This article was very popular when it originally appeared in June of 2004. For anyone that may have missed it, we are reprinting it in light of recent proposed charter conversions.
After having looked at some recent charter conversions from credit unions to thrifts, we believe there is a fundamental flaw in how they are conducted. The flaw lies in the NCUA’s rulemaking authority regarding conversions, the subject of concern being the equity built up in the credit union.
Under current rules, there is a kind of black-or-white finality. If a credit union gets enough votes in favor of a conversion, then the conversion is made to whatever new financial institution charter the vote concerned.
But under these rules a successful conversion appropriates the equity built up in the credit union. This equity – or retained earnings or capital – was fostered since the beginnings of the credit union. It may have been – probably was – built up over decades, perhaps half a century or more. A conversion very often places it in the hands of board and managers who consider it capital of the new organization. As such it is not only put at risk, but it is also used to lure more capital, the end result of which is to most benefit the very boards and managers who pressed for the conversion. The members of the old credit union are relegated to bit players in a new institution.
The fact that certain people can come along and feel that the accumulated earnings of decades is theirs if they can persuade people to convert does not make sense to us. They should not be appropriating the whole history of a credit union and converting it over simply because it seems like an opportunistic time for them to do so.
Charters should cease
A better approach is the following. When a credit union converts, it should first be deemed to have terminated. That is, when the old charter ends, it does not instantly convert but in fact dissolves, ending the old credit union. The built-up equity in the credit union then automatically vests in the members. How the equity is divided is an issue we are not quite ready to solve, but the point is that the members have control of the equity.
The members (or, rather former members) then have the right to let their personal equity portion pass to the new institution (mutual savings bank, mutual holding or even stock company, etc.) or remove their savings and equity portion to do with it as they will. This may be to deposit it in any bank, another credit union, or even to charter a new credit union that these members who do want to become bank customers, can set up on their own.
A more democratic and credit union-like way
This seems to us the best, most fair and most democratic means of dealing with a conversion to a thrift or a bank– and the one best in keeping with credit union tradition and philosophy. Just as people are uneasy at the notion that members should be denied the right to vote for a conversion so they should be uneasy with the notion that built-up capital is absorbed willy-nilly into a new institution.
Credit unions began on the premise that common people should be able to join together to own and direct their own financial institution. What they have built up belongs to them. When that institution is dissolved, then the equity vests in those member-owners. They should have the right to then say what should be done with their share.
This points up yet another difference between for-profit financial institutions and credit unions. As much as banks would like to promote the notion that credit unions look just like banks, there is a fundamental difference: Credit unions embrace the notions of member-owners and of democratic decision-making.
A difference worth preserving
Bill Moyers was once asked why he chose to work with Public Radio rather than commercial radio. He answered that he felt commercial radio considered their listeners to be consumers whereas Public Radio considered their listeners to be citizens, indeed citizens who were expected to participate and have a role in the institution and not merely be exposed to ideas with commercial sponsorship.
This is the sort of a distinction that credit unions have long made. Credit unions are organized and made by participant member-owners who run them democratically. They are a public trust. The principles embodied in these notions need to carry into charter conversions to thrifts. If they do not, then banks may have a point – the conversion is merely from one form to another without much distinction.