Carl Icahn’s Lesson for Credit Unions

Activist investors may be a thorn in the side of corporate America, but thinking like they do can focus credit union decisions about capital and investing.


Carl Icahn is one of America’s most effective activist investors, to the chagrin of the executives of companies he invests in. Icahn amasses ownership in companies with pent-up shareholder value that can be unlocked through reorganization, improved governance, and better financial decision-making. He then uses his ownership position as a bully pulpit to force change.

Icahn’s most recent target is Time Warner, which he criticized for not implementing “measures that would increase value for shareholders.” His attack pressured the company to use its excess cash to increase a planned stock buyback from $5 to more than $20 billion.

An Optimal Use of Member Resources?
At year-end 2005, the country’s 8,880 credit unions had assets of more than $690 billion and net worth of $80 billion for a capital ratio of 11.6%. Assuming a regulatory minimum net worth ratio of 7% of assets, this leaves credit unions with nearly $30 billion in excess capital. If Carl Icahn could swoop into the credit union space, he would likely offer the critique that much of the capital stash is a suboptimal use of member resources.

Would he agitate for giving the money back to the members in the form of a dividend? Probably not! If credit unions were to pay excess capital out in a lump sum to members, it would rival the $32 billion Microsoft dividend of 2004, and would have a noticeable one-time impact on the economy as a whole. However, this presumes that credit unions don’t have other member-value-creating uses for the capital, and that is a real fallacy.

Instead, I believe that Icahn would press credit unions to deploy the excess capital to create durable value to the members. Opportunities abound, and credit unions have sharpened their abilities in this area with each passing year. On a collaborative basis, credit unions have created Credit Union Direct Lending, Prime Alliance, the Co-op Network, FSCC shared branching, and leading edge corporate credit unions. Through these cooperative networks, credit unions have revolutionized the way they serve their members, and created much longer-lasting value than if they had paid the amount invested out in dividends.

Individual Decisions with Collective Impact
A 7% capital ratio is not right for all credit unions; to be conservative, some credit unions and regulators will feel more comfortable with a 9% capital ratio. Even at that level, credit unions have $15.5B in excess capital—an amount roughly equal to the market cap of Ford or GM, or half of Sallie Mae. Just imagine the possibilities available to strengthen credit union competitiveness in the financial services marketplace by developing additional collaborative ventures—or by enhancing the individual credit union’s value proposition.

To learn about how some credit unions are using their capital to give back to their members, join us for a webinar titled: How Much Capital Is Sufficient?




March 13, 2006


  • What about using some of that capital to support a national marketing or advocacy campaign?
  • If we want to be really accurate, the excess capital is even higher. We have legislation pending that would reduce the required core capital level to 5%(which is where it should be!) If we were a truly capital efficient industry, we might see fewer credit unions converting to a stock corporation just to enrich the insiders.