Puppies and hugs and dollars and cents
Posted by Brent Dixon on February 11th, 2009
Yesterday I had a conversation with a friend about the current situation in credit unions and we got to talking about the role of the 7 cooperative principles in all of this. She relayed a quote she’d recently heard from a credit union CEO:
“Philosophy is nice, but it doesn’t pay the bills.”
So I’ve got to ask both sides of the spectrum – from the ice-cold dollars & cents folks to the rainbow-colored, patchouli-scented idealists – What do you think about that? Is there a business case for philosophy? Are the principles only suggestions?
Also, I wouldn’t mind asking a lot of banks: “How’s not-philosophy working out for paying the bills?”
Brent,
Great post. And consider this. It’s 1929. The stock market crashed – REALLY crashed – lost 80% of its value. Banks failed in record numbers, FDR ended up closing all banks (the bank holiday) for three days to calm people down.
Enter – Filene and his cause for financial cooperatives. Prior to the crash he was traveling from state-to-state (using his own funds) to spread the word. Now he KNEW he had a viable model to create a system.
Why? Because the public had not only lost faith in the US banking system – but the banking system itself had frozen up and was not going to make a loan to the average person. Sounds familiar.
In 1934, FDR signed the Federal Credit Union Act establishing the federal credit union system we have today.
That “philosophy” thrived in the next 10 years. Credit unions grew to over 10,000! People helping people worked – without the internet, air conditioning, SUVs, Cable Television, iPhones, computers, and NAFCU.
So what’s changed? Our values and our leadership in my opinion. Many credit unions haven’t “acted” like financial cooperatives for years. And that’s why THAT model can’t pay the bills. There’s no heart or soul left. It’s just a bank.
A bank that measures product and profit and not the value of people.
I am a puppy-hugging credit union lover, but I have zero expertise in the economics of how credit unions can survive this current mess. That’s why I’ve read all of the blog posts and have said nothing. I feel that I have nothing positive to add.
I also have a real bias being from Canada and being immersed in a thriving credit union system built on an entirely different model. This only adds to my hesitation to comment on posts like this, but what the heck…
People are saying “No, we can’t take the money” or “The corporate bail-out plan is wrong” but I don’t see any of my fellow puppy huggers coming up with concrete plans to fix this.
If you are a CEO or CFO at a credit union today, you are wondering how to pay your staff and make ends meet. When credit unions were run out of churches and shoe boxes, it was all about people helping people but unfortunately the moral high ground and the driving purpose that credit unions had in the Filene era are not completely transferable to today’s situation.
I have to agree that philosophy is nice, but it doesn’t pay the bills. In very simplistic terms, really bad investments were made and something needs to be done to survive. If your ship is sinking, do you just hold your breathe and hope for the best?
As a business owner with eight employees, I see those employees drive into work in the cars that they have loans on from the houses they have mortgages on. I see the dozen kids they are supporting at staff gatherings. I have had to downsize from 13 employees over the past three years. I have had to look into people’s eyes and tell them we can’t afford to keep them on. I can’t imagine the pressure that a CEO of a credit union with hundreds of employees is feeling right now.
Credit unions can get back to the basics and return to people helping people, but now is not the time to cling to the 7 cooperative principles that have been largely ignored for the quite some time.
@Brent: Breathing doesn’t pay my bills, but I don’t stop doing it.
The CEO’s comment was a non-sequitur. The only reason for abandoning the philosophy is if it were “wrong”—not whether or not it pays the bills.
@Denise: I’ve read your comment twice, and I must admit, I don’t understand what you’re trying to say.
Tim,
I really like your thoughts. I’ve had trouble finding a way to make a valuable contribution to fix this problem (wait…it’s more than one problem). And I’ve had many more questions than suggestions.
Now I have another question that I just haven’t been able to answer. Why are we clinging to the idea of saving everyone?
Here’s a non-credit union in example. I’m a native Richmonder, and it was really cool to have Circuit City headquartered here. Well, it was cool until you heard all the stories from your friends and family about how miserable it was to work there. How horrible management was. How mistreated the employees (front line and administrative) were treated. These stories started YEARS ago.
Now that Circuit City ran itself into the ground, people are lamenting their demise. “Awwww…poor Circuit City. We hate for you to go.” Where were these people years ago when the trouble started brewing?!
