpose of the cooperative model.

If risk analysis were as simple as a single formula, then there would be no need for cooperatives — just one financial charter license, one common set of rules, and one way to serve the market.

Credit unions were started because the existing financial frameworks and ways of doing business did not meet the needs of member-owners or of their communities.

For more than 100 years, credit unions have used a reserving-capital process that requires they  set aside an amount or percentage of income as a cushion for difficult times and to meet minimum well-capitalized targets.

This approach has worked. It has well served  members, the regulators, and the American economy. Reserving  is a holistic judgment that balances opportunity and member need with the uncertainties inherent in any market economy.

RBC plays defense only by focusing on one very narrow factor in managing safety and soundness.   It adds nothing to the evaluation of specific opportunities or individual credit union business situations.

More importantly, if the complex formulas are wrong overall, or in respect of any asset category, that mistaken judgment could push credit unions over a cliff who followed the letter of the law.

Reserving beyond meeting the well-capitalized minimum leverage ratio of 7% is best done by the boards and managers who are directly accountable for their judgment, not government bureaucrats.

 

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The Fallacy of Risk Based Capital

Vice Chairman Hoenig’s 2016 WSJ editorial reprinted yesterday described both the actual experience and logical failures when using RBC for measuring bank capital adequacy.

In October 2015 the NCUA board approved a new rule, in a 2 to 1 vote, imposing this standard on all credit unions over $100 million.  All the required risk based weights are in this two-page NCUA summary.

NCUA’s 424 Page Rule

The final rule is 424 pages.    Here is how NCUA estimated the costs to the 4,784 credit unions under $100 million not yet subject to the rule and the 1,489 who would be covered:

Additional one-time costs estimated by NCUA are $152,562 collectively, spread among 4,784 non-complex, non-covered credit unions, at an average of 1 hour for policy review and revision, for an average of $31.89 per credit union; and $1.9 million collectively, spread among 1,489 complex covered credit unions, at an average of 40 hours for policy review and revision, for an average of $1,275 per credit union. 

NCUA states it will only cost $1,275 for each credit union covered by the rule to implement it; and $31.89 each for the 4,784 credit unions not yet subject to review it.  These estimates cause one to wonder what operational world NCUA is living in!

The two page summary shows over 75 categories of risk weights with multiple subsets that would make each RBC calculation a spread sheet with over 100 different inputs with multiple percentage weights. Several risk weights for the same asset can vary from 100-300% of the asset’s book value.

The following are some examples of how NCUA would implement the rule.

Deductions from the numerator (net worth) of the RBC ratio include 100% of the NCUSIF capitalization deposit, all goodwill and any other intangible assets.   This treatment is contrary to GAAP accounting presentation and how credit unions report these assets in their financial statements for their members, examiners and the public.

FHLB capital  is risk weighted at 20% and the  CLF equity at 0%.     NCUA is  100% sure there is no loss in the CLF, assigns a 20% risk to FHLB stock, and 100% certain the NCUSIF deposit is at such risk that it has no value.  This reflects a complete lack of confidence in NCUA’s own supervision  of credit unions-even under RBC!

Off-balance sheet items, not yet  assets, are included in the denominator.  Unfunded draws under lines of credit are added to the denominator at various percentages of total value and then weighted at 100% risk.   All loans transferred with recourse are included at 100% of value, no matter the kind or amount of credit enhancement provided by the credit union.

A 19% RBC Ratio

NCUA’ s  impact analysis from Oct 2015 states the average RBC ratio for all “complex” credit unions would be 19%.  Only 16 new credit unions (out of 1,489) were determined to be  undercapitalized that had not already been identified by the existing RBNW rule.

Of the 1,489 cu’s  subject to the rule, 482 would report RBC greater than 20% with 110 of those over 30%.   This is  one example of the distortion and misleading impression created by RBC versus the easily understood and comparable  leverage ratio.

If in doubt about the negative impact of this burden, then review  the tables of risk weights to understand the complications when calculating the RBC ratio.   Or better yet, review the 424 page rule.

There is one primary reason this approach was dropped by the banking regulators.   The “juice is not worth the squeeze.”

 

 

 

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Why Risk Based Capital Is Far Too Risky

The article below is an op-ed in the Wall Street Journal by the then Vice Chairman of the FDIC, Tom Hoenig in 2016.

In 2019, the FDIC replaced its RBC requirement with a simple leverage ratio.  Banks are no longer required to calculate or report it.

