Unanswered Question: Who Owns Capital?
Last week's initial public offering of converted credit union Rainier Pacific Financial Group, parent of Rainier Pacific Bank, has raised the debate over who has ownership rights over the former credit union's capital.
Many in the credit union movement argue that the capital, which represents years of retained earnings, belongs to the credit union's members, who build it up, and that those funds should be distributed before the institution, along with its capital pool, is sold to the public.
Steven Bisker, a well-known credit union attorney in Alexandria, Va., insists that members of a credit union should have the ability to vote on the liquidation and distribution of the capital at the same time they vote on conversion of the credit union to a mutual savings bank. "If the members want to convert and cash in, then let's divvy it up and distribute the retained earnings on a pro rate basis," said Bisker, long a critic of credit union conversions.
The concept of a liquidating option interests Bill Hampel, chief economist for CUNA, who is also an opponent of credit union conversions. But, noted Hampel, such an option is impractical because it would invite members to go from credit union to credit union to ignite a self-liquidation, creating havoc in the credit union movement.
But to those guiding the conversion process such a liquidation is problematic. "In a perfect world, the credit union member has the right to those retained earnings," conceded John Hall, president of Rainier Pacific Financial Group, the former credit union-turned bank. "But how do you decide who is entitled to those retained earnings? If you were there from day one of the credit union and every penny in retained earnings was earned while you were there, than that's easy enough. But this is an imperfect world. How do you allocate it?"
In the case of Rainier Pacific, capital soared from $32.5 million on Dec. 31, 2000, the last day it was a credit union, to $43.5 million at June 30, 2003, as millions of dollars in new deposits flowed in during the second quarter of the year to make depositors eligible for last week's IPO.
"It's nonsense, the regulators aren't going to let you do it," said Alan Theriault, president of CU Financial Services, a Portland, Me., consultant who has helped convert more than a dozen credit unions to mutual savings banks. "As far as giving all the capital back to members, that's not an option.
"The ownership in a credit union is just like the ownership in a mutual-it's fictional. All they (the members) really own is a liquidation right. You can't take ownership in this institution and sell it to somebody else. If you can't sell it you don't own it. All you own is the right to liquidation," said Theriault.