There's Nothing 'Fuzzy' or 'Clouded' About Alternative Capital Initiative
The three letters that appeared on page 10 of your Oct. 12 edition exhibit three completely different levels of understanding of the issue of alternative capital for credit unions.
Jay Johnson (Unfuzzy CU Math: Additional Capital Options = Loans 'Multiplied Many Times') hits it out of the park (baseball playoff time calls for baseball analogies)! He understands that alternative capital can be structured so that the ownership rights of members are subjugated and that with proper disclosure it would not create undue risk to members. In fact, as Jay suggests, member capital options will enhance the cooperative model. He accurately points out that "a single dollar in member capital can be multiplied many times in loans."
Swings & Misses
Timothy Richey (Fuzzy CU Math: Current Proposal Shifts Capital Around Instead of Building More) takes some good swings but doesn't make contact on all of them. Alternative capital will not shift capital-it will create new capital. When a member invests in a qualified instrument the CU will be able to count that as capital, thus directly increasing the capital in the credit union. Whether that investment is a form of subordinated debt (likely at a higher rate than insured deposits to match the additional risk), some type of capital shares or any other form that NCUA approves, it will count as capital and increase the net worth of the credit union. No doubt there will be requirements for levels of retained earnings and some restrictions on the amount of alternative capital that will be allowed, but make no mistake, alternative capital can improve credit unions' capital position, enable us to do a better job of serving our members and improve the safety and soundness of the NCUSIF.
I do appreciate Mr. Richey's desire to allow us to raise alternative capital from outside investors. Many of us agree with that position but it is just not possible to make that happen at this time. Such a proposal faces likely resistance from legislators, regulators and the administration. In addition, some segments of the credit union community would oppose this option and to get this, or any, legislation passed will require a unified effort of substantial measure. And it's pretty clear that the coming months, with the current appetite for regulatory changes being so strong, will create the best opportunity for legislative action that we will have for many years. As to the thought that members aren't sophisticated enough to understand this concept, don't underestimate the intelligence of our members. I've talked to many in recent months who are very knowledgeable and who would consider an uninsured option.
Michael Dillon (Clouded CU Leadership: Why Alternative Capital Shouldn't Be Our Focus) just can't seem to catch up to a major league fastball. He suggests that alternative capital "sows the seeds of polluting our insurance fund" (he actually uses those words). Alternative capital instruments will not be insured. How does that cause any harm to our insurance fund? On the contrary, with appropriate use of alternative capital, credit unions will increase net worth. Isn't that a good thing for our insurance fund? Mr. Dillon adds that "it potentially overturns the egalitarian proposition that has served us for so many years that all members are created equal by creating a preferred class of members." Despite the flowery prose, that's just not true. The proposal sent to NCUA clearly states that any alternative capital must not "alter the cooperative nature of the credit union, including, but not limited to, members' ownership and control of the credit union." NCUA board members and staff have consistently insisted that this be part of any alternative capital initiative.
The other argument that Mr. Dillon uses is the most insidious. He states that it "only serves the very largest credit unions." Now I should acknowledge that I work for one of those large credit unions that operates on the west coast of Florida and is suffering through a severe and protracted economic recession (and yes, we would hope to be an early adopter of alternative capital). But if anyone thinks that all credit unions aren't suffering from this economic downturn and the resulting credit union losses, you're just not paying attention. There are a record number of credit unions, both large and small, below the 6% or 7% net worth benchmarks. There are many others, large and small, at all net worth ratio levels that have reduced benefits and services to members for fear of future losses that would move their net worth closer to 7%.
We have a huge bill facing us for the corporate losses, past and future. We have a real possibility of substantial natural person credit union losses in the coming years (Chairman Matz said as much before Congress last week). Who will pay for all of this? You can bet it won't just be the largest credit unions — it's going to be all of us. If we don't come up with a better option for growing capital, the credit union community will be digging out of this massive hole for many years to come. Forget about growth, we risk becoming irrelevant!
The proposal before NCUA isn't perfect but it is the best shot we have at expanding our capital options. Let's not waste the opportunity!
Tom Dorety, CEO
Suncoast Schools FCU, Tampa, Fla.
LETTERS TO THE EDITOR
Credit Union Journal encourages reader feedback. Letters to the Editor can be sent to Managing Editor Lisa Freeman at firstname.lastname@example.org. Letters can also be faxed to 561-832-2939.