ARLINGTON, Va. — A lawyer whose practice includes helping credit unions convert their charters to mutual banks reminded the industry last week that while credit unions may get access to alternative capital in the coming year, that capital will not come without its own burdens and challenges.
Speaking to a Feb. 9 meeting of the Metropolitan Area Credit Union Management Association, Richard Garabedian, a partner in the Washington law firm of Luse, Gorman, Pomerenk & Schick, observed that the industry and trade press sometimes looked only at the good that alternative capital sources could bring and not enough at its potential drawbacks.
"Alternative capital will never be free," Garabedian told the group of credit union executives that gathered for the afternoon presentation. "It will have several different kinds of costs that the industry needs to consider carefully."
Garabedian stressed that one key premise of his comments was that Congress would have to make necessary legislative changes to provide for capital other than retained earnings. But he also observed after the talk that the current legislative and regulatory atmosphere and uncertainty could increase the potential for legislative change.
Garabedian started his talk by describing the ways credit unions that are designated as low-income are able to use subordinated debt as a source of alternative capital. He then offered a mini-tour of the other capital options currently being used by mutual thrifts and other banks-including the issuing of preferred stock by banks that have accepted government funds under the U.S. Treasury's Troubled Asset Relief Program.
He emphasized that while each of these different options would offer credit unions a number of benefits, they would also carry costs in terms of servicing the debt, which typically pay out a higher interest rate, and costs of complying with different government regulations that come with the debt to the costs of managing the debt.
For example, Garabedian brought up the experience of the failed thrift Lincoln Savings where it had sold securities in its parent company that were not covered by FDIC insurance, a fact not well understood by many of its mostly older investors. A subordinated debt plan seeking investments from credit union members would have to address these kinds of disclosure adequacy concerns.
Concerns also arise with the issuing of some kind of stock, perhaps through a CUSO that a credit union or group of credit unions might establish. In that scenario, the CUSO would likely have to comply with Securities and Exchange Commission regulations and issue prospectus for the stock, among other things.
"I think it doubtful that any new law allowing alternative capital for credit unions would offer credit unions a wholesale exemption from existing regulations," Garabedian said.
–dmorrison@cutimes.com

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