I hate that my hometown lost what was a really cool corporation with a really cool history. BUT, what I hated worse was the abuse that the people there took. Based on all the “talk” (yes…that includes rumors), CC didn’t have any principles they were following either. How did that work out for them?
I don’t know if anyone “deserves” the pain association with going out of business. But, if you make your bed hard, don’t you have to lay in it?
“Reaping what you sow” is a sweeping generalization, and it’s not the reason for the WHOLE US Central mess. But, it belongs in there somewhere.
So, to uber-simplify, we have to: 1. FIX IT!! (love the SNL clip) 2. FIX our heads so we don’t make the same mistakes again. Our principles have to play a role in it. If not, we’re just Circuit City.
my two cents: this quote was incomplete. it should read:
“philosophy is nice, but it doesn’t pay the bills if you aren’t authentically following it.”
we came together as cooperatives to work together in community to make the world a better place. somewhere along the way we lost sight of that and bought into this idea that we need to be uber profitable businesses, in constant states of growth, competing with big banks. we lost sight of what we were at our core – our philosophy. when we get back to our original philosophy truly get back to that, the shift we seek will present itself.
and yes i have a puppy, and i hug her lots. but i prefer sandalwood to patchouli than-you-very-much.
@Tim – I totally disagree with you and had to read your last sentence twice to make sure I was reading it correctly.
To be clear – when I say PHILOSOPHY I am specifically talking about the seven cooperative principles that are NOT suggestions, but rather in our bylaws. They are the rule setters – they are the reason that Congress will not give us bail-out money. They are, in some ways, saving us from ourselves.
I agree with Susan – some credit unions may not survive.
I’ll just say it – many credit unions (many LARGE credit unions) rode the capital wave – that is to say, right on the edge. As a financial cooperative our capital IS our rainy day fund BECAUSE we are cooperatives and are not allowed to raise capital like a bank. This is no secret.
Credit unions that built capital at an average of 11% are going to be fine – even after the Corporate bail-out. Those that did not, run the risk of NOT being fine. Again, this is not some great accounting secret.
So the Credit Union philosophy CAN pay the bills – I spoke to a credit union CEO earlier this week that said he was so glad that he practiced the “Art of Adherence” that even when examiner’s were telling him he had too much capital, his response was “We will be a survivor when times get tough,” and he ignored them.
So now that the world has gone to sh*t some are screaming for a government bail-out. Let’s change the rules of the game so WE can survive (i.e. keep our jobs).
I truly believe that the credit union movement as it appears today is going to change. Either through legislation (combined insurance/regulatory fund) taxation, consolidation. BUT, I believe that a financial cooperative movement will re-emerge and thrive as it did in the 1930’s.
@Ron – the first time I met you you stood in front of a room of credit union people and asked “Why am I here? I don’t work with credit unions and I don’t want to.” So i don’t put much value on your opinion as it pertains to philosophy and credit unions.
Philosophy determines what bills you should be paying in the first place.
It’s a tough place to be in (whether personally or in an organization) when you take a hard look at the things you are doing or the metrics you are using and realize they don’t align with your philosophies. I think that’s where Credit Unions (as a generalization) are at.
The issue I have with “now is not the time to cling to the 7 cooperative principles” is that if NOW is not the time, then WHEN is? If Credit Unions as a whole can’t realize the need for drastic and radical change now, when will they? When things get “better”? I doubt it.
@Tim – I totally disagree with you and had to read your last sentence twice to make sure I was reading it correctly.
To be clear – when I say PHILOSOPHY I am specifically talking about the seven cooperative principles that are NOT suggestions, but rather in our bylaws. They are the rule setters – they are the reason that Congress will not give us bail-out money. They are, in some ways, saving us from ourselves.
I agree with Susan – some credit unions may not survive.
I’ll just say it – many credit unions (many LARGE credit unions) rode the capital wave – that is to say, right on the edge. As a financial cooperative our capital IS our rainy day fund BECAUSE we are cooperatives and are not allowed to raise capital like a bank. This is no secret.
Credit unions that built capital at an average of 11% are going to be fine – even after the Corporate bail-out. Those that did not, run the risk of NOT being fine. Again, this is not some great accounting secret.
