By Frank J. Diekmann
Well, I was wrong, and even faster than usual.
About six weeks ago I wrote in this space that the embezzlement by Edward Rostohar of $40-million from a $21-million credit union was “a black eye for credit unions as a whole, and I’d say the same for NCUA as an examiner, but it’s long since run out of eyes to blacken.”
It seems I way undershot the runway and, unusual for me, was way too optimistic. It turns out there were approximately 5,500 sets of eyes left to be blackened.
The second right hook to the collective face of the credit union community has come from an the 13,587-car pileup of medallion taxicabs in New York City, where the market has crashed and the best body shop in the world will never bang out all the dents and make it good as new. A 10-month investigation by the New York Times found even as taxi medallion values were driving right off the Brooklyn Bridge, many people—especially lenders—were getting rich, including one credit union CEO who reportedly took home more than $30 million.
Meanwhile, borrowers, who were primarily low-income immigrants (you may remember them from that story of the founding of St. Mary’s Bank credit union folk like to tell when gathered around the cooperative campfire) have had their lives so upended nearly a dozen have committed suicide and nearly 1,000 others have been left bankrupt. Even those still driving and making loan payments will never see any value close to what many of them paid for their medallions and shall forever be upside down. You can find CUToday.info’s report on the Times’ investigation here. Spoiler alert: the ending is even less satisfying than Game of Thrones.
$750 Million Was the Small Cost
Every federally insured credit union in the country has paid a price for the Medallion meltdown to the tune of a $750-million hit to the National Credit Union Share Insurance Fund, and that doesn’t even count those CUs that bought medallion loan participations that they’ve had to write down.
But NCUSIF assessments are inside baseball stuff, and every credit union in the country, federally or privately insured, is instead paying a much bigger price when it comes to reputation. The Rostohar embezzlement received press coverage across the country, and the same is now true for the taxi medallion loans scandal. And now that those loans have become the subject of investigations by New York’s attorney general and City Hall, there will only be more headlines to follow.
Back in the Headlines
It’s hard to believe that so shortly after what I wrote in April, that credit unions are giving the impression they are “some sort of amateur investment clubs with crooked management and little professional oversight”–the mass media is again filled with similar reports.
Six weeks ago I asked what could be done about embezzlements, and readers were quick to offer their ideas and feedback, including those who said ultimately nothing can be done except stopping it more quickly.
This time I have a different and far bigger and existential question: who, if anyone, in the credit union community is going to stand up and do something? Who will speak up and admit there are some problems that are fixable, and it’s up to everyone to fix them? Who will stop bragging about the white hat and instead pick it up and wipe off some of the mud?
Who Will Lead?
As we’ve seen so far, it’s not going to be the trade associations, who in a sad irony are so busy talking about advocacy in Washington they don’t seem to have time to advocate for some frank assessments and self-help. Hey, nobody likes paying dues to the Debbie Downer Club. And I haven’t been to a CU meeting this year where I didn’t trip over someone or three yapping about the “Credit Union Story.” The Credit Union Story is indeed a story of good news—but that doesn’t mean new chapters can’t and won’t be added.
There's a big vacuum in credit unions just begging for someone to step in and build a discussion around what's happening in credit unions. Although it may not seem like it, the future really isn't about CECL, unless that's Current Expected Credibility Loss.
Standing up for what’s right and what needs to be said is damn tough when times are good—“don’t rock the boat” is the cliché most often cited, and those who do rock the boat are usually thrown overboard by the party-can-never-end crowd. But it would seem by now credit unions have learned some bruising, black eye lessons about what happens when courage takes a back seat to not being the rain at the parade, and the bubble finally bursts.
The Horns Are Blowing
In the case of the Medallion bubble, the New York Times’ investigation makes abundantly clear there were plenty of blowing horns to be heard by anyone willing to stop and listen that the price appreciation could not be sustained. But who was willing to step up when the good times were rolling? A decade ago, as CUs also learned in an even more painful tutorial, there were even bigger red flags being run up poles all over the country that the housing market bubble was getting bigger and bigger and…
Today, we have credit unions basking in surging membership growth and strong capital positions, and it seems a day doesn’t pass when I don’t receive a press release in the inbox about the latest CU to join the billion-dollars-in-assets club. Heck, credit unions have even gone from fighting banks to increasingly buying them.
You might say credit unions are enjoying quite the confidence bubble right now. And it’s growing, and growing…
Frank J. Diekmann is Cooperator in Chief at CUToday.info and can be reached at Frank@CUToday.infoor followed at @FrankCUToday.