Executives Debate the Causes and Effects of the Corporate Crisis
LAS VEGAS -- Can corporates promise members they won't again leverage risk to chase yield and avoid a fourth systemic crisis?
Jim McKeon, treasurer of the board at New York's $1.6 billion Municipal Credit Union, challenged a corporate credit union breakout panel, saying he thinks corporates have yet to learn from history. Corporate credit unions exist to serve their members, not maximize profit, he said. With so much corporate focus still on making money, he thinks anyone who invests in corporates is "out of their minds."
His question drew loud applause from attendees.
Panelist Mike Mercer, president/CEO of the Georgia Credit Union Affiliates, responded, saying natural person credit unions forced corporates to become overly competitive and produce maximum yield. He said he's heard reports of corporate members who have threatened to leave their cooperative over just three basis points of returns.
"Whether we want to admit it or not, credit unions made this," Mercer said.
Fellow panelist Bill Hampel added that almost all corporates will require significant recapitalization, so if members no longer trust corporates, they will simply cease to exist. He also said NCUA's proposed corporate rule that requires credit unions to make their own investments provides the framework to address such concerns.
Hampel, CUNA's chief economist, said as of April 2010, the average corporate credit union came up 16 basis points short when comparing fee income to operating expenses. Larger corporates tended to do better.
"Corporates have historically required both net interest income and fees to cover expenses," Hampel said. "So, one of two things will have to happen, they'll either have to become more efficient or raise fees."
Hampel predicted corporates will produce a combination of both.
Mercer commented that U.S. Central was leveraged at a rate of 50 to 1, compared to 40 to 1 at Bear Sterns when it failed. "Thank God The Wall Street Journal didn't know about that," he said.
Credit unions can also expect examiners to be more critical about their investment portfolios, he added.
"For a couple of decades we've had a pass," he said. "You could have 100% invested in a corporate credit union and nary a word would be spoken of it in your exam."
Another challenge facing corporates is the need to quantify the cooperative's value to members, said panelist Brad Miller, president/CEO of Southeast Corporate FCU. To survive, corporates will have to be less competitive and more collaborative.
"We need to work together as entities to find back-office efficiencies," he provided as an example.