Black Friday? Sure. But We Need a Plan for the Future Corporate System
I'm not sure a Black Friday would be such a bad thing. ['Will the NCUA Let Loose a Corporate Black Friday?' CU Times, Aug. 18, page 1.]
Let me clarify that. The savings and loan crisis taught a valuable lesson that forbearance always costs more than prompt corrective action. The FDIC is one regulator that has a very good process for dealing with troubled institutions. The process is transparent, it is prompt and it is effective.
If the NCUA would use the same process as the FDIC, then conservation of the corporate credit unions would be a good thing.
I was on the Wescorp board when the Capcorp failure occurred. The failure of Capcorp prompted the NCUA to recognize that the corporate credit union system had problems and that reform was needed. It was clear that the corporate system had too little capital given the risks on the balance sheet. Regulation 704 put in place rules that addressed the issues at the time except for the structure of the corporate system. To many of us in the corporate system at the time, it was clear that the corporate credit union system should consolidate. The three-layered system, US Central, corporate credit unions and natural person credit unions had too many layers and too many independent corporates. Each layer introduced overhead.
In a system with too little capital, reducing overhead would have improved earnings and contributed to faster capital growth. Instead of managed consolidation, the new NCUA rules allowed national fields of membership. The national fields of membership encouraged each corporate to compete for growth with all the other corporates. Services were duplicated, costs increased, corporates used rates to compete for business and the end result was a wasteful duplication of services and competition that increased costs, slowed capital growth and increased the risk of the corporate system.
There were warning signs that the corporate system needed change before this latest crisis occurred. The Capcorp debacle was one warning. The Treasury warned the NCUA about the risks that the corporate system posed to the credit union system and the insurance fund. The study done by Dan Brumbaugh and Jack Barth for the California Credit Union League warned about the risk posed by the corporate credit union system. The credit union system and the NCUA missed countless opportunities to make changes that may have avoided the recent corporate collapse.
Forbearance is a policy of extend and pretend by the regulator. The CPA audits of a number of the corporate credit unions raise the issue of whether those corporates are "a going concern." It doesn't take a CPA to realize that much of the corporate system is no longer a going concern. How difficult is it to draw the line between prompt corrective action and forbearance? Forbearance is always and everywhere a mistake.
If we allow the corporate system to hand off the legacy assets and then sink or swim on their own, it would be a big mistake. The corporate system did not heal itself after the Capcorp debacle and it will not heal itself now. Fundamentally it can't heal itself. The reason is simple, and it pervades the entire credit union system.
In every organization the vested insiders, management and the board, will always seek to perpetuate the organization even if it is not in the best interests of its members. It is without doubt that the corporate system would have had far less risk, stronger capital and better member service had it consolidated into one or maybe as many as four corporates. Just as healthy credit unions rarely merge, the corporates did not merge. I believe the reason is because the interests of the management and boards overrides the best interests of members.
One advantage of having a Black Friday is that it removes the management and the boards who would otherwise be inclined to protect their own interests and resist what is in the long run best interests of members.
But the solution is not to have the NCUA run corporates either. The Wescorp conservatorship proves that members are given less consideration under the NCUA than before conservatorship.
When the FDIC conserves a bank, it comes in on Friday and on Monday the bank reopens as part of a new bank. Ed Callahan had a sign above his desk, "We don't run credit unions." The FDIC knows that the best regulators regulate and allow the bankers to run banks. CUs should be under the control of their boards. Regulation and operation are incompatible.
We have the opportunity to use the power of conservation to rebuild the corporate system without the impediment of catering to the interests of management and boards. But our Black Friday has to be done wisely. The NCUA and the industry need to have a shared vision of a corporate system that provides the services credit unions need and provides them safely. Unfortunately, the proposed corporate rule is not the result of a shared vision. It creates a set of rules that insure safety but at the cost of providing the services credit unions need. A well-run corporate manages risk, it does not avoid risk. There is no collaboration between the eventual users of the corporate system and the NCUA. The new corporate rule is a recipe for failure.
In the meantime, we have a collapsed corporate credit union system that only exists because there is no prompt or corrective action. What we have is forbearance that increases the eventual costs, an uncertain future, a complete lack of transparency, a tremendous loss that will burden credit unions for years, and no plan for the future.
What should we do?
No. 1. The NCUA and the trade associations should convene a task force to come up with a plan for the future corporate system. A new corporate system that doesn't meet the needs of credit unions has no future. Any plan must fix the mistakes of the past, allow for the needs of the future and include the input of the credit unions that will use that system. We don't have that.
No. 2. We should use the power of conservation to transition the current corporate system into a single corporate according to the plan developed by the task force.
No. 3. We need to build accountability into the corporate system. Accountability has at its core transparency. The NCUA should publish all future corporate examination reports. Members pay for everything. They have a right to know. Transparency brings accountability. The lesson of the corporate credit union collapse is that only at the end did we have a view of how bad things were. If you only know at the end how bad things are then you have no chance to fix them, no chance to hold boards and management accountable. The lack of transparency not only hid the mistakes of management, it hid the mistakes of the regulator. We either learn from our mistakes or we repeat them.
SAFE Credit Union
North Highlands, Calif.