Taking the King's Schilling

This economic crisis can once again be a demonstration of the power of the cooperative model, but not if we take the King's schilling. At that point we lose both the moral and political authority to differentiate our solutions from those who did create the problem.


While justifying the Administration’s $700 billion bailout proposal last week, Treasury Secretary Paulson testified in Congress that it would cover all financial institutions, specifically including credit unions on the list.

Most segments of the economy, including credit unions, could benefit if the program works. However, directly participating in this program could be a serious error for credit unions.

The reason: credit unions were not part of the problem and should not be tarred with the same brush as those who were. Instead credit unions have been and continue to be part of the solution.

Credit Unions Have Never Used Taxpayer Funds

Identifying credit unions as beneficiaries of a tax-funded bailout could seriously jeopardize their status as tax-exempt cooperatives.

Never in their history have credit unions asked for or received taxpayer funds. Not in 1909 when the first charter was issued, in 1934 when the Federal Credit Union Act was passed, in 1971 when the NCUSIF was established, in 1978 when the CLF was organized or in 1984 when the 1% funding solution for the NCUSIF was passed by Congress.

Cooperatives are established because market solutions do not always work or offer fair solutions to consumers. They provide a "middle way" between government funded or market-driven solutions.

Not Dependent on Market Expectations

As cooperatives, credit unions are not subject to the market-driven expectations for growth and earnings performance. There are no shares to be "shorted." Value is based on what is on the books, not an external share price. Cooperatives rely on members for their funding, not secondary markets or stock sales. Wholesale funding comes from the corporate network or the FHLB system, not commercial paper or Wall Street underwritten bonds.

Throughout the crisis, credit unions continue to do what they have always done—serve their members with competitive savings options and fair loan rates. Through June 2008, credit unions reported the highest six month loan origination in their history, a 40% increase in mortgage volume versus '07, and gains in market shares in autos, credit cards and mortgages.

Open for Business

Through every stage of the current crisis from the special Federal Reserve funding, to the Bear Stearns assisted merger, the takeover of Freddie and Fannie, the nationalization of AIG, and the failure and mergers of Countrywide, WAMU and Wachovia., credit unions continue to loan money and seek savings.

While not immune from the economic fallout, the credit union system has increased capital by over $2 billion in 2008 even in the face of increased chargeoffs and delinquencies. Credit union ROA has led all financial intermediaries for the last three quarters.

Common Sense in an Economic Revolution

As the mortgage and broader economic events have unfolded, we have characterized the situation as an economic revolution, not merely a cyclical downturn. Markets are fractured, firms are failing, delivery channels and secondary markets closed, and new solutions are being sought out.

In the first year of our country's political revolution against the English King, Tom Paine wrote a pamphlet called The Crisis, with the immortal opening line: "These are the times that try men’s souls."

Why did Paine use the word "souls" and not courage, or wisdom, or patience or resources? Sooner or later every revolution challenges its participants to be clear about who they believe they are and what they are doing.

This economic crisis can once again be a demonstration of the power of the cooperative model, but not if we take the King's schilling. At that point, we lose both the moral and political authority to differentiate our solutions from those who did create the problem.

Should the Treasury bailout, or some variation pass, there will be an opportunity to sell distressed securities and possibly delinquent mortgages to the government. But at what price?

Multiple Pricing Issues

The intent in buying troubled assets is to keep liquidity flowing in the financial system.

Three levels of “pricing” questions will be involved:

  1. How will a fair price for illiquid or troubled assets be set? It is highly unlikely this will be book value. Therefore, for any credit union that participates, this solution will most likely convert an unrealized loss into a realized one. Can a credit union’s balance sheet absorb this?
  2. What compensation will the government ask for when buying illiquid assets? Limits on executive compensation, warrants for stock purchases and other proposals suggest that the government will be looking for more than just any appreciation in value that holding these securities may bring.
  3. What will be the regulatory reforms imposed to “promise the public” that there will be no more bailouts? These reforms could be draconian. They could range from a complete restructuring of federal regulation as proposed earlier by Treasury to specific constraints that would put credit unions in the same box as the institutions that caused the problem.

