Guest Author: Jeffry Pilcher of The Financial Brand

We've been following stories about credit unions and TARP in the CU Journal (like the one from earlier this week - click here) for what feels like ages. First, credit unions are in; then, they're out. We're up, we're down - it gets confusing. 

One person who's also confused about the role of credit unions in TARP is Jeffry Pilcher, E-I-C of "The Financial Brand", a very popular blog for finance news, branding and everything in between. In addition to being a successful branding and marketing consultant (His company, IconIQ, can be found here), Pilcher spends countless hours pouring over news sources and tracking what's "hot" when it comes to personal finance. 

He decided to share with us his thoughts on CUs and TARP. 

 

Do natural person credit unions need TARP money or not?

Who really knows? One thing that’s for sure is that the credit union industry’s leadership has not offered a consistent explanation about why credit unions should be included in the TARP bailout. The rationale bounces around with each week that passes. 

Here’s a look at the range of reasons -- some contradictory -- being offered by credit union leaders, in what appears to be a shotgun, try-anything-if-it-might-work strategy: 

Reason #1 - Credit unions need to unload toxic assets 

Back in 2008 when the TARP idea was initially hatched, credit union leaders immediately started clamoring, “Don’t leave us out!” As NCUA’s Fryzel put it, credit unions had “troubled assets” (that’s industry code for “subprime mortgages”) that needed to be unloaded off balance sheets, even if only a few of them. That was the first reason offered. 

Reason #2 - Help credit unions unfreeze credit 

This argument makes the most sense. If banks getting TARP money aren’t lending it, then why not give it to credit unions. 

Unfortunately, the money won’t get lent no matter which financial institutions you give it to -- not right now. It can’t. There simply aren’t enough qualified borrowers under today’s tighter standards. And even if there were hordes of qualified borrowers, consumers aren’t buying. They are upside-down in their houses and worried about losing their jobs. 

Reason #3 - “But mom, he started it!” 

“Most credit unions never made subprime loans,” the argument goes. “Yet they're feeling the effects of the economy's downturn.” 

Translation: Let’s go rob Peter to pay Paul for Mary’s mistake. 

Isn’t everyone feeling the effects of the economy’s downturn? Using this rationale, wouldn’t everyone be entitled to TARP money? 

Reason #4 - “Give it to us... just in case. We may need it… someday.” 

“As the recession deepens, additional assistance for credit unions may be needed,” credit union leaders claim. “Inclusion in the bailout would be helpful.”

“May” be needed? Would be ”helpful?” Translation: We don’t need the money. But we might. So will you give it to us anyway? You know, just in case. K? Thx!! 

Reason #5 - “It’s not fair!” 

“Credit unions are looking at the bailout program and saying, ‘Why are you putting banks at a competitive advantage over us?’” 

Translation: Money was foolishly thrown at banks. Now credit unions want to compound the problem and level the playing field by throwing more foolish money around. Again, even though they don’t really need it. 

This is the most ludicrous argument the industry could offer. Why should credit unions get bailout money? “Because so-and-so got some” is the kind of answer you expect from huffy juveniles. To taxpayers, this kind of fiscally immaturity is completely irrational. 

CUNA has said, "Our position is that whatever is available for the banks should be available for credit unions." Is that a cry for parity coming from the credit union industry??? For real? Bailout participation without federal taxation? Does that sound fair? 

One credit union accusing TARP of “giving banks an unfair competitive advantage over credit unions” is even blaming their 10% budget cut in 2009 on the “competitive inequities” given to bailout banks. Come on... Practically everyone is cutting their budget in 09, regardless of who did or didn’t get TARP money.

Only 335 of the country’s 8,000+ banks have received bailout money, and few (if any) are in what anyone would describe as an “enviable position.”   

Reason #6 - “Credit unions need foreclosure relief.” 

Lately, credit union leaders have sensed that the public might be more receptive to TARP dollars that directly benefit homeowners -- you know, those folks living down on Main Street. After all, the TARP was originated to relieve mortgage-related stresses on the economy. 

So now, the new argument is that credit unions should receive TARP funds from the second tranche to “mitigate foreclosures.” If credit unions can find a way to use TARP money to keep people in their houses, this latest argument may actually work. Of course, this means admitting to a lot more subprime mortgage exposure than the industry might -- on the whole -- be comfortable with.  

But hey, if it doesn’t work, there’s always another reason... Try again next week! 

The good news is that credit unions remain “relatively healthy,” as CUNA and others have put it, so there doesn’t appear to be any immediate pressure to resolve this issue. 

Hasty and Ill-conceived solutions, like TARP, are the result of ill-defined problems. If the problem is that “X” number of credit unions could face federal conservatorship because mortgage defaults are ruining their capital ratios, why can’t someone just say it?

Comments

[Denise Wymore]

Jeffry,

Thorough, as usual. I think my personal favorite is the "We're tired of being treated like second class citizens...wahhhh wahhhh wahhh argument."

I for one am proud to be "second class" if it means I get to be part of a financial cooperative with a 100 year history of NOT costing tax payers money!

Thanks for keeping us up-to-date. I hope someone has the you-know-what to step forward and tell the truth - no matter how weird it might be. Like to hear it.

Cheers!

[SRG]

Yeah this goes right along w/ the article on The Financial Brand a week or so ago about how not getting TARP money is prob a good thing. I think most people would agree the first TARP handout of billions w/ no strings attached was ridiculous, hopefully the govt. has learned from that and will have plenty of stings/oversight on the rest of the money given out. If a CU gets some of that money they better be ready for Big Brother to have a constant watch on where it goes.

[Ginny Brady]

Most credit unions have put policies in place which reassure members that our lending practices are sound, our capital is safe and we can weather this crisis. This safe position may be unseated as a result of this week's action by NCUA. So called natural person credit unions will be asked to pay a special premium in order to replenish the NCUSIF after its $1 bil PIC deposit to shore-up the capital and liquidity of US Central. Perhaps this, ad hoc, CU TARP is necessary for the survival of corporate credit unions and by extension all credit unions, however, the cost could be a hardship for many credit unions. Quoting a letter written by the president of Corporate America Credit Union, Thomas Bonds, to members - a $100,000,000 credit union will be writing a check for $620,000. This will be an expense in 2009. Our credit union is 1/5 this size. Will we be paying $124,000? I'm hoping my calculations are incorrect.

[Elliott]

I had always wondered what the financial sector would look like if the federal government subsidized good behavior (conservative lending standards) rather than subsidizing bad behavior (doing whatever it takes to turn a short-run profit).

Another way to ask this question is this: "What if the 'bailout' money actually went to all institutions that could prove their stability?" The question won't do us much good right now, but for next time, I'd like to ask people to consider that question in regards to Jeffrey's second reason.

Honestly, it seems like the most sense that if you want to unfreeze the credit market, you give increased power (money) to lenders who have wisely managed their power (money) in the past. Imagine if a Congressman (or woman) stood on the doorstep of a credit union and said, "You've been doing the right thing all along. Please help us out of this crisis." It would be very UN-Congressman like, but wouldn't it be nice?