In July 2021 NCUA Chair Harper proposed a new rule to implement both the RBC rule, passed 2 to 1 in 2015, and an entirely new leverage option with a minimum of 10% to be well capitalized.  This new minimum is 43% higher than the current well capitalized, PCA-legislated standard of 7%.

As presented in the FDIC Vice chair’s editorial, RBC has no objective validation.   To impose this failed standard of capital adequacy on credit unions, would be a most onerous burden–with no documented benefit.

Hoenig states the correct approach to setting capital standards is: Regulators, relying on research and historical experience, requir(ing) investors to provide a minimum pool of capital to hold against a broad base of assets. 

NCUA’s proposed capital twins of RBC and CCULR are based on neither research nor historical experience.  It is a simply an edict imposed over unanimous industry opposition without any documented need.

His article is reprinted in full below:   

A risk-based system inflates the role of regulators and denigrates the role of bank managers.

By Thomas M. Hoenig

Aug. 11, 2016 7:21 pm ET

The risk-based capital system that was long used to judge the resilience of the world’s largest banks has been highly unreliable and contributed to the 2008 financial crisis. In its aftermath, the leverage ratio is used more actively and in conjunction with the risk-based measure as an important constraint on leverage. But as banks seek to bolster short-term returns, this leverage constraint is having an impact and the largest banks and some policy makers are working to undermine its role and return to the system that failed.

Under the risk-based system, regulators, and in some cases the banks themselves, assign weights to different classes of assets in a portfolio based on their calculated guess about future risks. This guess then defines how much capital should be held for each asset. Investors also look on these risk weights as an endorsement of financial safety.

But as we learned from the crisis, this measure too easily allows banks to conceal risk and amplify leverage. For example, regulators endorsed low-risk weights on subprime mortgages and highly leveraged mortgage securities before 2008 and banks then piled into these toxic assets, eventually causing havoc across the banking system.

Despite its failed record, the risk-based system is still pitched as a cure for slow economic growth. The Clearing House Association, a trade group for large banks, said in recent congressional testimony that a risk-weighting system is the only reliable way to judge bank capital. It condemned as “very inaccurate” the main regulatory alternative of a simple leverage ratio, which measures capital to total assets without applying different weights.

This is incorrect. The leverage ratio has proven most reliable principally because it does not pretend to judge future trends in asset quality. It simply measures how much loss from total assets a bank can withstand before it fails. When a bank is under stress, this is all anyone cares about.

Member countries of the G-20 are expected soon to propose weakening this capital standard further, even as some countries and their banks are vulnerable to financial and economic stress. While the largest U.S. banks have increased capital since the crisis, their capital is still lower than the industry average and inadequate for bank resiliency. Undermining the leverage ratio is not the direction we should allow these banks to go.

Let’s look further at the financial and regulatory record. The preponderance of independent research, including by the International Monetary Fund and Bank for International Settlements, demonstrates many of the weakness of the risk-based capital measures that contributed to industry problems. Risk-based capital schemes encouraged banks to use their financial engineering tools to increase leverage and reported returns associated with artificially low risk-weighted asset classes. Low weights were assigned to subprime mortgages, foreign sovereign debt, collateralized debt obligations and derivatives like credit default swaps. These asset classes ended up dominating the banks’ balance sheet, leading to massive losses. Unfortunately and surprisingly, these risk weights have changed little since the crisis.

Banking requires that managers be responsible for defining the business strategy, determining risk tolerance and analyzing assets. A risk-based capital scheme designed by regulators denigrates bank management’s responsibility. It inflates the role of regulators in allocating bank capital despite their poor record. It ignores that regulators are too slow to change risk weights as financial circumstances change and too often influenced by political agendas. (emphasis added)

While assigning risk weights may be useful when testing the quality of current bank assets under different performance assumptions, it has not proven a reliable means to allocate the placement of assets safely and productively onto a bank’s balance sheet. Regulators are no better than anyone else in predicting emerging risks.

A risk-based capital system makes bank regulators a partner with management in assigning risk weights, creating moral hazard by making regulators culpable when risks are misjudged. This makes it more difficult for governments to let the largest banks fail because they have had a hand in that failure.

As of December 2015, the largest global banks reported that on average only 45% of their assets carried risk. This is wrong on its face as it misleads the public by treating more than half of the assets of global banks as if they were risk free.

