The Old Testament story of the migrating Hebrews turning away from the God of Moses, to worship false idol, is widely known to readers of the Bible.
The wandering tribes were frustrated in their efforts to reach the Promised Land. So when Moses took a brief leave to talk privately with God, the people under Aaron’s temporary leadership, decided to hedge their bets and try a new god. Thus the construction of an idol, the fabled Golden Calf.
This Golden Calf metaphor is a theme in literature and art. Consultants even use it to diagnose organizational performance. Is it possible in this time of economic stress, especially among troubled credit unions, that some are worshipping a false god, and that we have taken attention away from the true way out of our difficulties?
Bad News Drives out Good
My thoughts were triggered by the increasing of some reporters’ jingoism in describing third quarter results. The focus is entirely on losses, often “record losses” followed by additional data about how dire these results are.
The facts are accurate. But no context is given nor is there any effort to portray this as anything but a ticking time bomb that could result in a merger or worse. But what causes the “time bomb” is a false idol, or the credit union Golden Calf.
But I am not picking on reporters alone. Their interest in the Golden Calf is just much more visible. At a recent CEO meeting earlier this year, the facilitator asked the group if they knew what percent of credit unions reported losses for the six months ending June 30, 2008.
Nobody guessed the right number, which, according to the leader, was higher than anyone had estimated. The conclusion, we are an industry heading for trouble. Again, a fact with no context or meaning.
Credit Unions’ Golden Calf
I believe that the credit union industry has created its own Golden Calf and, more importantly, lost sight of what Moses called the One True God.
Our Calf is capital, and specifically the capital ratio. Capital is king. Credit unions that have higher capital ratios are often viewed as “better performers.” These results are often caused by outsized ROAs even in today’s troubled circumstances.
I do not want to deny the role of capital, only to put it in its rightful place. For example, would it be better in today’s economic climate that no credit union reported a loss? Is that even realistic? What kind of institution would even think it could promise continuous earnings? Warren Buffet testified that he decided not to invest in Freddie Mac stock when he heard the company’s senior management promise continuous growth and earnings improvements that he did not believe were achievable.
What Should be the Focus of our Attention?
So if Capital is not King, what should we pay attention to? To paraphrase a point the political advisor James Carville made to Governor Clinton in the 1992 Presidential election: “It’s the member, Stupid.”
Here are two examples of how we should rethink our capital worship in view of our higher purpose of serving members.
1. Credit unions will have losses this year. But the most important question is, are they still serving members or have they been so neutered by boards, regulators and their own circumstances that they have just battened down the hatches?
An example: a West Coast credit union over $ 1 billion dollars in assets will report operating losses for the third quarter, year-to-date, and possibly into next year. However the number that caught my attention - and I believe is the true indicator of performance - was the $100 million in loan originations in September alone, of which $35 million were real estate secured. If every financial institution had the courage to continue to do what this credit union is doing, we would not be talking about a credit crisis today.
2. Secondly, we must not be afraid to use capital in bad times as well as good. When everyone is profitable, there is little resistance to opening branches, growing loans and shares and trying to invest in new member services. But when times are bad, the practice is often to shut down these “good investments” and stop growth, especially when the net worth ratio is headed below some arbitrary floor such as 6.5 percent.
Capital is more necessary in bad times. That is why it was saved during the good times. Not to use it and let the ratio fall, is to potentially destroy the ability of the mutual institution to work its way through difficult times. But that is another article for another day.
But there is more to the story. Moses did not live to enter the Promised Land. Rather it was Aaron who led the difficult journey across the Sinai Desert to a success. Leaders can make mistakes, but they can also learn to redeem themselves. Every day, that is exactly what credit unions are doing with members by the thousands—giving them a second chance and maybe a third one. And they are doing it with the capital they accumulated, just for this kind of economic circumstance. That is also why we call ourselves “cooperatives.”