In These Times, an Optimist Can Seize the Day and Capitalize on Opportunities at Hand

Oil hits record $110 per barrel. Gold prices explode and now exceed $1,000 per ounce. Storied investment firm Bear Stearns disappears over the weekend. The Federal Reserve dusts off arcane rules to create liquidity conduits. Real estate prices down by 33% in some markets.

Can it continue to get worse? Sure.

Higher fuel prices to decrease foreign oil dependencies. Lower government farm subsidies anticipated by American farmer due to higher food prices. Federal Reserve creative in attempt to stave off financial meltdown. Home price declines offering new and move-up buyers opportunities not seen in years.

Can it continue to get better? You bet it can.

An old colleague of mine used to frequently ask, "Is that the light at the end of the tunnel or the train bearing down on me?" Given this market, the finance guy in me tends to be cynical, considering the breadth of the problems. However, when I look at lessons learned from events of the past 25 years, and the market sentiment at the time of every ugly economic hiccup, the feeling was always that it was a precursor to the next Great Depression. This cycle is no different and it will pass, sooner rather than later, with an environment that will enable stronger long-term growth.

History supports why I believe it's not as bad as the headlines would have us believe. Our economy tends to be resilient, as evidenced by the series of events including Black Monday, Long Term Capital, the Russian debt crises, the technology market bubble, 9/11, and two recessions since the mid 1980s. Excesses lead to contraction, which leads to reaction, which leads to...and the cycle continues.

One of the most significant reasons for some balanced perspective is the way the Federal Reserve has injected liquidity and enabled access to credit at a time when the credit markets virtually shut down. Recognizing that record amounts of stimulus can be a double-edged sword and may contribute to adverse long term implications, given the task at hand, the Fed has done what is necessary the past few months in being very proactive, and even creative, in ensuring the contagion from the credit debacle does not lead to a full financial meltdown.

Widespread fear has engulfed all markets (equity, capital, commodities, and credit), driven by latest negative news. The media provides streaming reports on each event, and every uptick and downtick in the market. Information is shared immediately. Opportunists try and benefit from an event, markets of all types move, companies and institutions are affected, you and I talk about how much wealth is gained or lost, other interested parties watch and react (opportunists), and the cycle goes on....and that happens every minute of every business day.

That goes on because the age of information and technology allows us to hear and read about events as they happen. And, not to downplay the problems that exist today, but when negative news is spread across every newspaper and every newscast, it is hard to feel optimistic. We all know that negative news sells.

The accelerated pace of information and data sharing has also led to shorter reaction times in addressing crises, which has mitigated some of the potential damage. This helps bring some relief, solutions and balance to the problems today.

While not perfect, the Federal Reserve, the U.S. government, the regulating agencies and other market leaders have acted decisively in recent months. The worst may not be over--we will continue to see extreme volatility, but the attention from those who can exert the proper remedies in a difficult environment have been welcome and needed, and is having a beneficial impact.

Against this backdrop, credit unions are facing challenges. Delinquencies and charged off loans are increasing, the quality of consumer loan applications is eroding, loan volumes are lower and interest rates are declining, which in many cases is impacting net interest income.

Conversely, the opportunities for credit unions are in fact the best they have been in years to improve performance and market share.

Deposit, and therefore asset growth in the first half of 2008, should be very strong and will likely be above trend for all of 2008. With rates approaching a low point in the interest rate cycle, now may be a good time to offer competitive longer term certificates--members will be attracted to the added yield. Lock in your longer term fixed-rate funding and keep your member deposits on your books for an extended period.

Credit unions can fill a void in the mortgage market and build on our industry's paltry 2% market share by originating high-quality loans and becoming the new mortgage lender of choice. While home values may be declining, strong underwriting, as has been our industry's standard, will support a portfolio of credible loans and strong relationships.

The yield curve is very positively sloped, and therefore offers some opportunities to improve risk-adjusted returns relative to any point in the past few years. Depending on your balance sheet mix, capital position and risk, opportunities exist to deploy excess liquidity selectively in diversified, well-structured investments, as well as execute lower risk arbitrage trades (borrow short, invest short and capture the spread). These strategies have been almost nonexistent in recent years.

Capital levels are strong, member satisfaction remains high, balance sheets are comparatively well-positioned, and opportunities exist. While effectively balancing risk and reward, we need to recognize that with economic uncertainty, we have a unique opportunity to advance our cause and standing in the financial marketplace and capitalize on our strengths with consumers.

No doubt there are still some economic bumps that lie ahead. We will get through those; we have every time before.

Optimist or pessimist? Choose a side. I'll continue to think positively and believe it's light I see is at the end of tunnel.