By comparison the leverage ratio is more useful. Regulators, relying on research and historical experience, require investors to provide a minimum pool of capital to hold against a broad base of assets. Management must then balance earnings goals, liquidity needs and appetite for risk—and make lending decisions accordingly. Regulators then use supervision and stress tests to judge a bank’s financial condition and the adequacy of its capital, holding management accountable for sound banking practices and performance.

Mr. Hoenig is vice chairman of the Federal Deposit Insurance Corp. and former president of the Federal Reserve Bank of Kansas City.

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Fiscal Spending, Quantitative Easing and Inflation

In April 2014, Jim Blaine discussed the Fed’s policy of pouring money into the economy and the prospect of inflation.  His analysis seems relevant even more in today’s stimulus driven economy.

Chart This !!

Spent several days last week at an economics conference sponsored by the Federal Reserve Bank of Atlanta.  They hold it out in the north Georgia woods – a good distance from reality – which seemed appropriate.

There were a lot of really “scary smart” people at the conference including an economics Nobel laureate, several highly distinguished academics, global bank economists from the U.S., China, Spain, Japan, Chile, Italy, etc. and the leading economic theorists from government agencies such as the Fed, the FDIC, the U.S. Treasury, and the SEC.  You get the picture – the best and the brightest in quantitative economics. No one from NCUA was registered…

Never been bothered much about not being “the smartest person at the table”(that’s just the way life is); but it’s a bit unnerving when you have to honestly admit that you’re unquestionably and repeatedly “the dumbest person at the table”(it was that kind of group!).  Practiced being quiet a lot and trying to feign invisibility when the Q&A started soaring well above my head.

The Bernanke Solution !

What I found most intriguing was the open, heated debate among these very bright folks over the merits of the recent practice of “quantitative easing” by the Fed. Literally trillions of dollars have been injected into the banking system in an attempt to revive the U.S. economy.  Former Fed Chair Ben Bernanke colorfully labelled quantitative easing as the practice of “dumping helicopter loads of cash” on to communities all across America.

Much of the debate centered around the future economic consequences of reabsorbing this excess monetary stimulus as the economy gains strength.  It was somehow both reassuring and refreshing to hear the best and brightest profess profound doubt and concern over being in these uncharted economic waters – with highly arguable and uncertain outcomes. All in decided contrast to the “inerrant robusterians” at the NCUA, who remain resolutely and insanely certain, about the unfailing wisdom of their myopia.

To read his observation about how the Fed was using its monetary stimulus and his “image token” from the meeting click here.

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Tongass FCU: Microsites and Relevance

A long-time financial consultant wrote me last week:

I will share what I know for a fact: market relevance trumps scale every day of the week. I will concede that part of maintaining market relevance requires continuous investment in your business and scale can help pay for that investment. But scale is not economy of scale. You can be big, inefficient, and fail spectacularly. You can be small, focused, and efficient and blunt competitors all day long.

I have multi-generational clients that are not massive in terms of scale, but they serve their communities better than anyone else. It’s a relationship business. People tend to forget that. Banking is not a transactional business, although people try to make it that way. If you are going to be in the transactional business, then you better have scale and be efficient.

An example of this observation is Tongass FCU ($131 million in assets) founded in 1963 by teachers unable to receive loans from banks because of their seasonal income. Today the credit union headquartered in Ketchikan establishes “microsites” partnering with local sponsors to bring financial services to Southeast Alaska’s coastal villages and towns.

Its motto is offering a credit union where no bank will go. The following are stories by the CEO, Helen Mickel carrying out this financial services mission.

Our First Microsite, then Branch at Metlakatla

Metlakatla is the only Native Indian Reserve in Alaska. It is located on Annette Island, a 12 minute float plane ride from Ketchikan.

Metlakatla was suffering from an economic downturn back in the early 2000’s which caused the only bank, Wells Fargo to shut their Metlakatla “store” in May of 2005. Wells Fargo Regional President, Richard Strutz, explained that, “With the economic decline in the area since 2000, it was difficult to maintain and staff a store.” Wells Fargo has a minimum asset requirement for their stores and the $4 million branch was well below that minimum.

Because Metlakatla is on an island, accessible only by boat or float plane, cash was received only once or twice a week. Following Well Fargo’s closure, the community employees struggled to cash payroll checks through their tribal government office typically running out of cash well before the last person was served. This was in a town that primarily used cash for their purchases. One enterprising resident tried to run an ATM machine, but had difficulties keeping cash in the machine which ran out within hours of being reloaded.

