Give Me a Break Herb, Members Still Lost Out in BUCS Conversion
Editor's Introduction This letter to the editor by Truliant FCU CEO Marc Schaefer is in response to piece in the July 13 issue of Credit Union Times in which former BUCS FCU CEO and now BUCS Federal Bank CEO Herb Moltzan gave his first hand account of what he felt the BUCS conversion meant to members and how it affected him financially. Schaefer may be best to respond to Moltzan as Moltzan maintains when BUCS converted it was due to fear of being able to grow membership, while Schaefer's then AT&T FCU became the battleground for the banker attacks on CUs' ability to add new groups. This led to the Supreme Court case and ultimately H.R. 1151, the Credit Union Membership Access Act. Herb Moltzan's two entire pages of ramblings on the virtues of for-profit stock banks in the July 13th issue of Credit Union Times are what they appear to be. Self-serving rationalizations of a born banker who fails to understand or appreciate the benefits and values of member-owned financial cooperatives. Notwithstanding his time as a credit union regulator and manager, Moltzan sold out to banking interests in the middle of the field of membership battle that we waged with the banking industry in the mid and late 1990's. Ostensibly, BUCS Federal Credit Union could not survive by just serving Blue Cross Blue Shield employees in Maryland and they were eying the American Express office across the street to expand their membership. The American Bankers' Association's forced injunction, as a result of their lawsuit against NCUA and AT&T Family FCU (now Truliant), had temporarily halted the ability for credit unions to add new groups. So he decided it was better to switch than fight. How admirable and insightful! (according to Moltzan). The rest of us stayed with the fight and won overwhelming passage of the Credit Union Membership Access Act of 1998, which would have solved Herb's original problem. (Just as those who are ostensibly converting to banks due to capital, i.e. PCA, and Member Business Lending restrictions could choose to work toward passage of CURIA instead). Now Herb has become a cheerleader for others to sacrifice their members' best interests to join the for-profit banking sector. Oh, and no one that hasn't converted to a bank has any authority to speak to the issue. I guess we all need to walk in front of a bus to know for sure it's not a good idea? Moltzan's assertion that his bank customers are better off than if they had remained credit union members is sadly mistaken even though he delivers his message with great gusto. He seeks to dismiss the over $6 billion dollars ($336 million in North Carolina alone-The Benefits of Credit Unions to North Carolina Consumers of Financial Services 2005) in additional benefits that credit unions deliver annually to their members in the form of lower loan rates, higher savings rates and lower fees as fantasy. In fact, using conservative estimates, credit unions save Moltzan's and other banks' customers a couple of extra billion a year by retarding their ability to further charge and fee them. Herb's assertions that he has not changed his pricing in any way is difficult to prove or disprove; there are too many variables to quantify the change including interest rates, market growth; etc. But what is certain is that BUCS FCU in 1998 had $5 million in capital that their members had built up over the life of the credit union. That ownership interest would be "cashed in" by them and their families and their heirs by using BUCS FCU's services without vying with stockholders for distribution of benefits. Moltzan would have you believe that nothing is sacrificed. Members' equity can be diluted by bringing in new shareholders who I guess don't ask for anything in return. They can distribute a goodly portion of the capital raised to insiders and cover the additional costs of conversion and running a bank all for free. What a wonderful fantasy world! Amazingly, Moltzan's comments parrot Mr. Umholtz's of the Coalition for Credit Union Charter Options letter in the same issue of Credit Union Times regarding insider's profiting relative to the members. They both use almost identical language to state that at mutual savings institutions, Board of Directors establish salary and benefits. Neither bother to mention that 8% of the stock offering can be allocated to the Employee Stock Option Plan and another 4% to the Restricted Stock Plan. The CEO can and often does receive 25% of what goes into each of those buckets; that's before they even exercise their preferential right to buy additional stock. Because BUCS was relatively small ($78 million) and they only sold $5 million or less in stock those numbers may seem modest; apply them to a $1 billion credit union with $100 million or more in equity issuing $150 million in stock and most would view that as excessive compensation. I would argue that Moltzan's assertion that this represents his well-earned performance award rather than a distribution of the ownership interests of the credit union is flawed logic. My guess is that his members would rather have been paid their $840 (or whatever their pro rata share of equity might have been) than have insiders and outside stockholders distribute the value of their ownership. He's right in that the credit union board could have and probably would have allocated resources to his retirement; without diluting their members' stake in the credit union. Another slight of hand that both Motlzen and Umholz try to pull off in their respective articles is that the stock institution must establish a liquidity reserve equal to the original capital at the time of conversion. So what? That capital is still diluted by the ownership interest of the new stockholders. If a converting credit union can bring in 175% of the original capital, insiders get a hunk of the new capital, stockholders have to be paid and liquidation is unlikely, the existing members have been jilted out of at least some of the value of their ownership. Moltzan also assumes that every member has the money to invest in his precious stock and Umholtz proclaims that "profit" is the American way. It's difficult to imagine two contributors to Credit Union Times (other than the bank trades) that are less cognizant of credit union culture and values. Rather than continue to refute the self-serving views of those that are rationalizing abandoning the credit union model, I would recommend the following to those in the credit union movement (yes, Herb- movement) that understand, appreciate and seek to advance their members' longterm ownership interests: * Recognize the value of your credit union; note that outside investors are willing to pay multiples of your members' equity to own and control your credit union * Educate your members (including those that joined through indirect lending or affinity groups) on the true value of ownership; the benefits they receive in the form of lower loan rates, higher savings rates, lower fees and true member-centric service; encourage them to vote in your elections, run for the Board and serve on Committees * Become or stay politically active at the state and national level; 88 million Americans benefit from credit unions and are depending on you. * Remember that the rule change that allowed only a majority of those voting rather than a full majority of all of the membership to convert a credit union to a bank only occurred in 1998 as a part of the negotiations for passage of the Credit Union Membership Access Act. It is possible that this was a concession to the banking industry and may be more permissive than other institutions (e.g. mutual savings to national bank) that may require a majority of the owners to agree. * Tell our credit union trade associations what you want. Those that ask them to sit idly by while watershed changes occur in the movement are wasting our best resource. * Don't confuse those that advocate for conversion or wish to make it even easier to beguile your membership into voting for conversion with friends. This is a deadly serious business with hundreds of billions of members' dollars (and the quality of their financial lives) at stake. While we are all advocates of open discussion of conversions (to wit, Credit Union Times July 13th issue was full of pro conversion pieces) and understand that credit union members, Boards of Directors and perhaps management have the ultimate say in the outcome for their credit unions, this is not the time to prevaricate. Make up your mind and stand up for your beliefs. The time is at hand and the time for action is upon us. Marcus B. Schaefer President and CEO Truliant FCU Winston Salem, N.C.