Blaine and Conversion Lawyer Debate the Conversion Issue; CU Identity at Stake?

ARLINGTON, Va. – Just over 100 executives with credit unions, credit union organizations and other groups gathered in a hotel meeting hall in Arlington, Virginia on July 11 to hear Jim Blaine, CEO of the $13 billion State Employees Credit Union, and Richard Garabedian, a lawyer with the Washington D.C. law firm of Luse Gorman Pomerenk & Schick tackle a series of questions surrounding the topic of credit unions changing their charters to those of mutual banks. But while the topic has generated plenty of heat in various quarters and relatively little light, the atmosphere during the debate on the whole, reflected cordiality and gravity as each speaker tried to address different aspects of the controversial topic. The dinner discussion took place during the July meeting of the Metropolitan Credit Union Management Association. Many of Blaine’s points flowed from the premise that what converting credit union board members and management do when they guide their credit unions to become mutual banks and subsequently reap the windfalls of a stock offering is essentially stealing from the equity that the credit union’s members, collectively, own. Garabedian countered that, at times, changing a credit union’s charter to that of a mutual bank can be the best thing for helping members and that, in his experience, the boards and CEOs that he had worked with had not been primarily motivated by money when they chose to advise conversion. In general, each speaker refrained from zipping and zinging the other and stuck to the topic at hand, though Blaine employed many of the folksy examples and illustrations that he hoped would help bring a topic which he contends is too often obscured by rhetoric into clarity for the audience. “Richard, would you just give me your car?” Blaine asked, early in the debate. To which Garabedian replied that he might if Blaine had needed it in an emergency. “No. Would you just give me your car, out and out give it to me?” Blaine asked. “You wouldn’t, not without just compensation.” That is what this is about, Blaine explained. Credit union members are being asked to hand over something which has a very tangible value without just compensation. “The bottom line question is who owns the credit union and why should credit union members have to buy what they already own?” Garabedian countered that the membership interests in credit unions are not very tangible and that if a credit union merely changed its charter to that of a mutual bank, the members of the bank would still own the institution. He also noted that the members of the former credit union would be able to purchase stock on the same terms as the officers and board though he acknowledged that the bank could put into place an employee stock program in which the management and employees of the former credit union could participate. The Danger of Scandal The two men also differed significantly on the question of what could happen with credit union conversions overall. For Blaine, the issue is the most important facing credit unions today, in part because he believes it will only continue to grow and that each conversion, particularly in an area which is still comparatively unregulated, carries with it the seeds of scandal. “Make no mistake about it,” Blaine said, “this is here now and we need to address it,” reminding the audience of the debacle that followed in the savings and loan scandal in the 1980′s and pointing to the recent story in the Philadelphia media about a former credit union turned bank which, the story suggested, may have involved questionable dealings with local officials. Garabedian countered that while there were certainly scandals among the S&Ls, that crisis had also been about bad public policy which had come from Washington along with economic conditions that weakened the institutions. Blaine argued that the only way credit union members could really believe that their leadership’s recommendation of charter conversion was truly in their interest and not merely in the interests of personal gain would be for the credit union to publish to members the plan of how it intended to make money as a bank, to overcome the tax burden that becoming a bank would bring as well as the expectation of investors which would expect a return on their capital. He noted that the credit unions had to file such a plan with the Office of Thrift Supervision and other regulators as part of their charter change applications. “That is what really would count as full disclosure,” Blaine said, “an independent review of whether the credit union’s members would really benefit from a change of charter. So far none of the converting credit unions have been willing to do that.” Garabedian countered that since the business plans filed with the regulators contain proprietary information, any sort of disclosures that Blaine suggested would be “impractical.” Both men acknowledged as well that the reasons credit unions changed charters had changed over the years. Early credit union converts did it because they lost their sponsor or faced other field of membership issues. “But most current credit unions change charters because of capital needs,” Garabedian said. Blaine pounced on that, charging that excuse was fraudulent and that there were numerous tools a credit union could use to ease a particular capital pressure or to get over a particular capital need in a given area. Besides, he noted, as slowly as retained earnings accumulate, they had the overwhelming advantage of being free whereas most investors would seek returns on their investments in a former credit union of at least 15%. Afterwards Garabedian admitted that capital from investors carried a cost that retained earnings did not, but noted that the return could be the form of growth in value and not necessarily a 15% dividend regularly. Differing Definitions of Credit Union Identity By the end of the relatively short debate, both men acknowledged that the question of credit union charter conversions remained unresolved and, in discussions with each afterward, both also agreed that the debate had been at least partly about two differing views of what being a credit union means. “Credit unions are the last, best hope of the common man for affordable financial services,” Blaine argued. Credit union members trust their leaders to have their best interests at heart and to help them achieve their financial dreams and not to act in their own interests and for their own ends, and banks are just not about that. There are differences between being a customer and being a member/owner. After the debate, Garabedian acknowledged the difference but also noted that some credit unions may have reached a point where because of size or because of the wealthier nature of their membership, they were more comfortable with the notion of members being customers. “I live in Montgomery County, Maryland,” Garabedian said. “One of the wealthiest counties in the country. We have a credit union here, [the $307 million] Lafayette Credit Union that has a field of membership that covers the whole county,” he said. “Maybe in this county and these circumstances the shared cooperative nature of credit unions that marked their founding is not as important. Your charter should follow your service to your members, not the other way around,” he added. -