Unlike with mutual thrifts, it can reasonably be argued that roughly a third of a credit union's capital consists of untaxed earnings. Should taxpayers get paid back if an institution chartered as a credit union decides to forego its mutuality and become a public company?
Much has been written in these pages recently about the virtues of charter choice for credit unions. The beleaguered federal credit union regulator, the NCUA, has been excoriated for going to some pretty extreme lengths to "keep credit unions in their fold," so to speak.
"Permit credit unions to convert? Of course!," said the headline in an American Banker article on Feb. 3. But what happens after they become mutual thrifts? Of the 29 credit unions that have converted to mutual thrift charters, 18 subsequently became public companies-probably about the same percentage of formerly mutual thrifts have become public companies.
Credit union managers and others stated that they, too, could support credit union charter conversions, but only if there is full disclosure to members of all the "ownership rights" they risk losing, and if the means is found to assure that the management does not personally benefit.
Some even argue that a prorated share of the surplus should be paid back to members who object to a conversion. But do credit union members really own anything?
They have nothing at risk, nothing they can sell, and their deposits are, for the most part, insured by the federal government, just like deposits in banks and thrifts. They have the right to vote for management and the right to a prorated share of the surplus if there is a voluntary dissolution, but has there ever been one?
Credit unions should be wary of another danger before propounding the notion that their members "own" them. We need to remember the professional depositors ("flippers," they are called) who deposited money in mutual thrifts that they thought were ripe for conversion in the 1980s and early 1990s, so they could subscribe to what they anticipated would be underpriced stock.
Sophisticated investors would doubtless find a way to game the credit union system, too, especially if it is determined that they really do own something of value. After all, as bankers are quick to point out, it's pretty easy to qualify for credit union membership these days.
Arguably what the NCUA and others really want to preserve are institutions that can look at community or membership needs in longer than 90-day segments. Unfashionable as it may be to defend the NCUA, credit unions represent the last great hope of mutuality.
There are still a number of mutual thrift institutions around, including some that are large and powerful, but the industry is hardly what it was 25 years ago. Well over half the thrifts that converted to stock during this period were themselves acquired and are no longer "community banks" in any real sense. But the NCUA and its allies are not going to stop the exodus by requiring more disclosure.
Of course, a credit union should be allowed to convert freely, but a fair public-policy question is whether taxpayers should be reimbursed if it takes the second step and gives up its mutuality altogether.
The recapture of the past tax exemption would have no bearing on a credit union's conversion to a mutual thrift charter or even to a mutual holding company.
Such a company generally maintains the same legal relationships with its previous "members." But if the proponents of a full conversion to public ownership were required to replace taxpayer-provided capital out of an offering's proceeds, they might in turn evaluate its advantages more carefully.
Louis H. Nevins, a private consultant in Washington, is the former president of the Western League of Savings Associations and the former SVP-governmental affairs of the National Association of Mutual Savings Banks. This piece appeared originally in The American Banker.
