SAN DIEGO — It wasn't just the Treasury's TARP offer of cheap and abundant capital infusions that convinced the likes of Goldman Sachs, American Express, Lincoln National Corp. and others to swiftly convert to bank and thrift charters, said investment banker Peter Duffy. The bank and thrift charters hold a strategic advantage for the companies.
Duffy's firm, New York-based Sandler O'Neill & Partners, was involved in the recent deals that resulted in charter conversions for insurers Lincoln National and Genworth Financial, although Duffy said he was not personally involved. But, he did say the two were willing to modify the way they're regulated and chartered in exchange for access to cheaper deposits, more abundant and cheaper capital and better distribution and marketing channels.
“I'm not saying these companies change their charter and for them, there won't be any regulatory reform coming. There will be,” he said.
“But within the framework of the bank charter, there is more flexibility to accommodate the way America shops for financial products, and there is more opportunity to obtain deposits, or money, because banks can market deposit products to the average American. And of course, banks also have access to more capital.”
Financial institutions have been selling retail investment products, including insurance, to their depositors for years, Duffy said.
“Insurance companies were competing head-to-head with banks, but they couldn't take in deposits or raise capital like banks could,” Duffy said. “So, they decided to level the playing field.”
Duffy said he's been working with credit union clients who are asking about the strategic difference between credit union and bank charters, not because they're actively considering a charter change but because they are willing to “go there” when performing due diligence.
“Any credit union that knows about the Treasury's Blueprint, knows how difficult it is compete in this business and realizes that unusual things are occurring, like rapid charter changes…if that credit union doesn't at least consider the potential impact to their balance sheet, frankly, they are shirking their duty,” he said.
Well-prepared credit unions are willing to consider whatever means necessary to effectively steward member funds, Duffy said, and that includes crunching the numbers and feeling out all options should crucial reform efforts like CURIA or secondary capital fail, or if Treasury's Blueprint is put into action.
However, NAFCU President/CEO Fred Becker compared the banking world to a briar patch, saying credit unions would be crazy to consider a charter change considering today's financial landscape. Becker said when comparing loan losses, “it looks like a bright and shiny day in credit union land, across all loan types.”
Furthermore, Becker said he thinks the reason insurers, investment banks and others have converted to bank and thrift charters is for the deposit insurance guarantee.
“It's a flight of safety,” Becker said. “They're looking for the charter change to shore up their balance sheets and put the full faith and credit of the U.S. government behind them. It's not the same with credit union to bank charter conversions because credit unions already have that government backing.”
Becker said he thinks comments Treasury Secretary Henry Paulson has made stating credit unions weren't the cause of the mortgage and banking crisis will play out positively come regulatory reform time, which includes the possibility of a single financial services regulator as outlined in the Treasury's Blueprint. While the Bush administration-produced Blueprint loses power as the Obama inauguration approaches, the European Union did vote to place all European financial institutions under a single regulator three weeks ago, once again fanning the flames of concern on this side of the pond.
“When the new Congress and administration come back next year, there will be an effort to get those who were the cause of the crisis under some kind of regulatory umbrella,” Becker said. “Credit unions weren't the cause of the problem and were already under regulation, so what problem would further credit union regulation solve?”
Becker said he is willing to remind Paulson and others in Washington about their public statements in support of credit unions come January if the tide appears to be turning in a negative direction for credit unions. Furthermore, he said NAFCU is not about to give up the credit union share insurance fund and a separate federal regulator, the very issues NAFCU was founded upon, without a long, hard fight.
“Yes, we're watching regulatory reform closely, and yes, we'll be very aggressive in protecting credit union interests,” Becker said. “But, as they start to go after people, I think you'll see we're not even on the list.”
The Treasury Blueprint's elimination of the state financial charter would mean death for NASCUS, so naturally the organization is watching the issue closely, said Director of Communications and Public Affairs Kate Hartig.
“We feel it's important to have dual charters, because it offers competition and diversity,” Hartig said, “so for that to happen with the E.U., that's a concern because we feel that putting a federal blanket over all credit unions would not work as well as the system we have now.”
Hartig said the Blueprint isn't the top priority at NASCUS, however, and the organization is keeping its eye on several other reform possibilities.
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