Bankers Are More Excited about Potential Conversion Weakness in Credit Union Industry than the Prospect of Taxation

As reported in the April 12 edition of Credit Union Times, I participated in a panel discussion on credit union conversions at the University of North Carolina School of Law’s Banking Institute a couple of weeks ago. Others on the panel included Diane Casey-Landry, CEO of American Community Bankers, John Ryan, regional director of the Office of Thrift Supervision’s Southeast Region, and Gerard Comizio, a lawyer with considerable experience in charter conversions of all types. The audience consisted mainly of attorneys, scholars, some regulators and bankers. Our panel followed previous sessions focused on data security and the Bank Secrecy Act. To say it was a somber crowd is a gross understatement. I’ve been to see the Tampa Bay Devil Rays play the Kansas City Royals a few times and the crowds showed more enthusiasm! Regardless, our little band of diverse “experts” tried our best to raise the consciousness, if not the passion, of this highly educated assemblage. David Morrison correctly reported that our panel’s purpose was to discuss credit union conversions. Specifically, we were asked to offer our opinions as to why credit unions would consider converting, who should play a role in that process, and whether credit unions that have converted or plan to convert have been or will be successful. David also reported that I appeared to be frustrated by the lack of understanding that my fellow panelists exhibited as to the core issues of member ownership. He was also correct with that observation, up to a point. My frustration was not at their inability to grasp this key concept. I think they do understand – they just choose to ignore it. In fact, I left that panel with a clearer understanding of the banking community’s tactics with regard to conversions. Here are my observations: * They see credit union conversions as our kryptonite. Diane Casey-Landry said that she is thrilled to be talking about conversions as opposed to taxation. While the taxation issue continues to fail to get meaningful traction, she sees conversions as a real opportunity for success. If they are allowed to proceed without a factual analysis of the real impact on member value, bankers believe the credit union community will render itself irrelevant. * NCUA has become the major target. The banking community is using its considerable resources and contacts to impugn the credit union regulator in Congress and in the courts. They understand that by neutering NCUA’s ability to effectively monitor them, conversions would be allowed to proceed with minimal due diligence. Mr. Ryan of OTS was subtle but quite clear in his criticism of NCUA as it has sought to protect the rights of credit union members. * The banking community insists on suggesting that credit unions are only converting to mutual ownership, which they say is not inherently different from their current structure. While there are some notable differences in the two entities, this is really a moot point. The only former credit unions that retain or plan to retain mutual ownership are quite small. Tellingly, between 1975 and 2004, assets held by mutuals declined from over 23% of all depositories to 1.4%. A large mutual thrift has become as difficult to locate as Marvin Umholtz’s credibility! Even Diane Casey-Landry won’t suggest that any large credit union seeking to convert will retain their mutual structure for long. * A catch-phrase that the bank trades, attorneys and regulators like to use is “market discipline.” They theorize that once a credit union becomes a stock-owned entity, those stockholders will demand a higher accountability than currently exists. This position resonates with those familiar with equity markets. It could actually be a worthwhile discussion except for one glaring question: Who would benefit from this “market discipline,” assuming it really happened? It certainly won’t be the current members whose ownership stake has been transferred to the new stockholders and who end up paying more for their financial services as a result of the inferred “market discipline.” * We often hear that members will have an opportunity to purchase stock and therefore will have meaningful ownership after the mutual converts to stock ownership. This just doesn’t happen. A review of previous mutual-to-stock conversions indicates that the average member participation in the stock offering is less than 5%. They either don’t understand the voluminous prospectus, they don’t have the resources to invest or both. The overwhelming majority of stock is acquired by insiders (key management and board) and outside investors. * Which brings me to my final observation. Few people want to discuss the reality of insider profit-taking – certainly not bank spokesmen (or women), their regulators or the officials of the converting credit unions. I provided an analysis, prepared by a legal firm that specializes in conversions, that shows exactly what a conversion to stock ownership would mean to insiders at Suncoast. Even my fellow panelists didn’t try to rationalize my very realistic potential windfall of $35 million, which would be attained without a penny of my own money being placed at risk. They prefer to point out, correctly, that any real gains are governed by the rules of the bank regulators. In other words, it may not seem fair, but it is legal! I’m sure some folks in the banking community, and even in the credit union community, might dispute my observations. A larger percentage will simply suggest that they’ve heard all this before, but there is nothing that should be done about it. They argue that credit unions that want to convert should be able to do so and that those of us who protest have no right to do so. The suggestion is that we are only trying to protect ourselves, our trade associations and our regulators. Well, I think I could go along with those arguments if we could agree on the following two actions: 1) A converting credit union should present a reasonable business plan that shows that a charter change will benefit existing members in the long run. By necessity, the plan would explain how they will deal with the additional expenses of taxation, return to stockholders and additional regulation (CRA) when calculating the benefits to those existing members. An objective analysis performed by a qualified third-party would be important. 2) A converting credit union should fully explain and justify or repudiate (now that would be different!) the significant monetary gain that insiders will realize from the inevitable conversion to a mutual holding company or stock-owned bank. Don’t hide behind OTS rules – give the real numbers. I’m sure they know exactly what’s at stake. There are certainly other options that could bring this process out into the light and give it credibility, but it seems to me if we take care of member value and insider windfalls, most of us could agree that we’re on a “level playing field,” as the banking community is fond of saying. And just think how much harder Diane Casey-Landry’s job would be!