How Credit Unions Survived the Crash
By Ralph Nader
February 26, 2009 "CounterPunch" - February 23, 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.
By Robert Scheer Truthdig: Freb 24, 2009
We are lucky to have Barack Obama as president. I write that even though I believe the content of his Tuesday evening speech deserved no more than a B+ / A-, for its failure to seriously address the origins of the banking crisis and for only hinting at the severe military budget cuts required to get close to his goal of reducing the federal deficit by the end of his first term.
But first the positives, which were stunning, and I am not referring only to his superb delivery, which thankfully is logical and informed and inspires without pandering. The one truly memorable, historically significant line-unfortunately desperately needed because of the shameful actions of his predecessor-was: ". I can stand here tonight and say without exception or equivocation that the United States does not torture."
That simple declarative sentence justifies my vote for the man, no matter my disagreements with him. It is recognition of the essential vitality of a free society as defined by our Founders through the protections they wrote into the Constitution and which George W. Bush so casually demolished. As Obama put it, ". living our values doesn't make us weaker, it makes us safer and it makes us stronger."
Another gift of this speech is the reassertion that government exists to redress our grievances rather than exacerbate them. His is a bold reincarnation of the wisdom of Franklin Delano Roosevelt that the Democratic Party had all but abandoned. Obama's insistence that government rather than just the "free market" should set needed priorities is refreshing and important, particularly in light of his emphasizing the changes needed in education, health care and energy efficiency-the three areas that a short-term view of economic growth systematically neglected since the New Deal.
So, he was great, and when I was just listening to the speech, I was quite enthralled, as were those around me. But on reading his remarks, I have questions.
Speaking of the financial crisis, he observed, quite correctly, ". it is only by understanding how we arrived at this moment that we'll be able to lift ourselves out of this predicament." Then he went on to observe, "Regulations were gutted for the sake of a quick profit at the expense of a healthy market." Leave aside that his top economic advisers, particularly Lawrence Summers, were responsible for that gutting. Maybe they have reformed and will now do the right thing.
But the right thing begins with a recognition that it was deregulation, specifically the ending of all statutory regulation of the "hybrid instruments" that allowed for the exotic financial products that have turned so toxic. Just read the language of the Commodity Futures Modernization Act, which Summers as treasury secretary pushed and which he got then lame-duck President Bill Clinton to sign.
When Obama stated "I ask Congress to move quickly on legislation that will finally reform our outdated regulatory system," he missed the point. The system is not outdated; it is a get-out-of-jail-free card for Wall Street bandits. Unless we return to the New Deal-created rules that separated the activities of banks, stockbrokers and insurance companies and put them under tight regulation, we are doomed to a repeat of this meltdown.
The other problem with the speech is that while Obama made some fleeting references to getting rid of Cold War-era weapons and did promise an end to the Iraq disaster, he once again left open the door to the United States being trapped in an even more treacherous quagmire in Afghanistan.
At some point, if he is to make good on his promise to cut the deficit by half within four years, he will have to confront the military-industrial complex, which now obtains much larger annual budget allocations than when President Dwight Eisenhower issued his famous warning.
Currently, military spending makes up 60 percent of the federal government's discretionary budget. Let me offer one example of why the president must begin to turn swords into plowshares if we are to have a sound economy. That example concerns his bold call for spending $15 billion a year on the entire program to develop alternative sources of energy. Sounds like a lot of money, but it isn't when one considers that an almost equal amount, $14 billion, for Virginia-class submarines-worthless in fighting landlocked terrorists-was pushed through the Congress in the month before Obama took office.
The critical test for Obama will be to break that incestuous circle of influence, particularly the clout of the bankers and the war profiteers and the other top lobbies that pay off both parties, and put the public interest first.
Ralph Nader is a consumer advocate and three-time presidential candidate.