Over the next six to eighteen months, approximately $6 billion will be re-invested in the corporate network. On both a percentage and total dollar figure, this amount far exceeds the original credit union capitalization commitment for the NCUSIF in 1985. The money has been authorized, natural person credit unions are legally liable for repaying the draw down, and NCUA has plans ready to go. So how will this single largest investment ever in credit unions be made? Will it just fill investment potholes in corporate portfolios or will it underwrite a whole new road for the credit union system in the 21st century? Many credit unions say they have put the corporate issue behind them. They have expensed the estimated costs; they have begun looking for alternatives to corporate functions; and they believe that NCUA will do whatever it wants. Credit union input, they feel, may be acknowledged but viewpoints are so diverse that trying to influence events at this point is hopeless. “Let’s just move on – we have enough of our own challenges to take care of” is a common sentiment. I believe that assessment is incorrect. The corporate issue is just beginning, not ending.
Two Vital Questions
Two points of view about the future will strongly influence how the $6 billion investment is structured, and they depend on how the following questions are answered:
In this time of radical transformation of critical sectors in the economy, is the credit union system okay and just needing to get through this troublesome period to succeed in the future? Or is the credit union system in need of dramatic change to thrive in the new economy?
How will the various future roles for the corporates be identified and chosen? Has the ANPR process been the best vehicle? Is a different process necessary if the corporate system is to be relevant for all credit unions after the $6 billion is invested? Up to now the approach to the corporate resolution has been to “fix a problem” rather than “plan a future role.” Continuing on this path may correct obvious shortcomings in a way that significantly minimizes any future contributions to the credit union system. In other words, the money may be spent to cover past losses rather than for future returns. So what is the state of the credit union system and does this investment really matter?
An Era of Transformation
Throughout the U. S. economy, fundamental changes in major industries are underway. Some of these are obvious in the destruction of the traditional models for investment banking, domestic auto manufacturing, and newspaper and magazine publishing. The health care system is now up for congressional action that will alter the roles of every profit-making and not-for-profit firm serving this sector of the economy. Consumers are dramatically reversing their spending and borrowing habits of the last 15 years and stepping up personal saving rates. The role of government in replacing shortfalls in consumer spending by fiscal stimulus as well as a more activist role in overseeing the private sector via regulation are well underway. One newspaper/television reporter who has covered Washington and international events for over 30 years has said he has never seen so much change in such a short time. But except for the corporate and some natural person credit union financial challenges, is the credit union system really a part of this change? Or is the cooperative model just naturally adaptive to whatever the broader environment may bring? I believe that both the objective data as well as more conceptual understandings of credit unions suggest that a fundamental change in the role of credit unions is not only feasible, but necessary. And unless this change is understood and embraced, credit unions could end up emulating the thrift industry’s demise. I also believe a re-envisioned corporate wholesale network is a vital component of this new cooperative opportunity.
The Beginning of a Movement
Jim Collins, the author of popular business classics such as Good to Great and Built to Last, recently gave an interview in Inc. magazine in which he updated his understanding of a firm’s evolution. To this point his writings have described this evolution as: good idea, successful business, great company. Now he believes organizations are on the cusp of Stage Four: “Stage four is going from a great company to a great movement. A movement is bigger than a company... It’s not just about having a good idea or building a successful business. The movement is the ultimate expression of the idea.” Credit unions’ track record during the past two years suggests that the industry is on this cusp. In quarter after quarter, credit unions are reaching record levels of loan originations, improving core earnings, increasing rates of both share and member growth, and continuing innovation in financial service offerings. Market shares in all segments are increasing. In essence, while credit unions may have been created by a social movement, they are now in position to become a truly great economic movement, a movement, in the words of Collins, that really “empowers individuals.” The need has never been greater. In America, those who have the least or know the least pay the most for financial services. Credit unions are prospering by serving those individuals and markets that the for-profit system has had to abandon or cannot serve until their own balance sheets are repaired. In this uncertain economy, credit unions have created partnerships with some of the most important sectors of the economy: auto manufacturers, real estate brokers, and colleges and universities, not to mention thousands of local small businesses – all in need of reliable credit for their customers, students, or own firms. Moreover, the cooperative model is now being debated as the best solution for expanding health coverage to all Americans and may be the way Fannie and Freddie emerge from their conservatorships.
The Corporate Opportunity
One reason the corporate system’s financial strength is not as robust as needed is because the corporate model was insufficiently designed. The system began as a short-term liquidity manager, then evolved as a source for longer investments while trying to function as a “wholesale” partner but without the means of funding longer-term loans. Competition narrowed corporates’ investment margins, and credit unions went to the Federal Home Loan Banks for term borrowings. Corporates are an integral part of the credit union system. They provide an operational backbone and settlement system that unites credit unions and provides a comprehensive distribution capability matched by no other alternative. But they are not meeting credit unions’ longer-term needs, and the insurance system built on retail risk models is insufficient for wholesale institutions with large asset exposures. There are, however, several highly successful cooperative models that could be the basis for a more comprehensive, relevant, and less risky corporate structure. These options should be the foundation for thinking about the $6 billion investment in the corporate system of the future. Much more than the corporate future is at stake as these funds are spent. Credit unions are making their largest collective investment ever. Will the money be spent bailing out the past or preparing for the future? Now, more than at any other phase in the corporate saga, credit unions must be engaged. So when future generations ask, “What did we get for out $6 billion expenditure?” we can answer, “A whole new credit union system for the 21st century.”