By Frank J. Diekmann
You may now officially stop looking. The new gold standard has been identified for how historical performance can be meaningless and how things can be going great right up until they most definitely are not. And here (and here and here) it is!
“Losses caused by speculative commercial loans do not give any indication to the riskiness of (member business loans) such as taxi medallion loans that are supported by an asset with a stable value, supported cash flow, and personal guarantee…”
That ironclad forecast is from a 2014 comment letter to NCUA from Progressive Credit Union, a New York City-based CU that specializes in loans for taxi medallions—you know, those never-to-depreciate “stable value” pieces of collateral.
To make sure those Debbie Downers of Duke Street at NCUA weren’t missing the all-too-obvious, Progressive Credit Union further pushed back against the risk-based capital proposal by stating, “The inappropriate risk weighting is a means of NCUA legislating our offerings and micromanaging credit union business strategy without regard for the success of that strategy without any history of being risky (means) we will be compelled to maintain a higher level of capital.”
Isn’t that just like the feds, rolling out a strategy without "regard for success…”
'Never Written Off a Single Penny'
It wasn’t just Progressive astonished the regulator was so ridiculously over-reacting.
Consider this priceless prognostication, also part of a comment letter sent to the agency four years ago in response to the agency’s proposal for risk-based capital:
“Over the course of the past 40 years, the credit union has never suffered a loss in a taxi medallion-related loan and is proud to state we have never written off a single penny of principal in any taxi related loan in the cities we serve. We have built our solid financial strength on the quality of our service to our membership and the expertise with which we have underwritten these loans to thousands of members…The history of a credit union should matter in calculating the necessary capital to correspond to the risk on the balance sheet. So should the historical performance of the credit union with decades of expertise in underwriting, funding and collecting business loans.”
That comes from the comment letter of Montauk Credit Union. Or, more correctly, the former Montauk Credit Union. Less than a year after it was taking a Hi-Liter to its “decades of expertise” to emphasize it knows what it’s doing and NCUA can keep its risk-weights to itself, thank you very much, the then $162-million Montauk CU was conserved by New York’s state regulator and eventually merged into Bethpage Credit Union (with every NCUSIF-insured CU now on the hook for all those bad fares).
I have to give Montauk CU credit, however, as they were right: No one has had to write off a “single penny” in taxi medallion loans. There’s been nothing single about it.
'The Best-Performing Loans in the Country'
It wasn’t just the credit unions themselves objecting to the idiotic audacity of some know-it-all bureaucrats in Washington sticking their nose under the hood down at the taxi livery garage. Their trade associations were also appalled.
In its 2014 comment letter, the New York Credit Union Association argued that NCUA’s RBC proposal needed to be “extensively revised,” noting, “By placing too much emphasis on concentration risk and giving itself the power to impose customized capital requirements on specific credit unions, the NCUA is seeking to take too much power away from credit unions.
“Some of the best performing loans that credit unions make--taxi medallion loans--would be given among the highest risk weights possible simply because there are some credit unions that specialize in making these types of loans, with no consideration of the fact that these are among the best-performing credit union loans in the country,” the NYCUA added.
Go ahead and let that one rattle around for a moment.
For good measure, the New York association’s letter added, “The last five years provided credit unions with an unwanted real‐life stress test. They demonstrated that the credit union system as a whole is extremely well‐managed and has more than enough capital to withstand even a severe recession.”
A broad recession, maybe. But the kind of narrow vertical recession/depression the category-killing ride-sharing apps have brought about? Not so much.
We'll Always Need Taxis
The New York association’s letter closed by telling NCUA, “In addition, the weightings should be decreased for credit unions with a history of well‐performing MBL loans…”
Because if there’s one piece of conventional wisdom that deserves to be slathered in gold leaf, it’s that history is a reliable guide for the future and people will always need taxis, right?
The point here isn’t to throw some 20/20 hindsight shade at people in credit unions who were not just “convinced,” but who KNEW they were right. After all, faulty convictions based on historical performance were by no means limited to CUs. This year marks the 10th anniversary of the collapse of the U.S. housing markets and much of Wall Street, when everyone KNEW home prices never fall nationally and mortgage securities were every bit as safe as government bonds.
Instead, with 2020 now getting close—and with the credit union trade groups once again working to push NCUA’s latest RBC proposal even beyond that year– it’s to remind that critical to 2020 foresight is remembering that that “know” is not just the basis for “knowledge,” but also for the sentence “I should have known…”
With NCUA and the NCUSIF currently reserving nearly a billion dollars for losses related to taxi medallion loans, perhaps what everyone really should be talking about isn't risk-based capital, but instead the danger of “risk-based knowledge.”
Frank J. Diekmann is Cooperator in Chief at CUToday.info and can be reached at Frank@CuToday.info.