The transportation of cash to the community was a constant problem. The community struggled and asked various financial institutions to come in, but found no takers. Then some community leaders visited Tongass’ then CEO, Susan Fisher, to ask about the possibility of a branch in Metlakatla.

The Credit Union’s officers and staff met with Metlakatla residents in June of 2005. Susan explained the difference between banks and credit unions and described the importance of their involvement for a credit union to be viable in their community. We needed affordable space for the credit union and residents willing to become members who would borrow and save at the credit union.

The credit union began offering services once a week at the Metlakatla Indian Community council chambers in the summer of 2005. Staff members flew to the island, opened accounts and transacted business with new members.

The residents gave us a warm welcome. One member waited for over an hour so he could show us his artwork and his small gift store at the artist’s village. Another member took staff to his house so we could take pictures for a home equity loan. We met his wife who was baking pies that day. She sold them once or twice a week as a small in-home business. Their daughter ran a take-out pizza restaurant out of their converted lower level.

Another member gave a tour showing us Purple Mountain – which brought new meaning to “purple mountain’s majesty, above the fruited plain” from “America the Beautiful.” We saw Yellow Hill – which would look more at home in the Arizona desert.

I fell in love with Metlakatla that day. It reminded me a little of Ketchikan when I was a kid and working at Steamboat Bay on southeast Alaska’s west coast. I felt welcomed and honored.

A New Office

Within months we opened a small office in the old Wells Fargo building doing all our transactions without the aid of computers. A staff of three part-time employees worked just two hours a day during the week. The ATM at the office was re-fitted and fired up right away. Two more ATMs were purchased over time and placed in the mini-mart and bingo hall. In the fall of 2006 computers were installed in the tiny office and our staff began doing real time posting.

In 2010 TFCU was approved for a secondary capital loan that allowed us to invest in a new building in Metlakatla. The new branch was completed in 2012.

Early in our outreach to Metlakatla we established a local advisory board. This board helped TFCU work toward providing services in their unique community. Listening to the community members has been a foundation for our progress on Annette Island.

A sign was requested by the local advisory board for the branch’s exterior. They wanted something that would reflect their culture and their “house of money” which is the Smalgyax translation for bank. In 2017 TFCU was able to connect that request with reality in the form of David R. Boxley’s “Spirit of the Tongass” logo, shown below in Smalgyax .

As of 8/31/21 Metlakatla Office’s numbers:
Members: 1,272
Shares:       $8,037,007
Loans:         $9,574,664

THORNE BAY – THE BLUEPRINT

In 2006, we began offering financial services in Thorne Bay.

Our first space was located inside a sporting goods store that was in the lower level of the store owner’s home. The cash was kept in a gun safe and transactions were noted on paper.

Since that time, we have created a more sustainable model, hiring employees, using computers and eventually finding a home in the City of Thorne Bay building.

Thorne Bay became the blueprint for future sites.

NEW COMMUNITY MICROSITES

In September 2019 TFCU opened our Hydaburg site in their local school with an offer to use an office in the common area. Then in December of 2019 we opened in Kake, sponsored by the Kake Tribal Corporation and located in their office building.

Our most recent community microsite is in Hoonah, opened during the pandemic in June 2020! Our TFCU promise and Hoonah’s commitment made it happen. Before, these communities were “banking deserts” with no available financial services.

We brought financial services to Hoonah in partnership with the Hoonah Indian Association – serving the community from their beautiful canoe shed.

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Can Elections Indicate an Organization’s Relevance for its Members?

What is your impression of a non-profit that has five open board seats out of 15 total directors, and received 33 nominations for the positions?

That is the status of the board election now underway at Inclusiv.  The incredible interest from credit union members certainly suggests a dynamic, responsive and relevant organization with which people want to engage.  All the nominees are shown on the website with candidates for open seats from states in Region I and for at-large seats, from across the country.

Here is how Inclusive described this moment when announcing the board election openings:

This is a historic moment for community development credit unions. As a result, Inclusiv is experiencing a time of unprecedented growth, with over 400 member credit unions. This is the largest membership in the history of our organization! Much of this growth has been fueled by the increasing number of credit unions committed to financial inclusion and racial equity. 

Inclusiv is seeking passionate, committed and thoughtful candidates for its Board of Directors. This is a truly unique opportunity to join the industry’s leading voice for Low Income designated, CDFI certified and MDI designated credit unions.