The bottom line on the bailout proposal is there appears to be no benefit and almost inevitable certainty that participation will put credit unions in the new regulatory framework as the institutions that brought about the crisis.

Helping Credit Unions in Trouble

In fact, credit unions are part of the solution and all data for the last year supports these efforts in responding to members’ needs.

So, if taxpayer funds are not the answer, how does the system help credit unions confronting liquidity or capital issues?

Credit unions have two resources not available to market-driven firms: patience and cooperative resources. Patience means that if problems are due to cycles in value, credit unions have leeway in riding out the down cycle—if the asset quality issues are contained.

Secondly, in extreme cases where capital is insufficient, credit unions can be funded by the NCUSIF. Credit union’s pooled insurance fund is a source for re-capitalization when other options such as mergers or sales are not feasible. Problems do not have to result in liquidation.

Finally corporate credit unions have multiple options beyond these because of their unique structure. Extending some of these options to the entire system should be one of the objectives for regulatory reform that will be enacted in response to the current crisis.

So why take the King’s schilling? Indeed, credit unions were created by government policy to meet needs when markets fail to do so.

The Credit Union Way

New regulatory legislation will not only be part of any bailout.  It will also be a top priority for the new administration.  Why?  Because we know now who the new GSEs-- that is stockholder-owned companies that are too big to fail--will be.  They are Citigroup, Bank of America and JP Morgan Chase.  A couple more may be added to this list before the markets are settled.

So no one will want to repeat the Fannie-Freddie mistake of letting shareholders benefit but government taking the losses.   These trillion dollar financial conglomerates will face a new regulatory attitude and structure.

Regulatory "Reform" Already Underway

Already some are predicting the end of the OTS and the thrift charter.  OFEO now regulates the FHLB system, not the old five-person board.

It will be critical in this environment that credit unions have their legislative priorities clearly defined, if they are to stay clear of the new regulatory vortex that will be created in 2009.  What should these priorities be?

Credit Union Regulatory Reform

Every initiative should focus on strengthening the credit union system’s ability to serve members in a cooperative structure.   The changes that would make this more effective could include:

  1. Membership capital accounts.  Similar to USAA’s insurance model or Vanguard’s mutual funds which own their advisor, membership capital ties participation and ownership together in the member’s relationship.
  2. Clarified Role of CLF. Make explicit, if necessary, the role of the CLF in providing liquidity to the system by promoting access to secondary markets with CLF involvement.
  3. Enhanced transparency for members and a clearer process for capital accountability in the event of conversion.
  4. Easier rules for banks and thrifts to convert to a credit union charter. Given the probable changes in bank regulation, the cooperative charter may become much more attractive.
  5. Clearer standards to encourage the chartering of new credit unions as an Agency responsibility and priority.

Each of these key areas would significantly enhance the role of cooperatives as providers of economic resources to their members.

The core focus, however, should be to keep the cooperative model intact and separate from the market-driven model of banking.   Additional ideas such as increasing CUSO investment limits or incentives for member savings could be included as long as they  enhance the cooperative structure. 

Why Cooperatives Matter

Cooperatives are especially important in times of market crisis.   As hard as regulators and legislators will try to prevent future problems, these are an inevitable part of the market’s creative dynamic.  A clear statement of this reality is an excerpt from Rudyard Kipling in 1919:

Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew
And the hearts of the meanest were humbled and began to believe it was true
That All is not Gold that Glitters, and Two and Two make Four
And the Gods of the Copybook Headings limped up to explain it once more.

Cooperatives manage their copybooks for members, not for the Gods of the Market.




