Hoping for the Best; Fearing the Worst

By Mary Arnold

Tuesday at CUES' CEO/Executive Team Network in Orlando was "think-outside-the-box" day for me. I know that's a worn-out phrase and I resisted using it when I filed my article that night for Wednesday's post on cues.org. Yet, here it is, still in my head.

We started "think-outside-the-box" day by hearing from Bucky Sebastian, CEO of $1.9 billion/204,000-member GTE Federal Credit Union, Tampa, Fla., about his idea for a new financial services cooperative charter that CUs could opt into. We wrote about it here, so I won't go into all the details, but the general idea is that CUs that moved to this charter would get open fields of membership, access to secondary capital and greater business lending authority, in exchange for complying with the Community Reinvestment Act and being subject to taxation.

After Bucky's session we heard from a Canadian attendee who said this charter vision is similar to Canada's current credit union structure. And in an extended workshop on charter choice, Richard Garabedian, a partner in the Washington, D.C., law firm of Luse Gorman Pomerenk & Schick, P.C., pronounced Bucky's proposal to be very similar to a mutual savings bank charter.

I'm sure there are similarities, but I don't think either structure includes the cap on CEO compensation at 20 times the average employee total compensation that Bucky is suggesting.

Next, I listened to what for me was a very sobering extended workshop led by Pete Duffy, associate director of Sandler O'Neil and Partners, L.P., New York. Even though I headlined my coverage "The Best of Times and the Worst of Times," it was the worst-of-times part that really hit me because I had not heard it before.

The best-of-times piece refers to the marketplace opportunity that still exists for credit unions to fill both the credit and the consumer trust vacuums that exist in financial services. Hanging over healthy CUs' heads, however, is the unknown cost of corporate stabilization and potential losses from large natural person credit union failures, Pete said.

In spring, NCUA ran a stress test on the insurance fund, releasing the results in late September. Based on his firm's analysis and that of a third party, Pete thinks the projected losses are on track. Here's what NCUA's results looked like: The analysis "produced an allocation of $32.6 billion in losses resulting in 38 failures with a maximum exposure to the NCUSIF of $577 million using the baseline assumptions," which don't include effects of corporate write-downs.

But if losses are being projected at $32.6 billion, why would the maximum exposure to the insurance fund be only about $.6 billion, or less than 2 percent of estimated losses? Answer: "NCUA is expecting large healthy credit unions to merge in the wounded ones," Pete said. Barring that, the agency would assess all federally insured CUs for the shortfall.

Pete called this possibility "an unlimited contingent liability on your capital," and estimated that $32 billion would equal 500 basis points over five years. "It is imperative that you recognize the need to understand and quickly deal with the risk the system represents to both your CU's capital and its future," he said.

After that, I half expected the second run of Luse Gorman Pomerenk & Schick's charter change workshop to be packed. It wasn't. I'm still not sure if that is good or bad. Obviously, I would hate to see CUs switching charters en masse, but I do want to know leaders are seriously considering the potential threat to their capital.

CUES member Henry Wirz, president/CEO of $1.5 billion SAFE Credit Union, North Highlands, Calif., took the coverage of Pete's sesson seriously enough to write a response, which we've published today on cues.org.

Among other things, Henry wrote, "The financial crisis could be a great opportunity to create a new credit union system. But in fact the rebirth that is occurring is usually the result of merging very unhealthy credit unions into a healthy credit union. The healthy credit union has to dedicate one year's business plan to the merger. The healthy credit union has to use precious capital. The healthy credit union has to forego other business plan initiatives to focus on the merger project. And a merger of two $50 million credit unions does not create a $100 million credit union organization or culture—it just creates an oversized $50 million culture and an organization that takes years to transform."

Later, he said, "There are some better options that will give birth to a new credit union system. The economic crisis is going to destroy the old and clear the way for something new. We should resolve to build something better than what we have." Read his ideas here.

On Wednesday, Chip Filson, president of Callahan & Associates, Washington, D.C., closed CEO/Executive Team Network. In some ways, his remarks about credit unions' record loan and share growth and extraordinary opportunity to provide a "countercyclical" force in today's economy reminded me of Pete's "best of times" opportunity thoughts.

However, Chip would not have agreed with Pete's nor NCUA's estimates of impending credit union losses. Back in the office yesterday, I Googled "NCUA stress test" wondering what others were saying about it. I found an article called "Time for the NCUA Board to Ask for Some Real Numbers and Undertake a Policy" on Callahan & Associates' Web site, creditunions.com.

While everyone doesn't agree on the numbers (be sure to read what Chip had to say), I think many could agree with this: "Cashing out problems at the lowest point of value resolves nothing. It merely shifts the burden of failure to the merged credit union or across the whole industry. Anyone can hold a garage sale," Chip wrote.

Mary Arnold is VP/publications for CUES.