What Could Credit Unions Do With $2.5 Billion?

This is the fourth in a series of articles analyzing the NCUA’s closing of the Temporary Corporate Credit Union Stabilization Fund (TCCUSF) and retaining the majority of surplus funds for its own use. Read Part 1: The Most Important Audit Ever. Read Part 2: Smoke And Mirrors At The NCUA. Read Part 3: Save The NCUSIF Model From The NCUA.

The NCUA merged the TCCUSF with the NCUSIF on Oct. 1, 2017. It quietly put $2.5 billion in cash onto the NCUSF’s balance sheet and the same amount in overnight treasuries. No formal announcement. No press release.

But what if that money was put to truly good use? How many new credit unions could be funded? How many small business loans made? How many neighborhoods revived?

But the industry was silent. Why not? Hundreds of comments were submitted, nearly all asking the regulator to return their money to them. The regulator may give them some but only after keeping billions for itself. ContentMiddleAd

Democracy And Public Speech

Effective democratic governance, at credit unions and beyond, depends on public speech. This is more than expressing an opinion. At its most basic function, such acts speak truth to power. That means telling leaders when their priorities, judgments, and actions do not align with those subject to their decisions and coercive authority.

Public speech matters not because it will necessarily bend leaders to an articulated demand, but because people feel they must not be silent in the face of injustice, moral turpitude, and/or willful ignorance. Speaking requires courage because it is a critical catalyst for political action. Speaking out matters even if you cannot define a ready solution.

For credit unions, public speech further demonstrates one’s belief in the cooperative system and the integrity on which the fiduciary oversight of common wealth depends.

Not The First Time For Arbitrary NCUA Actions

This is not the first time the NCUA board has made decisions in its own self-interest at the expense of credit unions.

When the NCUSIF was restructured with the 1% deposit, the dominant concern of credit unions was that sending money automatically to the NCUA to sustain this level would just incent government’s propensity to spend funds regularly coming to it.

To counter this real concern, the legislation and NCUA board created a series of checks and balances on the NCUSIF. Among these were the 1.3% cap, the requirement for a dividend when equity exceed 1.3%, the filing by April 1 each year of an annual report to Congress, the monthly report to the board of the fund’s financials for timely credit union monitoring, and an annual independent CPA audit following FASB and GAAP principles.

The status quo continues, with no end in sight. The consequence of this bureaucratic inertia and self-dealing is that the NCUA will end up paying more to the outside lawyers on contingency, than to the credit unions that suffered the losses and funded the bailout.

This last commitment was vital. When chairman Ed Callahan arrived in October 1981, the fund’s accounting records were unreliable. The GAO audit was conducted only every two years and the latest opinion was issued 10 months after the audit date.

This audit also contained the statement: The NCUSIF does not state its estimated contingent liability for unknown future insured credit union closings because such estimates are impossible to make. This was after 10 years of operation.

This was not an acceptable reporting standard for the chairman. He said the NCUA should hold itself to the same auditing and reporting requirements required of credit unions themselves. An outside auditor was hired.

It took three years, but in 1984 the NCUSIF received the first GAAP clean opinion using FASB standards. The auditor stated that it first had to satisfy itself about the reasonableness of these estimated losses and the related provision for insurance losses. The impossible became possible.

For the next 25 years, the NCUSIF was managed according to these safeguards. These were troubled times for the other insurance funds. The FDIC and FSLIC both required explicit government guarantees in the late 1980s and in the 1990s the FSLIC failed again and was merged with the FDIC. The NCUSIF performed its insurance and resolution roles without interruption even in the face of recessions, the dot.com meltdown, and the Sept. 11, 2001 attacks.

The Crisis Of 2008-2009

In a March 21, 2009 Wall Street Journal article titled U.S. Seizes Key Cogs for Credit Unions, NCUA chair Mike Fryzel justifies conserving the corporate credit unions by saying this: With us in control we’d get honest numbers.

But when it came time for the NCUA to comply with the April 1 annual report deadline and the release of its own December 2008 audit, the board went dark and provided no numbers.