So the Credit Union philosophy CAN pay the bills – I spoke to a credit union CEO earlier this week that said he was so glad that he practiced the “Art of Adherence” that even when examiner’s were telling him he had too much capital, his response was “We will be a survivor when times get tough,” and he ignored them.
So now that the world has gone to sh*t some are screaming for a government bail-out. Let’s change the rules of the game so WE can survive (i.e. keep our jobs).
I truly believe that the credit union movement as it appears today is going to change. Either through legislation (combined insurance/regulatory fund) taxation, consolidation. BUT, I believe that a financial cooperative movement will re-emerge and thrive as it did in the 1930’s.
@Kate – I wear my puppy loving “lavender’ wearing hat proudly too!
@Skeptic – nice! I mean, according to how I was raised (strict Catholic) you don’t get to follow the Ten Commandments when it’s convenient. Doesn’t work that way….
This post and Tim’s comment deserve a longer response than I’m about to offer…but here goes: The CU Skeptic is right.
I think the Daily Show’s Jon Stewart said it best a couple of weeks ago. After showing a clip of Bill O’Reilly saying that sometimes we need to compromise our values in order to protect ourselves (referring to the US’s practices at Guantanimo), Jon Stewart pointed out,
“If you don’t stick to your values when they’re being tested, they’re not values, they’re hobbies!”
@CU Skeptic, Warrior and Denise.
Great points and I absolutely agree with sticking by the principles. I did not mean to imply that they should be disregarded. Let me see if I can explain myself.
I agree that the US hierarchical system needs to be completely overhauled and the time is perfect for it. What seems to be happening though is that highly principled small credit unions that did no wrong have to foot the bill and may be put of business because of it.
I never suggested doing away with the cooperative principles. But how come those abiding by the principles all this time are going to be hardest hit based on decisions that they had no part in? I guess this is Cooperation Among Cooperatives but there didn’t seem to be much discussion involved.
The investments that are being discussed didn’t seem to following the principles of Autonomy and Independence or Democratic Member Control. It seems that no one knew about them.
Is it not possible to start fresh by rebuilding based on the cooperative principles versus pulling the cooperative principles out now to justify sucking millions out of the natural person credit unions?
As Mike said on the post on February 4, “The time to claim self-sufficiency was before these destructive investments were made and the industry was self sufficient—not after the damage is done.”
To see where I am coming from, it would be worthwhile to look north and to better understand the Canadian model. One governing body for all FIs and no FI is exempt of the T-word. Canadian credit unions have hearts of gold, plenty of soul and the ability to compete on a very level playing field. They are profitable and return plenty of dividends to their members. Because there is less hierarchy and regulatory burden, it is much more entrepreneurial and innovation is able to happen much easier. It is also extremely cooperative. There is no need for 10,000 people to congregate annually and lobby the government. There is nothing to lobby for. Everyone plays by the same rules. CUSO’s don’t exist in Canada either. There is no need for CUSO’s to get around regulations.
I know I will lose this debate, because honestly I don’t have a deep enough understanding to hold up my side of the argument and probably should have kept my mouth shut.
On another note, I do love that Open Source CU is full of passion and vigor again! Now, please correct me.
My comments come from four years of researching and trying to build a framework around the 7 Principles.
Honestly, when we started researching cooperative ideals, the 7 Cooperative Principles – as a phrase, didn’t show up much around credit union land. Online searches pointed to Rochdale wikis, shopping, school and energy cooperatives.
I’m not saying that CUs had abandoned ideals, but at the time there was more debate on using the word bank or the meaning of membership than talk of principles.
That said, it’s true that philosophy is not paying bills. Revenue, spread, cash flow, and income pay bills.
To the CU Skeptic’s point, principles, philosophy, dogma, values, missions, vision, yadda yadda, are what determine how to generate those things. Yet it means nothing unless you can demonstrate (internally and externally) all of it working together.
Example: The battle to attract funds has pushed your cost of $$ too high. Your ALCO needs to create spread. Lots of ways to do that but mainly – increase loan rates, lower deposit rates or both. Say you’ve been high in your local market in IRA rates. You could lower those rates and create spread. Enter Principle 3……Do we really need to lower IRA rates at a time when our members have lost loads in their 401ks? We still need to create spread and reduce our cost of funds. Can it come from another source? A cut expense? A smaller rate reduction over multiple deposit products to reduce the burden on one product line?
