WASHINGTON -
The consternation in the credit union movement was palpable as observers first watched Community CU, at $1.4 billion, then OmniAmerican CU, at $1.2 billion, and DFCU Financial, with almost $2 billion in assets move to shed their credit union charters. And the organized credit union movement was scratching its head on how to slow the trend.
NAFCU, CUNA and the leagues had been reluctant to intervene because CEOs and directors that ultimately pay dues resent outside influence in their internal workings.
Enter a couple of CEOs of huge credit unions, who decided there was no better place to gather support for an independent initiative to address the issue than the GAC-where some 4,000 credit union executives, volunteers and vendors gather annually. The two, Jim Blaine of State Employees CU, and Bucky Sebastian, of GTE FCU could be seen throughout last year's GAC buttonholing people in the hallways for their support.
Thus was born the National Center for Member Trust, which got off the ground with initial pledges of as much a $250,000 in a few short days. Since then, the center has been involved behind the scenes in support of members, helping to turn back efforts to convert DFCU, and more recently, Lafayette FCU, a $330-million CU in suburban Washington.
"We wanted to be a resource," said Sebastian, one of the original partners in Callahan & Associates and former general counsel at NCUA. He said at the time there were no resources available for rank-and-file credit union members to obtain full information from the credit unions in conversions, as well as other change of structures.
Blaine, head of $14-billion SECU, sees the purpose of the Center more broadly, one that will protect the charter of cooperatives. "The change of control process is well worked out in the for-profit community; there's a process set out for due diligence; the rights of the owners; fiduciary responsibility of the board and the management; a determination of fair value. There's a lot at stake these days, whether you sell or when you convert," said Blaine.
Blaine was talking about the net worth of the credit union, which he believes the conversion to mutual savings bank-then to stock form-allows outsiders to steal from the long-time member/owners.
The issue of who is entitled to the net worth, of the converting CU, is one that troubles Blaine, as studies have shown how a handful of insiders-management and directors-end up with effective control of the institution once it makes the journey to publicly owned bank.
The same studies have shown that millions of dollars in stock, stock options and cash bonuses have accrued to many of those insiders-money that is not available to the rank-and-file member of those CUs.
Blaine likens it to a corporate raid in which cash reserves held by a corporation are targeted by raiders, who then divvy up the money as special dividends or other payment after they win control of the company.
He figures that the average credit union has $1,000 in net worth for every member. "And financial institutions generally sell for two times their net worth," said Blaine. "That's a lot of money."
Not surprisingly, the positions of the two credit union CEOs was questioned by representatives on the other side. Robert Freedman, the Washington lawyer who has converted most of the 35 or so credit unions to mutual savings banks, is one. "I think they're a group of guys who on the one hand are worried about they're own credit unions converting, and they have an axe to grind," said Freedman, partner in Washington's Silver Freedman Taff. He said if credit unions really are a democracy then the judgment of the boards of directors who are voted in by members and management in each credit union should be respected. "I believe that they're doing a disservice to the boards and I believe that they're blocking the ability of members to get the real truth about conversions."
Freedman criticized the regulatory process, noting that NCUA vigilantly monitors the statements and publications of each CU during the conversion, but not of the small groups of opponents that have emerged in recent cases. In fact, there is very little oversight of what opponents can and do say and print. He was referring to the cases of Lafayette and DFCU, where the center helped organize opponents who posted daily blogs, organized petition drives and, in the case of DFCU bought advertising, to help defeat the conversions-all without publicizing their role.
First-year expenditures amounted to about $500,000, with about half of that going to pay for an ongoing series of ads in the Capitol Hill newspaper Roll Call running through May.
Most of the rest was spent on legal expenses to support opponents in the two cases, both of which have ended up in the courts. DFCU Owners United, the group fighting that credit union conversion was also provided funds to take out ads in local media. Some of the legal expenses were paid to Steve Bisker, a former counsel at NCUA who has been working as a credit union attorney in Alexandria, Va., since then. Bisker has been involved behind the scenes in several of the legal battles over credit union conversions, including Lafayette, DFCU and Columbia CU, in Vancouver, Wash. Bisker has developed a template that uses a CU's bylaws to petition for a removal of the board. The recall has yet to succeed, but at Columbia CU, for example, opponents of the conversion gained control of the board by either resignations or retirements of individual directors. Sebastian said they rejected requests to get involved at Columbia CU, because they thought the fight was no longer about the conversion. Sebastian and Blaine see a permanent role for the Center, with its own office, someone to run it, and resources to help members of cooperatives, not just CUs. Among the near-term projects is a research paper into the viability of so-called poison pill bylaws that will make it tougher to embark on a mutual savings bank conversion.
"This is not anti-conversion," said Blaine. "If you do this process right, if people are well-informed and given the opportunity to vote and evaluate their options, then let them vote. But that's not the way it is."