New Name and Expanding the Mission and Role

Inclusive is renamed from the former National Federation of Community Development Credit Unions. Its mission is the same: helping low- and moderate-income people and communities achieve financial independence through credit unions.

I would also suggest that Inclusiv’s example is more than supporting this segment of the credit union system.   When leadership roles in any organization are so attractive that 33 nominees vie for five open seats, it is a demonstration of members’ excitement and interest in the firm’s purpose.

In your credit union’s last election, how many members were nominated for open seats?  Was an election even held?   If you could somehow ignite this enthusiasm with your members clamoring to volunteer as directors, what would that say about your credit union’s standing with its owners?

Inclusiv’s election contest may be more intense than their leadership anticipated. However it is also testimony to the courage and foresight of the CEO and board that are facilitating this participation in democratic governance.

 

 

 

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Doing Our Job in a Time of Tragedy-Credit Union’s Role after September 11th

In September 2001 Ed Callahan was entering his 14th year as CEO at Patelco Credit Union.  He continued to write a monthly column for the Callahan Report.  In the issue right after the 9/11 attacks he assessed their impact and the role  credit unions were now called to play.

He opens by acknowledging the pervasive feelings of fear and vulnerability.  He follows with the need to stay open to keep the economy functioning and provide assurance and forestall panic.

And finally he urges cooperatives to be “out in front”with expanded efforts for service.  A leader’s thought  about Doing Our Job, meaningful then, 20 years later, and in any future crises.

Here is the full article:

September 11 was a profound shock, and caused a deep wound from which we as a nation can never completely recover. In some respects it was the darkest day in our history. When the two towers fell, so did the illusion that the United States of America was protected by its two oceans.

We never thought something like this could happen, and yet it did. And I am sure on that awful morning everyone thought: “If this can happen, what else — and worse — could follow?”

When you have that sort of question on the minds of millions, panic can be just around the corner. Panic arises from fear of the future, and that kind of fear can likely be far more destructive than what kindled it. Franklin Roosevelt was right in 1933when he said: “Fear is the greatest enemy of all, because it destroys everything it touches.”

Staying Open

This is why it was so important for credit unions — indeed all financial institutions — to remain open on September 11 . . . and the 12th and 13th and subsequent days.

This is not meant to be a macho statement. I firmly believe it.

Firefighters and other emergency workers were on the front lines. That was their job. But financial service workers had their job too. They had to demonstrate that the financial system of the country was still functioning, that people’s money was safe and available. This was not the life-threatening work of the emergency workers, but it was absolutely essential nonetheless. It kept the lid on fear; it quashed panic. Just imagine those days if all financial institutions had shut their doors and turned out their lights.

Service: We have to mean it

When President Bush addressed the nation on the night of September 11, the first thing he said after stating that the country’s government was operational was that its financial system was functioning. These were not idle thoughts on his part — they were carefully included to dispel any notion that people’s money was not safe or accessible.

People at my credit union and undoubtedly thousands more wanted to be with their families on that terrible and unsettling day — who knew what else might be in store for us, or where? I sympathized. I felt a keen need to be with my family also. We allowed anyone to go home who felt strongly they should do so.

But others remained and kept the doors open that day, and the days following. This was important on two levels. One was symbolic, of course — we would show a face of continuity, and we would not take an action that might lead others to succumb to fears about their savings.

The other was functional — we really were there to carry out transactions, provide cash or whatever else people wanted. Credit union employees are service workers, not isolated business units, and they have to provide a service in good times and disturbing times. They often have to provide that service to settle the waters, because if they do not the waters will roil. Thus, we need to be grateful to everyone who worked that day and that week and to express our gratitude in both words and acts.

Cooperatives to the Front

All this said, we can be more helpful. People everywhere have been asking, “What can we do?” Credit unions can step up to the plate. They can be the conduits to relief efforts. They can encourage their employees to contribute to the United Way and other worthy relief organizations that are sending food, medicine, supplies and financial resources to emergency workers and victims’ families. They can research and post for their members those relief agencies most effective in delivering aid to the greatest needs.

People faced with this horrible attack want to help heal and rebuild — it is the essence of cooperation. Let America’s cooperatives show what they are made of. Together we can bind the wounds, relieve the widow, raise the orphan, and reconstruct both our confidence and our damaged buildings. We owe that to our forebearers who built this country and to our children who will inherit it.