In the economic crisis of 2008-2009, the professional norms, independent accounting oversight, and legally required reporting were all overridden by the NCUA board. There was no NCUSIF Annual Report for 2008 filed with Congress. The auditor of the fund was changed in the middle of the crisis from Deloitte (2008) to KPMG (2009), always a warning sign in any organization’s financial reporting.

The combined audit reports were not released until June 2010 (18 months after Deloitte’s audit date). Deloitte’s report cited material weakness in that the fund failed identify the appropriate accounting treatment with respect to its variable interests in certain corporate credit unions. KPMG’s 2009 report cited significant deficiency in the NCUSIF’s financial reporting and accounting practice.

One analyst on this kind of internal shortcomings stated: Material weakness in financial controls is not something you want to see anywhere, let alone at an insurance company that sells financial promises and prides itself on balance-sheet strength.

But the NCUA board kept these facts concealed at the time. Had these actions occurred in a credit union, the board and management would have been removed.

From that time forward, NCUSIF statements have been presented not as in the previous 25 years practice of FASB private sector accounting, but rather as government fund accounting. This presentation obscures the ability to easily track income and expense. It creates the impression the fund is government-owned versus credit union-owned and designed based on cooperative principles.

These withheld and long-delayed audits with their disclosures of inadequate accounting practices would have enabled credit unions and or Congress to better assess the claims the NCUA was making about the problems credit unions faced and appropriate solutions.

Moreover, the so-called honest numbers NCUA claimed it would now oversee from the corporates have proven to be significantly in error. As of Sept. 30, 2017, the five corporate legacy assets have unused loss reserves of $3.1 billion. The actual numbers show that four corporates, other than WesCorp, had overestimated their actual loss reserves by as much as 50% when put in liquidation.

These corporate over-reserves also raise the question of the rigor of KPMG’s review of the NCUSIF’s loss allowance estimates. During their eight years of NCUSIF audits, the allowance account (and loss provision expense) shows no correlation to actual net cash losses in the years before, during, or immediately following the audit date.

The core problem is that the NCUA board is accountable to no one. Its budget is not subject to any independent review. There are no checks and balances on its rule making or its supervisory effectiveness, much less how it spends money.

The Nut Of The Problem: No Organization Changes By Itself

The fundamental problem is not insurance fund design, NOL levels, or even operating expenses. The core problem is that the NCUA board is accountable to no one. Its budget is not subject to any independent review. There are no checks and balances on its rule making, its supervisory effectiveness, or even how it spends money.

When some actions require a pro-forma administrative request for comments, the board just rejects recommendations it doesn’t like. The Office of the Inspector General provides no management oversight. Its audits and material loss reviews are perfunctory and provide no meaningful insight or analysis.

NCUA board members routinely assert their independent status from the administration’s directives. On broad governmental policy issues such as pay rises, freezes on hiring, or contingent legal contracts, the agency has proclaimed its independent nature by exempting itself from those decisions.

One might expect board members to acknowledge responsibility to the credit union constituency that funds them. However, the board proceeded to merge the TCCUSF despite receiving 650 comments, of which 98% opposed the action in whole or in part. The board changed not a single aspect of its initial proposal. The comment process was merely a fig leaf to cover a predetermined plan. This behavior echoes exactly the board’s unilateral actions during the 2008-2009 economic crisis

Board Dependent On Staff

No one is minding the store at the NCUA. Board members are so dependent on staff’s views that they appear unable to develop their own perspectives. The board may propose policy initiatives, but meaningful change, such as cost control, is always somewhere in the future.

Because the board is not accountable, it does not hold staff accountable. All management oversight has been delegated to staff. No professional broke ranks during the 2008 crisis to challenge the board’s dereliction of duty. Many of these staff professionals hold even higher office today.

With the current structure of two board members, the agency has, in effect, co-chairs. No policy or real structural change can be made without the approval of both members.

The status quo continues, with no end in sight. The consequence of this bureaucratic inertia and self-dealing is that the NCUA will end up paying more to the outside attorneys than to the credit unions that suffered the losses and funded the bailout.

