The Great Debate Over Who Owns The Capital?

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One of the biggest debates going on amid credit union circles during the annual congressional hiatus is over the growing number of converts to banks. But what is driving the debate more than the philosophical issue is the handful of those converts that are then flipping over to publicly owned entities through initial public stock offerings. The major bone of contention in these cases surrounds the capital of the converting credit union: whose money is it?

In other words, the members of a credit union build up $15 million in net capital over, say, 65 years of existence. To whom does that money belong?

To purists, the answer is simple. That money belongs to the members, those people who helped build it up over the years. They say there is something unseemly, even unethical, about a credit union converting to a mutual savings bank, then selling itself and its major asset, its pool of capital, to outsiders. They say there must be some mechanism to pay the capital out to the members, such as through a pro rata dividend or liquidation, before the ultimate sale of the institution to the public.

But there are several problems with this argument.

First and foremost is the fact that once their funds go into the capital pool members are rarely given an opportunity to get them back, even when the institution remains a credit union. Credit unions rarely dip into their capital to pay members. When a long-time member retires and goes to Florida, taking his credit union savings with him, a credit union generally doesn't give him back his pro rata share of the pool. He leaves that behind, no matter how much of it he was responsible for over the years. From a practical point, how would you pay out that member, anyway? How would you determine his fair share of the funds? You couldn't.

Likewise, when a credit union is merged or liquidated, it doesn't distribute its capital, except in very rare cases when the regulator approves a liquidating dividend, or if there is something left over after creditors, usually the NCUSIF, are paid off.

No, the members' ownership rights to that capital pool is mostly theoretical. In practical terms, members don't have rights to the capital no matter how much of it they have put into the credit union.

At least in the case of conversion to a bank (thrift?), the member-depositors/owners still have use of that capital. That use, of course, is to satisfy regulatory requirements, provide a potential for growth, and for safety in case of a rainy day. Managers who have undertaken this process boast that when they take a converted credit union public they aim to give the former members and/or current depositors first crack at buying the stock. This is no small matter, since these issues often have great run-ups after their initial offerings, making huge profits for the members/depositors, as well as the managers and directors. At least on paper.

The capital still belongs to the former credit union members, but has been put to a new use, which in most cases is to finance a more active expansion. The money hasn't been stolen, as some credit union purists claim.

This is not to say whether these conversions are good or bad. I tend to like the credit union model and think if you want to direct or manage a bank, then you should leave your credit union and go find work at one. But the question of who owns the capital upon these conversions is an irrelevant one. It is still being used by the institution, albeit a differently structured institution, to its benefit, as well as its owners.

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