One month later in Doing Our Job in a Time of Tragedy-Part II, Ed described Patelco’s  enhanced efforts to serve members.  The plan used Internet delivery and was called eAccess Freedom Trail.   His second column and the project summary  can can be accessed here.

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September 11th at Callahans and the Marriott WTC Hotel, New York

We are all heirs of September 11, 2001.  Some from experiences close up and personal.  Others as horrified observers, unable to look away from the TV coverage.  And for more, it is an event in history known primarily  through broadcasts like those aired this past weekend.

That September day is now part of America’s story.  The heroic parts about fully loaded firemen walking up 80 stories to open jammed doors to let occupants walk down while they, duty-bound, rose to ever higher floors and  their destiny.

We recall the shared emotions-fear, vulnerability, anger, confusion and the desire for retribution.

And we follow still the unfolding domestic and international political decisions that continue to be analyzed and interpreted two decades later.

The posts today and tomorrow are about that day. First two personal accounts and tomorrow a response at that time by a credit union leader.

Everyone has a story.   They connect and sustain us.  They help to make us who we are. That is why we remember.

A Personal Story

On Tuesday 9/11, I was in our office overlooking Farragut Park in the center of DC, three blocks from the White House.  September would normally be a peak month for planning sessions out of the office. However our daughter Alix was getting married on 9/15 and  Joan and I had planned a week long singing vacation in Salzburg, Austria for later in the month.  I was not paying attention to the business trip Joan began the prior Thursday to New York City for NABE’s Annual convention at the Marriott World Trade Center Hotel.

Upon first report of the plane hitting a trade center tower, I assumed an accident had happened.  Here is how one employee remembers the following cascade of events.

“I was at the  Callahan office that morning which happened to be 5 days before my wedding.

I got a call from Alix  who was home after her morning coaching session on the Potomac .   She told me that a plane had hit the WTC while she was watching the Today Show (NBC). I remember thinking of a documentary I saw where it described how a plane had accidentally hit the Empire State Building in fog several decades earlier causing some damage but obviously not destroying the building or causing mass loss of life.  So, I wasn’t very concerned. 

When it became clear that this was a passenger jetliner and that another plane had struck the other tower it was obvious this wasn’t an accident.  By this point, everyone the Callahan office was very aware and all were concerned.  We rolled out the large CRT TV on its cart so people could watch the live news coverage. 

News of the Pentagon being struck became part of the news too but very limited live footage of that was available.  Most of the TV focus stayed on NYC.  At Callahan we could see the smoke coming up from the Pentagon from our 10th floor Farragut Park overlook which had a line of sight directly to the National Airport Control tower — next to the Pentagon.  

Cell phones and office phones rang throughout the morning — mainly family members of employees calling to check in and share info.  Rumors swirled in the office from the calls– other planes possibly headed to the White House, just blocks away. One employee said there were “fires burning on the mall.” From our windows we saw employees walking/running from  all White House area buildings

Of course, this increased the  concerns of everyone in our office.  

It wasn’t long before the scene at Farragut Park totally changed  from a normal calm mid-morning, post-rush hour commute.  The park was absolutely flooded with people…all trying to go home it seemed but the metro wasn’t capable of handling that many people at non-peak times.  Large crowds blocked all streets, barely moving and no cars or buses could escape.  Cell phones were also no longer working — the networks were far too congested.  

The big question was whether we should close the office and tell people to go home.  I recall the conversation centered around what would be safest for staff — staying put was probably safest and least frustrating given the chaos on the streets outside and likelihood of many hours to get home (many had to walk given the transit freeze).  However, we knew that many staff wanted to go so we gave everyone the choice to decide for themselves. Most left within an hour. “ 

During the cascading events of that morning, Scott Patterson came to my office to tell me that my daughter Alix thought Joan was in NYC for a conference.  She wanted to make sure I was aware.  I had not remembered nor put 2 and 2 together that Joan was not only in NYC but also at the WTC complex. Lara, my other daughter, six months pregnant, was in nearby New Jersey, having arrived in Newark from California the night before to attend a conference.

Of course, Joan was unreachable, without phone, on her own until  that afternoon when a third party called on her behalf as described below.

By midday, everyone had left the office.  People needed to be with their families and away from any potential targets in downtown DC.    I remained  at Callahans till late that afternoon, answering phones and watching.  By then the metro was running, the crowds had left and I got back to Bethesda that evening.

