June 7, 2004


Comments

 
 
 
  • I agree with the idea but the logic is flawed. Dividing the equity built up over the years among the existing members presupposes that all existing members contributed to that equity. in reality, some of the members may be entitled to some money, deceased members' estates may be eligible for some, yet there may be others that actually "owe" the credit union money because they were unprofitable. It is not unusual at any given time to have a 40/60 split between profitable and unprofitable members. Following the course of action suggested above, while noble in concept, is overly simplistic thinking.
    Anonymous
     
     
     
  • If members own a "share" of the credit union (and how you equitably allocate that to borrowers vs. depositors is dubious) than that is exactly what they should get in return for their ownership stake...shares in the new company. The solution suggested in this article would effectively make it impossible or undesirable to convert, which is probably the intent. Making boards and/or management rich isn't the only reason why conversions are becoming popular - it's also for the much needed access to capital. So we have some choices...change the the way CU's can raise capital or find a way to convert without unjustly enriching volunteers and CEO's.
    Anonymous
     
     
     
  • Very well put. However, there are a couple of issues that we need to keep in mind. First is the fact that some 'banks' are as much of a cooperative as a credit union. Least we forget, there are several 'cooperative banks' in the U.S. If a credit union converts to a thrift with mutual ownership, it still operates as a cooperative (i.e. credit union). If the mutual then converts to stock ownership, then I think the capital distribution has merit. I am hoping there will come a time when we can embrace the mutual thrift ownership model into the 'cooperative (credit union) movement. Secondly, if you follow the argument through to its logical conclusion, a case could be made for ANY change in the charter; State to Federal, Federal to State, even a merger could call for a distribution of the capital.
    Anonymous
     
     
     
  • The majority of credit union net worth has been accumulated in the last decade at progressive institutions run by skilled managers - not over 50 years. Members contributing to the net worth buildup can vote, others have moved on - abandoning their interest by moving their deposits. Paying out the net worth would cause the collapse of the entire mutual system and the wholesale shifting of funds. For the slightest premium, most would agree members would quickly vote to liquidate. The typical member sees very little value to a cooperative charter. Since 1974, Congress has banned giveaways in connection with mutual-to-stock conversions. Courts have declared that a member's mutual interest is inchoate. The process of conversion to a mutual preserves the ownership and allows for further conversions and capital raising only after another vote supervised by the OTS and/or FDIC. It preserves credit union values and independence while solving many problems related to the credit union structure. Your superfluous attempt at creating distinctions between credit unions and mutual banks on the topic of ownership is just another angle to argue for the tax subsidy, stop conversions and maintain the status quo.
    Anonymous
     
     
     
  • I prefer your fact-based articles as opposed to "editorials"
    Anonymous
     
     
     
  • I certainly agree with you and hope your views become more wide spread. In fact legislation supporting your view might be a good thing for all members. Ralph Moore
    Anonymous
     
     
     
  • Well-reasoned. Would Callahan's print a coherent article that articulates the the opposite point of view?
    Anonymous
     
     
     
  • Very well put. Unfortunately, for those who need to hear it most, it may fall on deaf ears. Using the Columbia Credit Union example, that particular board doesn't doesn't consider its members to be owners - at least that is their legal argument.
    Anonymous
     
     
     
  • Ed and Bucky, What a great idea! Membership should mean more than just a vote. This gives real meaning to member ownership. Credit Unions need to give the members another tool to reinstate their ownership rights. A credit union can dissipate its capital while providing poor service to its members and the members are powerless except to withdraw their savings and move to another financial institution. In the for profit world, institutions that are performing badly can be bought out or acquired. Credit Unions that have built up a large capital base can operate for long periods of time before the market place forces changes. This is just another means of misappropriating the member's capital. Credit Unions need to come up with a market place discipline or governance tool that forces out bad manaagement and bad boards of directors (they usually exist together). What happened at Columbia Credit Union shows how difficult it is for memgbers to remove bad management. If our intent is to give member's the means to own and control their credit union and to protect the capital they have built over the years we need to make changes. What if we gave members access to information on merger offers? Stockholders can vote their shares in a public company? Why not let members evaluate merger offers?
    Anonymous
     
     
     