I guess what I’m saying is that in order to draw a solid line from philosophy to bill paying, you have to pull the conversation out of marketing, inject it into operations and then correspond it back to the community. Those who care will do business with you. It’s still possible to make sound financial decisions under principled philosophies.
It’s true—philosophies do not pay the bills. They do, however, dictate business strategies. And the key to paying the bills is committing yourself 100% to your business strategies. Wavering on those strategies (and thus, those philosophies) is what will kill you. Adapting or evolving your strategies is healthy; abandoning them when the going gets tough is not.
@ Jill,
Let me just say – I’m a big big fan of your 7 principles site and campaign and now I am an even BIGGER fan of you and your grasp of this issue.
You said it all – thank you for your inspiration and dedication.
@Jeff Stephens. It is all about business strategy, isn’t it. And having the guts to stick with it. Strategy is knowing what TO do and what NOT to do.
@Tim – I am envious of the Canadian model – I think we will have to go through a lot of pain to get where you are. But you have shown us it works! Cheers!
Is “due diligence” a concept that just died along with the onset of the recession?
Is everyone comfortable making their decisions armed with nothing more than their OPINIONS about “principles” and “competitive inequities?”
Where are the facts? Where is the data?
The industry has not adequately articulated or defined the problem(s) nor the solution(s). The CU industry is arguing about the philosophy of an abstraction right now. How people can debate an issue without any specifics is beyond me. There’s a huge difference between $10 billion in TARP for Corporates and $200 billion for retail credit unions.
From Day 1, the CU industry’s approach to TARP money has been scattered, irrational, inconsistent and unsubstantiated. It’s downright embarrassing.
We’re talking about defining a BASIC strategic plan here. This is remedial: Who, what, where, why, when and how much. Let’s get some numbers on the table. Let’s put a plan out there, like NCUA did, so we can debate that. Because sitting around arguing about “principles,” “puppy-hugging,” “Koolaid drinkers” and “fair play” is getting the industry nowhere.
@Jill This is precisely why the “grow at any cost” mentality was/is ill-advised. That insatiable thirst for growth has put some credit unions in a position that, financially, requires them to consider putting core philosophies aside. Growth isn’t bad, don’t get me wrong…forced growth is. The credit unions that were offering 1.9% intro rates for home equity lines and paying 7.00% for long-term certificates a few years ago, did so at the risk of it all coming back to haunt them.
Victory isn’t won in the credit union game by who can get the most branches, members, deposits, and loans…it’s won by promoting thrift and providing an affordable source of credit for provident and productive purposes. The more the merrier? Sure…I don’t know. But let the horse drag the cart.
This is why the “parity” and “level playing field” talk gets me so riled up. We shouldn’t be playing the same game. Too often for the past decade or so, we have forgotten that.
I just read the open letter to CUNA by Will Magnus – http://unrealizedlosses.blogspot.com/2009/02/open-letter-to-cuna.html
The letter articulates the situation better than anything I have read and gave me the background that I should have had prior to making my comments above. I now better understand the folly of my uneducated point-of-view above. Carry on.
Finally… Someone willing and able to get started with a real analysis of the situation:
http://christianmullins.wordpress.com/2009/02/06/analysis-of-estimated-costs-of-ncua-corporate-stabilization-program-ncua/
Thank you Christian Mullins. Thank you.
I haven’t read through a lot of the comments, but certainly not all of them and have a couple comments.
I’ve worked for a large CU for just over a year now and have really enjoyed the idea of doing what is right for the member. I’m not a die hard, but I do believe CU’s are fundamentally a good thing.
When the banks were initially getting their butt’s kicked CU’s rallied together to try and take market share. Now that we are facing a new, opportunity will call it, there is nothing but infighting taking place int the world of CU’s. Can I be the first to wave the, “Okay, it stinks, get over it flag?”
Everyone is going to lose some money in this deal, but by doing so you could be commended by the American people. We aren’t taking their tax money to pay for a screw up. We are handling our issue ourselves and that is a good thing.
Now, if you want the credit union to go “poof” take some TARP money. Banks will jump on that so fast we won’t know what hit us. In addition, that will be further fuel for the “one regulator” argument.
There isn’t a perfect answer to this problem, but one thing is certain… we must not divide.
Brent, going back to your question to banks, “How’s not-philosophy working out for paying your bills?”
