The soap opera-like drama surrounding credit unions converting to mutual savings banks has been a major story in the trade press in recent months. Many long-time credit union advocates are understandably distraught about these conversions, and overwhelmingly cite board and management greed and self-interest as the driving forces behind these actions. There is a problem with this oversimplified analysis.
In America making money is revered as long as it is not illegal. Although some converting-credit union officials can be accused of poor judgment and flawed implementation, none have yet been jailed for criminality. No matter how one looks at it, this credit union-to-bank conversion trend is not a pretty picture if it represents the future for the credit union charter. But where there is a bright light to be found is in the credit union community recognizing and understanding the underlying significance of dramatic developments like these conversions, as well as their ramifications, rather than ignoring them.
The fact of the matter is that existing laws and regulations support these conversions. The ability to convert charters from one type of institution to another is entrenched in U.S. financial institution public policy implemented during the 1980s and 1990s as a significant part of the solution to the savings and loan association debacle. These days a savings and loan association is hard to find, since most of the healthy ones converted to banks following that mess.
The current focus on the charter conversion greed factor is a straw man argument that distracts the credit union community from the real issue. The current state of the credit union charter, especially its inability to reconcile the compelling need for growth and the capital required to support it, is the real root problem. We can point our collective finger at restrictive Prompt Corrective Action (PCA) requirements or at the cooperative organizational structure's impediments to obtaining outside capital to fuel growth, among other causes.
Capital, and its cousin, Net Worth, should be on the strategic radar screen of every thoughtful credit union official. Having too little capital, and conversely too much capital, are certain to cause the credit union problems. Having too little capital stymies a credit union's ability to be competitive and fully serve its members. Too much capital makes it a highly prized target for conversion, involuntary liquidation and merger.
Consider one potential problem associated with having too much capital. Consulting firm Callahan & Associates recently released statistics about the top 100 in net worth to assets ratio for credit unions over $50 million in assets. The ratio in these 100 ranged from 15.68% to 45.73%. With credit union share certificates paying as low as they are these days, it is certain that there are lots of fixed-income retirees wringing their hands with worry about their lifetime savings and investments. Recognizing that individual self interest is such an overwhelming human motivator, it is only a matter of time before thousands of retired credit union members mobilize to cash in on the equity that they helped develop over the years at their respective credit unions by initiating voluntary liquidations.
Once these earnings-impaired credit union member retirees learn how easy it is to force a voluntary liquidation vote at one of these high-net-worth credit unions and get their hands on a piece of that pie, many will do so. Even with the expenses of a special membership vote and subsequent liquidation, the one-time liquidation dividend on these retiree members' savings would dwarf the credit union's certificate rate. The retired members could then move their newly swollen savings accounts over to another high-net-worth credit union and start the voluntary liquidation process all over again.
Now that the mutual savings bank conversion trend is picking up steam, these credit union member retirees have additional incentive to move quickly for liquidation dividends before their credit union converts. Rather than let conversion insiders become the only ones cashing in, everyone can get something sweet. CUs may soon see a groundswell of retiree grassroots enthusiasm for this moneymaking strategy. It could become a serious socio-economic movement.
Imagine the potential impact of a voluntary liquidation consultant's full-page advertisements in the AARP magazine urging member retirees to join the new organization called Save Our Retirement Earnings (SORE), whose sole focus would be to voluntarily liquidate high net worth credit unions. It would then be only a matter of time before SORE-sponsored late night television spots appear announcing..."You may be eligible for big bucks if you are currently a member of a credit union. Join us and cash in on the equity that belongs to you!"
Perhaps you will accuse this writer of moving from the serious to the absurd. Don't laugh. Stranger things have happened when market forces and individual motivation collide. It is yet to be seen whether these credit union-to-bank conversions will have a lasting effect upon the future of the credit union charter. Regardless, let's not take what credit unions have for granted. Stay focused on what really matters and fix the credit union charter before it disappears.
A 29-year credit union community veteran, Marvin Umholtz is President & CEO of Umholtz Consulting Services located in Castle Rock, Colorado. He can be reached at mumholtz