  • Ed and Bucky, What a great idea! Membership should mean more than just a vote. This gives real meaning to member ownership. Credit Unions need to give the members another tool to reinstate their ownership rights. A credit union can dissipate its capital while providing poor service to its members and the members are powerless except to withdraw their savings and move to another financial institution. In the for profit world, institutions that are performing badly can be bought out or acquired. Credit Unions that have built up a large capital base can operate for long periods of time before the market place forces changes. This is just another means of misappropriating the member's capital. Credit Unions need to come up with a market place discipline or governance tool that forces out bad manaagement and bad boards of directors (they usually exist together). What happened at Columbia Credit Union shows how difficult it is for memgbers to remove bad management. If our intent is to give member's the means to own and control their credit union and to protect the capital they have built over the years we need to make changes. What if we gave members access to information on merger offers? Stockholders can vote their shares in a public company? Why not let members evaluate merger offers?
    Anonymous
     
     
     
  • The authors make an excellent point. I have not heard this arguement stated so eloquently before. It is hard to dispute their observations.
    Anonymous
     
     
     
  • The authors make an excellent point. I have not heard this arguement stated so eloquently before. It is hard to dispute their observations.
    Anonymous
     
     
     
  • I would give this article 5 on the "Interesting" scale but only because the case it makes is preposterous. A credit union is not a committee that can be dissolved on a whim and reconstituted instantly. CU dissolutions are driven by distress or, in rare cases, lack of a compelling business proposition (i.e. closure of a sponsor facility). One does not dissolve a going concern -- with staff employed, members at the counter and transactions in flight -- and then expect to reconstitute it from scratch without missing a beat. Aside from the absurd premise, the article also carries a number of misrepresentations about what actually happens in a CU-to-thrift charter conversion, such as: (1) "appropriation" of the equity [it doesn't go anywhere, and the members remain customers who benefit from the capital strength of the institution]; (2) putting that equity at risk [all capital is at risk in any business venture -- that's the point of capital]; (3) luring more capital benefits the boards and managers [insofar as the institution is strengthened, it benefits all employees and customers; and (4) members of the old CU are relegated to bit players [they have full ownership and control as long as the instutution remains a mutual, and will retain control even when new capital is raised in the form of a minority stock offering under the mutual holding company structure]. Readers of CREDITUNIONS.COM deserve better work than this from its own publisher.
    Anonymous
     
     
     
  • The conclusion reached that equity should be distributed to members is flawed on many counts: 1. The members have to approve a change in charter which tranfers equity to the new entity. If this distribution is unfair, the members should disapprove the change. 2. The equity has been built up over many years. Any distribution to members would thus not be fair in that a recent member would get a disproportionately high amount while prior members would get nothing. 3. The argument is made that the very boards and managers who pressed for the conversion are the ones who will benefit most. Who do you think benefits most in a credit union? Managers of course. They are the ones who get the fat salaries, benefits and perks, and the ones who perpeturate themselves in office. Historically in a changed charter situation members who became shareholders have profited dramatically from their stock holdings. 4. Face it - the ones who benefit in any group situation are the ones who resist change. In this case, it's the managers and boards of the credit unions, the regulators, and the publishers of credit union data.
    Anonymous
     
     
     
  • The conclusion reached that equity should be distributed to members is flawed on many counts: 1. The members have to approve a change in charter which tranfers equity to the new entity. If this distribution is unfair, the members should disapprove the change. 2. The equity has been built up over many years. Any distribution to members would thus not be fair in that a recent member would get a disproportionately high amount while prior members would get nothing. 3. The argument is made that the very boards and managers who pressed for the conversion are the ones who will benefit most. Who do you think benefits most in a credit union? Managers of course. They are the ones who get the fat salaries, benefits and perks, and the ones who perpeturate themselves in office. Historically in a changed charter situation members who became shareholders have profited dramatically from their stock holdings. 4. Face it - the ones who benefit in any group situation are the ones who resist change. In this case, it's the managers and boards of the credit unions, the regulators, and the publishers of credit union data.
    Anonymous
     
     
     
  • Should be sent to all CU CEOs.
    Anonymous
     
     
     
  • Your article on CU conversions was right on target. My approach on the conversions for some time has been if the leaders of a credit union want to have a bank that is fine. They should resign from the credit union, obtain investors and start a new bank. I have not understood why it is ok for the leaders of a credit union to "take" the members' equity and start a bank with the funds. If credit unions are really a financial cooperative that are owned by the members, then the equity belongs to the members and should be returned to them when the organization ceases to be a credit union. At least the membes should have the option of either receiving their share of the equity, or receiving stock equal in value to their share of the equity. The funds or shares should be equal for all member/owners of the credit union. Please keep exploring this issue and how we can enact the necessary legislation or regulations to protect the members' interests. Pat McPharlin President/CEO Michigan State University Federal Credit Union
    Anonymous