Under Capitalized, Under Led

Looking Back....

In 1915, North Carolina adopted one of the very first state statutes governing the formation and operation of credit unions. Pretty progressive stuff for a bunch of unsophisticated "good old boys" from the backward South - wasn't it! Perhaps they just weren't smart enough to know any better; perhaps they just got lucky! Who knows?

Well, what we do know is that the 1915 credit union statute was authored and shepherded through the North Carolina Legislature by John Sprunt Hill, the patriarch of one of the wealthiest and most prominent banking families in North Carolina. Not exactly your barefoot-in-overalls type of guy to be sure! In fact, the credit union law was the direct result of Mr. Hill's then recent travels in Europe studying credit unions and other forms of cooperatives. Mr. Hill happened to be in Europe leading a United States delegation of national financial leaders appointed by President Woodrow Wilson. They learned well; they liked what they saw!

New idea....?
Not at all!

The principal thought and underlying foundation of the 1915 North Carolina credit union statute was: "The capital of a credit union shall consist of the payments that have been made to it by the several members thereof on the shares." 

As with all other cooperatives, the credit union was to be a shared ownership organization. Shared ownership, shared risk, shared purpose, shared rewards, and shared financial responsibility. Pretty cool, huh?! What a powerfully original idea - a member-owned and member-controlled financial institution!

Under the 1915 law, one of the principal duties of a credit union board of directors was to set "the par value of shares of capital stock." Additionally, a credit union board had the duty to determine "the manner in which the reserve fund should be accumulated" and the power to declare dividends in "good times" and to assess a reduction in share value when operating results were less favorable. Shared ownership, shared risk, shared financial responsibility. A cooperative financial institution, capitalized by member-owners who were financially "at risk", financially liable, and financially responsible for its safe, sound, and prudent operation.

Don't worry being a cute, little co-op
will protect you...

Fast forward 98 years or so! Today the Credit Union Movement stands on the beach - Bambi in the headlights - watching the worst financial tsunami in over a half century roll unrelenting over us.  While other financial institutions frantically raise capital in search of higher ground; doe-eyed Bambi credit unions await, on the economic beach trembling in the headlights!

How did this happen? Why do all other federally insured institutions have access to risk-based and supplemental capital? Why does the rest of the global cooperative movement uniformly have access to alternative forms of capital?  Why are natural person, federally insured NCUSIF credit unions the only insured depository institutions without access to these basic safety and soundness measures? How did we outsmart everyone else?

Spot any suspects?

Three groups led us into this position of extreme danger. Credit union managers (you and me!) have failed to make capital the preeminent  legislative issue for credit unions. We have failed through ignorance, indifference, or ineffectiveness. There is, at this point, more than enough blame to share all around!  

But, for those who have argued against modern capital measures, because of "loss of tax exemption", "loss of voting rights", "loss of control", "loss of member ownership", etc.; the experts say you're dead wrong.  Who are the experts? - the IRS, major CPA firms, Philadelphia lawyers, all other federal regulators, NASCUS, cooperative principles, legislative history, and the rest of the world!  And now you can add the hard, cold, dangerous reality of an economic collapse...

Capital Leadership?

Our regulators, too, can share credit for our vulnerability. Perhaps they were too proud or suffered from an unflattering focus on politics, precedence-over-prudence, or simply  their pensions. They never seem to have enough time to do what is difficult, but plenty of time for one-way webinars and "guidance" love letters.  Believe it or not most of us are aware, without guidance,  that the sun comes up in the east.  Their lack of ability to convince Congress, in the midst of this financial debacle, on a fundamental safety and soundness issue for the Country may speak volumes about their credibility on Capitol Hill.

Peacocking?

And, lastly, our trade associations have found courage to lead only on matters of little import - lip service aside - and with startlingly little success even on the crumbs. Peacocks, punditry, poppycock, and political pageantry - leadership of growing irrelevancy.

But don't despair! In the best tradition of that original 1915 credit union concept, we all will share the risk, share the liability and share the responsibility for this financial disaster. Why? Because one segment of the Credit Union Movement does have access to risk-based, supplemental capital - the NCUSIF, with an unlimited ability to assess and then assess some more... and absolutely no "fall-on-your-sword" accountability for its failures. 

Always wanted to learn how to swim, naked in a tsunami, haven't you?