It’s not that banks have no philosophy, it’s that they have a philosophy/legal mandate to earn the best rate of return for their shareholders possible. So the real question for banks is, how’s that working out for you where the owners are not the same as the customers?
All superb comments…great discussion.
Some credit unions believe in the cooperative philosophy, others don’t. If plotted out on a graph, you’d probably see a standard bell-shaped distribution. That probably won’t ever change.
Wouldn’t it be cool if we could link this distribution to long-term performance?
I would guess the philosophizers of the group would be characterized as follows:
I’d also wager my bumper-sticker laden Subaru, well-worn Birkenstocks, macrame embroided vest and the gallons of patchuli I own that the philosophy-driven CU’s would have more engaged employees, members and boards than the other group.
Bottom line, if you’ve leaned on the philosophy in the past, you are probably leaning on it today. If not, you are probably leaning on something else.
So what’s the big hurry?
A dark shadow has fallen over Credit Union Land. The Corporate Network (specifically at this point in time U.S. Central) faces a liquidity crisis because of investments that have fallen well below book value.
NCUA has responded to the threat by organizing a NPCU liquidity solution, CU SIP and injecting another billion dollars directly from NCUSIF. At the same time it has put out a 60 day request for comment, essentially asking NPCU’s what do you think the Corporate Network should mean to you? My question is: What’s the rush? Will our comment or any comments mean anything or has it already been decided as to what is to be done and the ANPR is just a nice cover. It is not like we haven’t bought the time. We have and it is expensive so let’s use it wisely because, despite some opposing opinions, most credit unions need the Corporate Network.
I think Chairman Fryzel has taken the immediate steps needed to stabilize the situation and given us some time to seek more permanent solutions. There are some questions that come to mind that deserve answers. PIMCO’s conclusion’s, paid for by Credit Union funds, should be disseminated to credit unions through their corporates. I think that the NCUA Board needs to look inward to determine how the lack of regulatory oversight contributed to the current difficulty. In a recent case, concerning some npcu’s NCUA’s Auditor General found that NCUA’s role in a 100 million dollar loss, more specifically their lack of oversight, was a significant contributing factor. One can only conclude that the same might be found in this case. If that proves true going forward, without the benefit of regulator reform, will eventually lead us to the next problem. Maybe one we cant fix.
I am surprised at the lack of comment on the part of other Corporate’s in the network. In my estimation they can help shed light on what happened. Questions like “Does Expanded Authority put Corporates in harms way? need to be asked. In my earlier life as a Corporate (CenCorp) Director, Supervisory Committee member etc I remember this question coming to the Board. The conclusion was that the “bang for the buck” was not worth the additional expense and the benefit would be barely measurable when the associated risks were considered. Given that some time has passed I would like the opinion of the Corporate Network on why the offending corporates did not reach the same conclusion and forged ahead seeking that authority from NCUA. While I recognize that there is probably a view, on their part, that people will discount their opinion if they offer it you would have to be fairly paranoid to paint them with the same brush. If we fail to take advantage of their experience and suggestions then we will lose a valuable tool.
So let me head out on this limb.
Chairman Fryzel, Slow this train down. Let’s get the PIMCO assessment under our belt before we move forward. Consider reversing the “expanded authority” and little else as to how corporate’s operate. Emasculating the network in an attempt to bulletproof them is not a good strategy for npcu’s. It will certainly make it more difficult for Corporates to build adequate capital levels and at the same time potentially disrupt the service levels of the network.
I have known, as many have, that losses in the network will be underwritten by the natural person credit unions. Suggestions that somehow credit unions that did term investments with their corporates should be more liable for the losses are divisive and only ignite debate. In discussing this situation the other day I stated that if we were a privately insured credit union we would probably be thinking hard about participating in whatever solution unfolds. We are brothers and sisters in this fight anything that potentially divides us must be avoided. One thing I do know this is a very serious situation that demands our attention. We can get through this but it will take us working together to do it. The same holds true for both the Regulator and the Regulated.
Dennis Moriarity, CEO UNITY Credit Union Warren, Michigan
For those of you that would like to examine the rules regarding “Expanded Authority” go to NCUA’s web site under Corporates and seek the PDF on Expanded Authority. Easy to see how things got riskier. Also look at the offending Corporates and see what level they were operating at.