‘This is the opposite of what federal bank regulators are doing with capital…’
(Ben Sellers, Liberty Headlines) Banks and other credit unions are crying foul over federal regulators’ questionable decision to greenlight a capital campaign for a financially teetering Big Labor credit union—while at the same time blocking similar requests by its better managed and capitalized competitors.
By rubber-stamping a request by Orange, Calif.-based Union Yes Federal Credit Union to raise $4 million in subordinated debt, at fixed and variable rates of 4 to 4.5 percent interest over five- to seven-year terms, the National Credit Union Administration gave the financial institution an unfair edge over competitors, say critics.
An industry insider told Liberty Headlines that the union-boss-run credit union has turned in financial performance numbers that would normally prompt a federal shutdown mandate, not new approvals.
The recent capital issuance approval—which would more than double the credit union’s current capital and raise debt totaling 6 percent of its current asset holdings ($63.4 million)—also means that the tax subsidy granted to Union Yes as a member-operated collective would theoretically benefit its investors instead of its members, said blogger Keith Leggett, a retired economist with the American Banker’s Association, on his Credit Union Watch.
Leggett told the subscription-based trade publication American Banker that agencies overseeing the non-subsidized banking industry, such as the Federal Reserve and the FDIC, would never allow such a sweetheart deal to fly with so much of an organization’s capital coming from short-term, temporary sources.
“This is the opposite of what federal bank regulators are doing with capital,” he said.
The NCUA contends that Union Yes FCU’s low-income designation allows it to bend the rules imposed on other, larger institutions.
But viewed from another angle, it seems more like a case of political cronyism at its worst.
According to the Union Yes website, the credit union’s mission since 1981 has been “to serve only union workers and their families” in Southern California.
Meanwhile, some comparable rural credit unions that have been denied approval for capital issuance have raised questions with the NCUA’s ombudsman, Joy Lee, regarding the arbitrary standards applied.
They note that in the agency’s own 2016 “Secondary Capital Best Practices Guide” (which were abruptly removed in recent days from the NCUA’s official website, under “poor practices,” it lists several standards that all would seem to apply, on some level to Union Yes FCU:
- Poor due diligence, inaccurate cost benefit analysis and weak strategic planning in connection programs funded by secondary capital
- Premature and excessively ambitious concentrations of uninsured secondary capital to support unproven or poorly performing programs
- Failure to realistically assess and timely curtail programs that, in the face of mounting losses, are not meeting expectations
- Use of secondary capital solely to delay Prompt Corrective Action
- Insufficient liquidity to repay secondary capital at maturity
A look at the bank’s records indicates that the capital campaign may even be an effort to skirt the imposition of corrective action over recent negative returns—creating a potentially toxic brew for investors who hope to get their money back in a timely fashion.
So indefensible was the NCUA’s approval of the near-failing credit union’s capital raise that one insider floated the possibility of corrupt motives by the NCUA bureaucrats involved in the decision.
Union Yes CEO William Byerly, however, painted a rosier picture in the credit union’s March 13 prospectus.
“Over the past few years,” he said, the credit union “has been experiencing extraordinary growth and needs to raise additional capital to fund new membership growth.”
Union Yes says its goal is to become a $100 million financial institution.