Sept. 29, 2008


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  • What a great article! Your points are well made!
  • Exceptional Article! this needs to be in the business section of all major news papers so people can learn the real difference and value of Credit Unions.
    Rifat Ikram
  • Well said. Credit Unions have always been the "average Joe's" best financial resource.
    Michelle Rosner
  • I thought this was a well written article. I believe in with Chip's opinion on the subject matter. Everything should be put into perspective during these hard ships. Looking at the long term effect of this aid project may have harsh affects on the market and I definitely don't agree with passing the $700 billion proposal. It makes me glad that I work for a credit union knowing that our practices are extremely ethical and our stance in the marketplace is recognized in a positive way. Thanks
    Eric Brotherson
  • I was taken aback when I saw the first article of Dan Mica boasting how hard everyone was working to make sure CUs were included in the bail out. I had erroneously assumed we would keep our white hats spotless.
  • Very lucid explanation for the credit union difference. More important than ever!
  • Very nicely stated. We SHOULD NOT be tarred with that same brush!
    Roy Campana
  • I think this moment in history can be our defining point as credit unions. We have never been able to clearly define ourselves as different than banks in the eyes of the consumers no matter how much we market our position. The fact that we do not take tax payer bailout money should speak volumes for us as financial cooperatives.
    Mary Beth Wilcher
  • Excellent and right on Target! These are the 'times that try men's souls' and this article reminds me of another saying that's not so well known. "If you don't stand for something, you'll fall for anything." Credit unions are standing and will continue to stand when we are educated by leaders and associates such as Chip (Callahan & Associates) who are experts and knowledgeable in the industry. I am looking forward to the next explanatory articles.
  • Let's not overstate our case. CUs lost depositor funds in Rhode Island in 1991. Several CUs have already been consumed by this crisis. Corporate investments are involved. Now is not the time to be making statements like, "Our economy is sound!"
    Bill Myers
  • Absolutely terrific article! Certainly suitable to be passed on to CU staff to encourage our members that their money is definitely safe with our CU.
  • An excellent piece for perspective. I haven't seen it stated in this way and it is thought provoking as framed. thanks Chip.
    Rob Givens
  • Credit Unions should not take money because they don't need it. If your credit union is strong, there's no issue.
  • I also respectfully disagree with comments #13 and #17. If CUs do not take the Kings Schilling now then we still have something compelling to lobby our case in the future (no increased oversight or consolidated oversight where CUs are not important). We are part of the solution. This would give CUNA/NAFCU facts to lobby our case with when the time comes (and it will). This is exactly the time I expect CUNA/NAFCU to rise to the occasion and use the political capital they've developed over the years (that we've all enabled or explicitly helped them to create through hike the hill, etc). Don't include CUs in the bailout. Don't mess with the cooperative structure or regulatory oversight that is still working for millions of Americans. In fact, CUs should be allowed/encouraged by the government to become even more relevant in the future of mega mega global banks where competition is reduced and consumers pay the price. CUs are local...we supply many good jobs (from teller to executive positions) in local U.S. communities -- we will always do so and that local support will only increase unless CUs are restricted in their ability to help.
  • I apologize to Mr. Dowling and others for not being more clear about my comment concerning the NCUSIF. Credit unions can indeed take great pride in not ever experiencing losses that caused a cost to the taxpayers. However, politicians and bureaucrats will use the "full faith and credit" factor as their underlying rationale for changing the rules concerning CU taxation and regulation. It is political reality, although not necessarily based in reality.
    Marvin Umholtz
  • As usual, Mr. Filson provides a very thoughtful and timely piece exhibiting a level of wisdom few of us pocess. Mr. Umholtz (Comment #13) misses the point. His reference to Federal Insurance ignores the fact that credit unions and not tax payer dollars fund the NCUSIF. We have yet to take the Kings Schilling and I hope we never do.
    Raymond Dowling
  • I agree with Chip and not with comment #13. CUs have never taken the Kings Schilling (not yet anyway) and there is no indication we will need to despite current conditions outside of the CU system. Just because CUs are backed by the government should NCUSIF fail doesn't mean CUs have ever been a drain on taxpayers or the government.

