[R-G] [BillTottenWeblog] How Credit Unions Survived The Crash

[Bill Totten]

by Ralph Nader

Countercurrents.org (February 27 2009)


While the reckless giant banks are shattering like an over-heated
glacier day by day, the nation's credit unions are a relative island of
calm largely apart from the vortex of casino capitalism.

Eighty five million Americans belong to credit unions which are
not-for-profit cooperatives owned by their members who are depositors
and borrowers. Your neighborhood or workplace credit union did not
invest in these notorious speculative derivatives nor did they offer
people "teaser rates" to sign on for a home mortgage they could not afford.

Ninety one percent of the 8,000 credit unions are reporting greater
overall growth in mortgage lending than any other kinds of consumer
loans they are extending. They are federally insured by the National
Credit Union Administration (NCUA) for up to $250,000 per account, such
as the FDIC does for depositors in commercial banks.

They are well-capitalized because of regulation and because they do not
have an incentive to go for high-risk, highly leveraged speculation to
increase stock values and the value of the bosses' stock options as do
the commercial banks.

Credit Unions have no shareholders nor stock nor stock options; they are
responsible to their owner-members who are their customers.

There are even some special low-income credit unions, though not nearly
enough to stimulate economic activities in these communities and to
provide "banking" services in areas where poor people can't afford or
are not provided services by commercial banks.

According to Mike Schenk, an economist with the Credit Union National
Association, there is another reason why credit unions avoided the
mortgage debacle that is consuming the big banks.

Credit Unions, Schenk says, are "portfolio lenders. That means they hold
in their portfolios most of the loans they originate instead of selling
them to investors, so they care about the financial performance of those
loans."

Mr Schenk allowed that with the deepening recession, credit unions are
not making as much surplus and "their asset quality has deteriorated a
bit. But that's the beauty of the credit union model. Credit unions can
live with those conditions without suffering dire consequences", he
asserted.

His use of the word "model" is instructive. In recent decades, credit
unions sometimes leaned toward commercial bank practices instead of
strict cooperative principles. They developed a penchant for mergers
into larger and larger credit unions. Some even toyed with converting
out of the cooperative model into the shareholder model the way
insurance and bank mutuals have done.

The cooperative model, whether in finance, food, housing or any other
sector of the economy, does best when the owner-cooperators are active
in the general operations and directions of their co-op. Passive owners
allow managers to stray or contemplate straying from cooperative practices.

The one area that is now spelling some trouble for retail cooperatives
comes from the so-called "corporate credit unions", a terrible
nomenclature, which were established to provide liquidity for the retail
credit unions. These large wholesale credit unions are not exactly
infused with the cooperative philosophy. Some of them gravitate toward
the corporate banking model. They invested in those risky mortgage
securities with the money from the retail credit unions. These "toxic
assets" have fallen $14 billion among the 28 corporate credit unions
involved.

So the National Credit Union Administration is expanding its lending
programs to these corporate credit unions to a maximum capacity of $41.5
billion. NCUA also wants to have retail credit unions qualified for the
TARP rescue program just to provide a level playing field with the
commercial banks.

Becoming more like investment banks the wholesale credit unions wanted
to attract, with ever higher riskier yields, more of the retail credit
union deposits. This set the stage for the one major blemish of
imprudence on the credit union subeconomy.

There are very contemporary lessons to be learned from the successes of
the credit union model such as being responsive to consumer loan needs
and down to earth with their portfolios. Yet in all the massive media
coverage of the Wall Street barons and their lethal financial escapades,
crimes and frauds, little is being written about how the regulation,
philosophy and behavior of the credit unions largely escaped this
catastrophe.

There is, moreover, a lesson for retail credit unions. Beware and avoid
the seepage or supremacy of the corporate financial model which, in its
present degraded overly complex and abstract form, has become what one
prosecutor called "lying, cheating and stealing" in fancy clothing.

_____

Ralph Nader is a consumer advocate and three-time presidential candidate.

http://www.countercurrents.org/nader270209.htm


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