Joan’s Story at the World Trade Center Marriott

 

 

 

 

 

The National Association for Business Economics 43rd annual meeting was at the New York Marriott World Trade Center Hotel from September 9-11, 2001.  The event’s tagline was “In a New York minute in the midst of economic uncertainty.”  I was the press officer.

Visiting Windows on the World

The night before the attack, Monday, Sept. 10, Diana Gregg, a reporter for BNA, and I decided to make a late night visit to Windows on the World, the famed restaurant on the 106th floor of the North Tower. We wanted to see the view and there wouldn’t be time Tuesday morning because of the conference and press events.  It was a short walk to the elevator on the ground floor of the North Tower; midway up, we changed to another lift, creaky, but with an elevator operator. We were tempted to stop for a drink, but it was late, so we went to the viewing platform to see the twinkly city below. There had been rain.  We felt we were on top of the world ….and believe we may have been among the last to leave Windows on the World.

Seventy-nine people who worked at Windows died on Tuesday morning, September 11, when the plane crashed into the building, as did 91 restaurant guests, many attending a conference that morning.  NABE had considered having its Sept. 11 CEO breakfast at Windows, but opted instead for the grand ballroom on the ground level of the Marriott WTC hotel. The hotel adjoined the North Tower.

On Tuesday, the morning session was in the 1st floor Grand Ballroom. Robert Scott, Morgan Stanley President and CEO, was speaking to the group.  Then came a jolt.  The lights flickered.   Chandeliers began to shake.  A rumble, like an earthquake.

Everyone headed for the exits.

My NABE colleagues and others helped people get out of the hotel…we were directed away from the front entrance because of falling debris and went thru the “Tall Ships” side entrance-which had been locked, but was knocked open… police on busy West Street highway  stopped traffic so that we could cross …I made my way to the Hudson River, stopping along the way to stand with groups of NABE evacuees gawking at the Towers. . . watching what looked like lumber falling from the windows, but then realized they were jumpers. . . some thought the fire in the North Tower was  being contained. . . NABE would be in touch with the hotel to see if we could resume our meetings in the afternoon. . .  saw a second plane smash into the South Tower. . .  gasps that went up from the crowd. . . ‘”This is terrorism.”

We didn’t know what was going on. There were no iPhones and cellphones didn’t work. But there was radio! . . . A group gathered around a man  who had a battery operated radio…desperate for news….people at home watching TV knew about the Twin Towers and the Pentagon…and Shanksville. . .We didn’t. . . We knew something terrible had happened in New York.. . We were on our own.

Tramping south along the river with thousands of evacuees. . .stopped at a vendor to buy 10 bottles to water because ‘this was going to be a long day’. . . do you know how heavy bottles of water are? . . .passed them out to anyone who would take them. . .ran into NABE Past President Diane Swonk, in a suit and high heels, surrounded by other NABE members and visiting international students . . . their passports and belongings were now dust, as were ours. . . Diane, chief economist at Bank One, possessed, miraculously, a cellphone that worked. . .  She offered to have her office call people’s families to let them know we were OK. . . we scribbled a dozen phone numbers on a piece of paper, she passed them on to her office.

Chip, who led Callahan & Associates in downtown DC, got a call later that afternoon from the administrative office of Bank One CEO Jamie Dimon with the message that I was OK…. Diane then led her group uptown to safety at Bank One’s midtown office…I decided to head south, along the river, thinking it was safer. . .  I reached the tip of the island –there was no place to go—it was either uptown or jump into the Hudson River and swim to New Jersey. . .seriously considered the idea! . . I was part of a huge crowd of anxious people…I needed to speak to someone, to ask how they were doing, but no one was interested in chit-chat…one man nearby said he was going back to get his dog…A cloud of black smoke was coming in our direction. . someone shouted “a stampede is coming”…panic was imminent. . .but it didn’t happen…suddenly, the smoke cleared, and as if by magic, a NY Waterways ferry appeared. . .I was never so glad to see anything in my life. . . I wouldn’t have to jump into the river!

