As I previewed Chip’s “The Special Role of Cooperatives in a Crisis,” I reflected on the fact that as I start my 30th year in credit unions, I have weathered three major crises and spent at least 15 years leading credit unions that were technically insolvent or at best extremely undercapitalized.
My first opportunity to manage during a crisis came in a time of rising interest rates. My task was dealing with $100 million of GNMA 8% mortgage-backed securities trading at 65% of book value. Three months into that challenging job the regulator came in and fired the CEO, gave six months to the COO to find another job and placed our credit union under one of the first Letters of Understanding and Agreement. Add to these circumstances the fact that the credit union was contractually obligated to purchase over the next year $150 million of forward traded GNMA securities and was funding these purchases by borrowing against the securities. Then the local newspaper found out about the CEO firing, and the “bank run” began. Over the next week the $150-million credit union had $20 million flow out.
The Importance of Regulatory Support and of Patience
It helped to be young and ignorant because while under stress I had a positive view of the future and recognized that while market values can go down they can also go up. I found support from NCUA and a believer in a young but seasoned NCUA examiner called John Ruffin. He believed in me and therefore provided the flexibility to execute a market-driven GNMA sale plus the unwinding of the forward securities trades. We went into the sales process expecting to lose $20 million over the next year of sales. Surprisingly, we managed to lose only $3 million while unwinding the future security trades and paying off all of the borrowings.
As Chip noted, the key to a credit union workout plan is “patience.” Then you add leadership confidence – particularly to the staff and to the regulator -- put a wall around the problem, and get the credit union team to focus on growing other parts of the business. The patience allows the credit union to work through the cycle of value and use well reasoned resolutions for the financial problems.
In this case the patience also allowed the credit union leadership to look beyond its own resources for external expertise, outsourced operations, and system support. During my 15 career years with severely undercapitalized credit unions, we borrowed from the CLF, were early adopters of shared branching, jointly owned a Data Processing CUSO, kept current on compliance from NAFCU, learned new ideas from all of the credit union magazines, and used the corporates for check and funds settlement services.
A Unique System Offers Unique Help in a Crisis
In the three credit union workouts I led, we received decisive assistance and support from NCUA. Unlike FDIC and FSLIC, the NCUA leadership (then with Chip Filson) and staff took the long view and understood the cycle of value. This allowed many credit unions to return to financial health and serve their memberships.
Truly it was the credit union cooperative support system that aided my credit union teams in turning around three financially troubled credit unions. Without those supports and without the uniqueness of credit unions, three credit unions and the half million members they now serve would not exist.