The NCUA has interpreted its independent status as involving no responsibility to the organizations they regulate except their self-determined role. This is a slippery slope to authoritarian behavior, not democratic leadership.

The unique cooperative democratic structure of common wealth, not private ownership, creates an unusual challenge for regulators, CEOs, boards ? all stewards of members’ collective capital.

Both the legacy and the future of cooperative structure are prone to manipulation that benefits current leaders at the expense of their constituency’s well-being. The temptation is to presume that fiduciary funds are theirs to do with as they will, not for the members.

The NCUA has interpreted its independent status as involving no responsibility to the organizations they regulate except their self-determined role. This is a slippery slope to authoritarian behavior, not democratic leadership.

The NCUA has repeatedly shown its inability to change itself, no matter the political leanings of the board. It carefully avoids the feedback that public assessments and fee increases would bring.

The agency is an organization unable to learn from its mistakes, because there are no pressures to do so, or to even acknowledge that mistakes were made.

The Need For Public Speech

The first priority is for credit unions to step up to the platform-wherever that may be. If credit union leaders cannot articulate their own concerns or desired futures, neither legislators nor the public can be expected to do it for them.

The late Ed Callahan, aforementioned former NCUA chair and CEO of Patelco Credit Union, had specific recommendations for oversight of the NCUSIF:

• Track whether the fund is operating on its interest income; if there are increases in operating expenses you must start asking what they’re doing with your money.
• Review what the fund is paying out to resolve problems. Are the NCUA’s actions increasing losses or reducing those prospects? Are they resolving problems or just trying to walk away by merging or liquidating them?
• Are you getting a return on your deposit, especially in years (like 2016) when insured losses were minimal? Why not?

This speaking out will become political. It might even prompt an NCUA effort at real dialogue. For the NCUA’s failings are not just of will, but also of imagination. For example, what if the NCUA had asked the industry for suggestions about using the $2.5 billion for the greatest benefit of the cooperative system. Think of the creativity this might have spawned.

Imagining The Possibilities

What if the NCUA, state regulators, and credit unions could announce the goal of starting 250 new credit unions in a year with $1.0 million seed capital each? The target could be communities with no locally owned financial institutions (credit deserts) to jump-start local ownership and development. The enthusiasm would be contagious and potentially inspiring to the hundreds of credit unions that feel beaten down by regulators and events. There would still be $2.25 billion remaining.

Bring in the millennial generation by identifying 20 campuses where the business department, faculty, and administration will cooperate to start a college credit union to teach students proper monetary management and provide a source of credit.

Or maybe the investment could be in CUSOs that would jump-start special lending needs that smaller credit unions are unable to easily do on their own — think small business loans to Main Street.

What entrepreneurial spirits might be loosed with members if there was a cooperative kick starter with capital to seed member startups under the local credit union auspices?

The power of cooperative designs is limited only by one’s imagination. Keeping $2.5 billion in government bills is the antithesis of the creativity empowered by human passion.

Time To Take Action

Today’s NCUA is non-responsive to its constituents, credit union members, and the unique purposes mandated for a cooperative financial system. This is a long-standing challenge. Without voluntary change then structural options are vital. The dual chartering system, a meaningful option in many states, must assert its independent, innovative capabilities.

Congress recently considered legislation that would place the NCUA’s annual budget under congressional approval. Public speech includes lawmakers in Congress and your state capitals. Now seems a particularly good time to present arguments for real regulatory reform.

The NCUSIF model is not broken, but it lacks the leadership and accountability that should be the hallmarks of a cooperative insurance fund supported by 1 cent for every dollar of every member’s insured savings.

It’s time to be public with these shortcomings and seek new means of board oversight which, if lacking, will justify externally induced change.

Also read: Seek Change From The NCUA

This is the fourth in a series of articles analyzing the NCUA’s closing of the Temporary Corporate Credit Union Stabilization Fund (TCCUSF) and retaining the majority of surplus funds for its own use. Read Part 1: The Most Important Audit Ever. Read Part 2: Smoke And Mirrors At The NCUA. Read Part 3: Save The NCUSIF Model From The NCUA.