People boarded carefully, no pushing or shoving… we donned life vests at the captain’s request. . .we looked to the sky….would we be attacked in the open water?…once in New Jersey, with no place to go, I approached  a young woman who was looking at Twin Towers. . .she was a temp, but had not gone in that day. . .an aspiring opera singer, she took me to her subsidized artists’ housing unit . . we would surely be friends for life…She went with me to a nearby car rental, where I hitched a ride with a group going south on I-95. . .I insisted we stop for gas, we didn’t know what was ahead….but it was OK and my ride went as far as Philadelphia…  they dropped me at the deserted airport. . . Sarah McLaughlin, the daughter of old friends from Chicago Tribune days, picked me up, drove to their house, put me up for the night. . . next day we went to the Amtrak station . . .wasn’t afraid to ride the train to Union Station, or the subway home to Bethesda. . . It was another world outside of lower Manhattan. . . I had made it home in time for Alix and Scott’s wedding three days later.

PS: This dramatic exodus enabled by an armada of boats  which evacuated hundreds of thousands off Manhattan in just nine hours is narrated by Tom Hanks in this 11 minute video.

The story is also told in this article Escape From New York.  Following is an excerpt:

Day and his maritime colleagues at the Sandy Hook Pilots Association — the specially licensed seamen who help larger vessels get in and out of the harbor safely — would help orchestrate the largest maritime evacuation in world history, larger even than the famous British rescue at Dunkirk.

With no plan and little direction, they would cobble together a makeshift civilian armada of fishing vessels, pleasure yachts, tugboats, and passenger ferries that evacuated somewhere between 300,000 and 500,000 people from the tip of lower Manhattan — desperate, worried, dust-enveloped people trapped by the closure of the island’s bridges and tunnels. . .

The flotilla that day included upwards of 130 boats: harbor launches, fishing vessels, sightseeing ships, and dinner-cruise boats, as well as 33 ferries and 50 tugboats, plus numerous FDNY, NYPD, and Coast Guard rescue boats. . .

 

 

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What Can $1,000 Buy in Credit Union Intelligence?

On September 2, 2021, I received an invoice for 40 hours of work at $25 per, for a total of $1,000.

The service included consultation, designing, programing, testing and updating an Excel spreadsheet that allows any user to project the NCUSIF’s year-end equity using the latest data and forecasts.

It was not a simple task.  There are four variables each using different math concepts:

  1. The % rate of insured share growth.
  2. Operating expenses in $ charged via the OTR.
  3. Anticipated loss in basis points of year end insured shares.
  4. Yield on NCUSIF investments expressed as an APR.

With beginning numbers from the NCUSIF 2020 audit, these four variables must be programmed in a dynamic way so that the outcomes in dollars and basis points versus a year-end NOL target (1.3%) can be instantly updated.

Later numbers can be inserted as the year goes forward.  This is the only management model needed for the NCUSIF. The fund’s basic 1% underwriting design, its unique loss reserve accounting practice, and the almost 40 years of experience have validated its long-term resilience no matter the event or economic circumstances.

Completed in 40 Hours

The student who did this work is a college senior majoring in “leadership.”  I explained the goal, and the input parameters.   We talked by Zoom, sharing our screens  using Google Docs, and working together to test the functioning.

Here is a link to the finished spreadsheet.  It uses a year-end NOL “target” of 1.3%, share growth of 10%, and the latest data on operating expense and loss experience: https://docs.google.com/spreadsheets/d/1eAZN2CjyNkgu9bfuUXIF1xmFPBwLvAio/edit#gid=2118513014

The spreadsheet can be copied for use by anyone.  The user can fill in more recent data or other assumptions believed to be more accurate.   With the current input, the year-end equity NOL outcome would be 1.2876 or just shy of the 1.3% goal.

Is This Modeling Tool Sufficient?

The spreadsheet includes all the major variables.   The NCUSIF sometimes has accounting entries that are not related to current events creating deus ex machina  financial interventions as in a theatrical performance.

One example is recovery from prior year’s AME loss estimates which turned out to be too high.  For the past 7 years these have totaled $313 million added back to NCUSIF equity.  A second is the expense for additions to the loss allowance reserve, which often have no relation to actual experience.

Even with these minor exceptions, the tool used in conjunction with NCUSIF’s historical performance, is about as close to perfect as one could hope.  Take a look, give it a spin.

The Student  Programmer

The designer of this spreadsheet is a college liberal arts senior who also works full time for NVIDIA to help market their new Omniverse platform.

At the moment, NCUA has spent close to $40 million and over five years trying to install the MERIT data management program.   I wonder how much a bunch of smart, college kids might accomplish outside the beltway contracting environment at a fraction of this sunk expense.

The invoice ended with these words: Thanks for the opportunity to serve you (the student’s name) and the programmer’s tagline:   When you can’t, she can. 

Now that’s the coop spirit.