    We should not be a part of this current government solution or future resolutions and increased oversight. Paulson has his own reasons and motivations for drawing CUs into this despite the facts (see comment 14 from Guy Messick)...CUNA/NAFCU BE WARNED what you are doing in lobbying for this and the consequences it will have for us!!! As for NCUA's desire for CUs to be a part of this bailout: the word "clueless" comes to mind -- which isn't anything I wouldn't have already expected from them.
  • Very well stated Chip. We have to be very careful here. The Treasury Report on the financial services industry wants to consolidate the regulation of all banks and credit unions. This crisis could accelerate the serious consideration of that proposal. If we want to continue to be separately regulated from banks, we should use this crisis to distinguish the credit union industry from the banks. It is important to not only be a solution that is independent of government subsidies but to let th
    Guy Messick
  • Credit unions have already taken the King's shilling decades ago. It is called federal share/deposit insurance. The "full faith and credit" of the federal government always comes with a price, despite the fact that credit unions are themselves paying for the NCUSIF.
    Marvin Umholtz
  • I, too, was surprised that CUNA took such a strong stance to have cu's included in the bailout. It kind of makes me wonder if Mr. Mica has more information about potential underlying problems in CU land that most of us are unaware of. Is it possible that some cu's need that bailout plan? If you look at the 5300's for the first half of the year, you'll spot several cu's that have taken significant hits to their loan loss reserves. That additional PLL expense is likely directly related to some uncertainty in the asset quality of their mortgage portfolios. And, what about Corporates? The nature of their balance sheet, with emphasis on ABS and MBS securities, and investments in US Cemtra;, would suggest there may be issues there. Having said that, I applaud Chip for a great perspective on the issue, and support his views. I just wonder if there is something else just under the surface compelling CUNA to take this position.
  • Comments so far are 'long' on agreement but 'short' on solutions. Is there a role for regional Corporate Credit Unions supported by some investment vehicle withn which 'troubled loans' could be consolidated and shared?? Credit Unions and the NCUA also must convince the various Examining Authorities to accept their 'workout' arrangements negotiated with 'troubled' borrowers that should be highly preferred over foreclosure. Absolutely, the Credit Union Movement should be very alert and not reach for this 'safety net,' and thereby 'swim free' from all the hooks that go with accepting government intervention.
    Jim Nichols
  • Thanks for everyone’s comments. Regarding the Corporates, please see part II of my article on the price to be paid. I don't believe that as currently proposed the bailout would in any way help the Corporates, unless the gov't was willing to pay book value or close to. I don't think that will happen. The SEC-FASB rule change giving greater flexibility on mark to market accounting may be more important for the corporate networks who are holding securities for which there is no ready market. Chip
    Chip Filson
  • Not only would our participation in this “bailout” be a serious error it would sound a hastened death knell for many small and mid sized credit union’s. An examination of the financial problems, as far as credit union’s is concerned, easily finds that those among us who have participated in the risky business would welcome the bailout. It would also sweep under the rug the actions or lack thereof of credit unions, regulators and trade associations as well as a Congress that steered us firmly into this morass. Simple participation would color us with the same greedy weakness and further serve to make us just another “bank”. Congress really enabled “sub prime” lending through CRA type legislation. Bankers and yes even some credit union’s seized what they believed was a revenue opportunity without properly assessing the risk in such action. Regulators, for whatever reason, lost their focus on issues of safety and soundness and concentrated on the subjective idiocy foisted on us about BSA, Patriot, Pandemic and Red Flag issues. In short the eye came off the ball and, wonder of wonders, they lost it. Don’t believe me ask small credit unions about the writings by their State or NCUA examiners most of which is devoted to BSA type stuff. Thank God most credit union Boards and Managers kept their good sense and did not participate in the idiocy. We should not participate in the bailout for many reasons but one really stands out. “If the bad actors in our movement are bailed out that is their bad investments are paid out with taxpayer dollars they will be strengthened unfairly and use this new found strength to compete against and eventually wipe out smaller credit unions”. Much of this happens now when big credit unions (who have failed because of their risky ventures) are merged into bigger credit unions using our funds to buy out the bad paper by a regulator/insurer who has no need to support his actions because there is not even a modest amount of
    Dennis Moriarity