So You Want to be a Bank? Maybe it's Time to Liquidate

Marv, you did what no one before could do. You got me to finally speak up about credit union charter conversions. I am talking to long-time credit union consultant and insider Marv Umholtz who recently announced that he was going to serve with the Coalition for Credit Union Charter Options, which lobbies for credit unions’ ability to convert their charters to those of mutual banks. I first became aware of credit union insiders wanting to take their credit unions to the other side when I was serving as the Executive Assistant to NCUA Board Member Bob Swan from1994 to 1996. I took a keen interest in this issue because of my background practicing corporate, securities and business law in Salt Lake City. During those years, I saw it all when it came to promoters and wheeler-dealers. On occasion, I represented some of these characters in some of their dealings. The problem I ran into representing some of these con artists was that I insisted that they follow the law. I had seen many promoters get into trouble with the authorities. Even more concerning, I watched many small time investors lose their money in penny stock deals. I saw it all, and it was sickening. These characters cared only for themselves, and would turn on their co-conspirators in a heartbeat. One thing could be relied on, though. At least these wheeler-dealers were true to themselves. You knew where you stood with them, knowing that if and when they could, they would stick it to you. They did not hide behind a philosophy of “People Helping People.” I eventually moved my law practice to Washington, D.C. I was fortunate to have the opportunity to work as Swan’s executive assistant. Even though NCUA was the regulator of the movement, there was initially a great feeling that I did not expect. The philosophy of the credit union movement was a marvelous thing, a cause in which we could all make a positive difference in the lives of those who belonged to credit unions. What a refreshing change from the securities arena from which I had escaped. Early on at NCUA, we received a couple of charter conversion requests. This was a new issue, and no precedents had been set on how to deal with these situations. Some on staff (and at a higher level) at NCUA took the approach that the members should be free to choose – let the forces of the free market prevail. Others took the opposite approach, that the agency should stop these conversion attempts. Frankly, a lot of good arguments were made for the various positions. My chief concern was that the members of the affected credit unions did not have enough information to make an informed choice. This is an issue that NCUA struggles with today, over 10 years later. From my securities law experience, I knew that disclosure statements were too often hard to read and understand, even if the members were disposed to try. I knew that credit union members would rely on the representations of the management and Board, the very insiders who would likely benefit from the conversion. Don’t Let Insiders Take Over The credit union movement is one based on enormous trust and faith in others. Its roots are far different than the corporate enterprises from which spring banks. Many credit union members are not sophisticated in these types of matters. It is for this very reason, among others, that credit unions exist at all! So, credit union members will tend to listen to the insiders, trusting their judgment and recommendations. They will not read disclosure statements, but will most often take the approach that “if this is what our Board recommends, then we should go along with it.” There were some at NCUA who advocated that maybe credit unions wanting to convert should be liquidated. That would be the only way to ensure that all of the assets of the credit union were returned to the members. This is not a bad idea. It is through the members’ loyalty to the credit union that growth takes place. There are certain expectations of the credit union. The principles of democracy are critical. Capital growth is built because of the members, not because of outside investors. However, insiders seeing the opportunity to cash in on the backs of the members is exactly the wrong reason to convert. In my assessment of these conversion attempts, while at NCUA and since, I knew that the mutual concept would eventually lead to a stock transaction. I have seen too many insider deals to conclude anything else. If a mutual conversion is the end goal, what is the driving force for the insiders to push hard for the conversion? The resulting benefits are not so great as to expend that kind of time and effort. It is through converting to a stock institution that the insiders can make some serious money. This is what drives these conversions. I have listened to management officials claim that they only wanted to convert to mutual banks and then go no further. They would talk about protecting the members of the credit union. I knew they were lying, and in every case in which I have been involved, conversion to stock eventually followed. Make All Aspects of Conversion Transparent Back to NCUA. The initial determination was to take a conservative approach and see how things developed over the long term. I advocated stronger action, particularly in the disclosure area. I even drafted a disclosure proposal similar to those used by the SEC. Even though we had numerous disagreements on other issues, to his credit, Chairman D’Amours also wanted stronger action. However, the Board consented to a moderate approach. The forces advocating charter change have only picked up steam. NCUA has responded with a variety of measures to ensure that all parties concerned are treated fairly. Disclosure to the membership has rightfully become a key concern for the agency. While I was a league president, I faced this issue in my state. I raised concerns with AACUL. I remember one closed forum attended by league presidents and some of the leadership of CUNA where I pleaded that charter conversions become a top concern. I stated that the issue would become more widespread unless properly addressed. The group ignored my plea, probably because most of them were not directly affected. I am somewhat satisfied that AACUL has finally organized a task force to consider the issue of charter conversion. I guess the problem has become widespread enough that they see the seriousness of the conversion cancer. In my mind, the charter conversion issue is a serious threat to the credit union movement. There are too many who put their personal interests ahead of the interests of those they are supposed to be serving. What should be done to stop these conversions? In my mind, any credit union seeking to convert to a bank charter of any type should, first, give full and adequate disclosure, beyond the requirements currently imposed by NCUA. There must be a written acknowledgement by the member that he or she has read the disclosure document before that person is allowed to vote. Second, opponents to the conversion effort should be given an equal opportunity to present reasons for not converting the credit union charter. This should be done through both mandated written communications and public forums. Current management should not be allowed to exclude opposing voices, even if opposition comes from outside the credit union membership. Third, voting requirements should be raised, both in participation and in approval. Fourth, if management says they will not convert to a stock institution but only to a mutual form, this should be a permanent decision. I maintain that any assertions that the credit union will convert to a mutual organization and there are no intentions to convert to a stock form are lies. Bet on it: the insiders will eventually convert to a stock institution. If they do so after telling members that the conversion will only go to mutual, have the institution liquidated. Fifth, if the credit union converts to stock form, then every member should be issued stock in a proportionate share based on deposits. There should be no stock or stock options reserved to management or Board or other insiders. There should be no treasury stock issuable except for full and paid-in consideration, not for services rendered or some other scheme to provide a benefit to insiders. In the event that the foregoing conditions are not acceptable, then we should require the credit union to do what it ought to do anyway. If they do not want to be a credit union any more, then liquidate. That is the only action that is fair and equitable to the entire membership. So, Marv, thank you for spurring me to speak out. I have been quiet on this issue since the leadership of AACUL and CUNA ignored my request. I figured that if they did not care, why should I. But your new allegiances, and AACUL starting to wake up, has encouraged me to stand up for the movement.