Will TARP Funds Level the Playing Field for CUs?

It’s depressing to write week after week and put out a magazine week after week about the current state of the nation’s financial crisis. While credit unions and community banks have not taken some of the hits so far, financially or politically, that the larger banks have, the fact of the matter is they are hurting and competing with government-subsidized banks. For all the talk of credit unions, and community banks for that matter, trying to douse a fire they didn’t ignite, can they afford to be the firefighters? Thus far TARP funds have only been used for capital infusions in banks, which have in turn gobbled up other ailing banks. This may help the consumers who drive the economy in the long-term, but they also have to survive now. Credit unions have been hamstrung from getting TARP funds. Despite being included in the bill that launched the program, practical application has prevented them from taking advantage, but they appear a step closer now than they had been. The House is expected to pass a bill providing guidelines to incoming policymakers as to how TARP funds should be used. NAFCU chief Fred Becker pointed out that federal officials have urged reconsideration of TARP for the purchase of mortgage-backed securities. How dire the credit union movement’s situation is during this economic crisis seems to be anyone’s guess. However, if the continued push by credit union representatives on Capitol Hill for taxpayer-funded money is any indication, it cannot be good. How could that possibly balance against the credit union movement’s larger and longer term goal of maintaining their tax-exempt status that would undoubtedly be called into question if they took taxpayer funds? CUNA debates that nexus but said the acceptance of TARP funds by credit unions would raise eyebrows as to why credit unions shouldn’t be included in a regulatory consolidation. After all, the Great Depression was what spurred the creation of the alphabet soup of regulators in Washington. According to Sandler O’Neill consultant Peter Duffy, credit unions and even banks, while incurring some self-inflicted wounds, are also victims of a system. Sometime in the mid-1980s, he explained to me recently, firms like GE, GM, and Ford were permitted to begin lending. At one time there was a line in the sand between banking and commerce, but the tide of innovation and free markets washed away that line, creating an increase on the supply side. Credit unions and banks over the last two to three decades have had new competitors to deal with to the point that seven lenders would be competing for one piece of A paper, according to Duffy. This took all of the profit out of lending, leading lenders to “experiment”-lenders like Countrywide and WaMu, and, yes, Norlarco, Cal State 9 and other credit unions. The competition was good for consumers in the short-term but not good for America or its financial institutions. CUNA said that while some credit unions may have been pushing the envelope, to a larger extent their problems can be attributed to local market conditions. The differences between the financial analysis of the four states have been really clobbered-California, Florida, Nevada and Arizona-and the rest of the country CUNA’s Bill Hampel described as “remarkable.” However, the economic troubles are spreading, and he admitted that with a variety of factors in flux, economists can’t even predict six months out. CUNA is fully expecting some type of regulatory restructuring and is weighing that against the amount of funds credit unions might take from the program. Hampel contends that the dollar figure would be relatively miniscule compared to the positives to be gained by continued lending and member service. Not only are members wooed, but Congress will appreciate the stimulus provided. Hampel was also quick to point out that the purchase of mortgage-backed securitie with TARP funds is not the same as a capital infusion. While the political capital and flight to safety warm fuzzies could be immeasurable, the risk exists that they can truly end up being unmeasureable. Just see our front-page interview with Barney Frank warning credit unions not to get greedy by asking for expanded business lending or risk-based capital. The seasoned legislator is just one man but a very powerful one in credit unions’ world. And consumers can be fickle. Lenders wouldn’t have been competing with all these alternative credit products if consumers weren’t chasing what appears to be the best deal du jour. Let’s all hope they’ve wised up on this aspect without retrenching entirely. One consistent and resonating question with regard to TARP usage according to the trades is a competitive one. They are hearing from credit unions that have to compete with the bank around the corner that received a capital infusion and turns around to offer 5% on CDs. On a national scale, GMAC received TARP money and subsequently began offering 0% financing, according to Hampel. How are credit unions going to compete with these circumstances on an unlevel playing field without assistance? Comments? E-mail [email protected]