There are two reasons governments nationalize corporations: (1) The company is losing money and it is considered too important to fail; or (2) it is making lots of money and the government wants to get its hands on it. Fannie and Freddie have had such a roller coaster ride since 2008 that they have been victimized by both impulses. Since credit unions have a vital stake in the future of the secondary market, they shouldn’t shy away from voicing their opinion.
Yesterday, Freddie Mac announced a $200 million loss for the first quarter. It attributed the loss to those blasted GAAP accounting rules. (If only companies could come up with their own financial statements without accountants getting in the way, the economy would be so much stronger.) Specifically they explained that interest rate volatility, combined with the way they book their derivatives, made things look worse than they actually are. Yada, yada, yada. http://www.freddiemac.com/investors/er/pdf/2016er-1q16_release.pdf
Freddie’s announcement raises questions about the continued wisdom of an aspect of US housing policy, which has thus far received too little attention. In September, 2008 the Government handed the GSEs a lifeline and $187 million was drawn from the treasury. Congress also empowered the FHFA to act as conservator or receiver of Fannie and Freddie, and to take over the rights of any stockholder, officer, or director. The Government originally took preferred stock; but, stating in 2012, the Government started sweeping all GSE profits exceeding capital buffers. Considering that the GSEs have made lots of money in recent years, this was a good deal for the Government. In fact, it was such a good deal that the Treasury is being sued by private stockholders claiming that the Government is taking money that belongs to them. Perry Capital LLC v. Lew, 70 F. Supp. 3d 208, 217-18 (D.D.C. 2014).
But, does this policy make sense if the GSEs are losing money? “This development reinforces my concern over current federal policy regarding the GSEs, who have more than fully repaid the funds they borrowed during the 2008 financial crisis,” said Rep. Michael Capuano, D-Mass. He is a member of the House Financial Services Committee, who has emerged as a level headed voice of reason on housing policy and was quoted in this morning’s American banker as saying. “Despite this, they must continue sweeping all their profits to the Treasury Department. The policy needlessly prevents them from building a capital reserve, which leaves taxpayers vulnerable in the event of a future crisis.” http://www.americanbanker.com/news/law-regulation/freddies-quarterly-loss-renews-cries-to-end-profit-sweep-1080807-1.html
A lot happened yesterday in NYS politics. Long-serving Southern Tier State Senator Thomas W. Libous, whose career terminated following a federal perjury conviction, passed away after battling prostate cancer.
Hugh Farley has announced he is leaving the State Senate after 40 years. For decades, Farley was one of the most influential banking policy makers as Chairman of the Senate Banks Committee.
And, of course, Sheldon Silver was sentenced to 12 years in jail, in addition to a hefty fine, and ordered to pay restitution of over $5 million.
On Friday, NCUA’s Office of Small Credit Union Initiatives released a series of video modules dedicated to “merging from the merging credit union’s perspective.” It’s like the flight attendant reminding passengers that their cushion can be used as a flotation device as they are flying over the Atlantic Ocean.
These videos would have been more appropriately titled “you got to know when to hold ‘em, know when to fold ‘em, know when to walk away, and know when to run.” If you think I’m exaggerating, watch the videos for yourself.
The recurring themes are (1) there is no shame in merging; (2) merging when your credit union is relatively strong gives you more leverage than merging when you are weak; (3) merging can preserve and increase membership value; and (4) contracts can be negotiated to protect employees and services. And did I mention that there is no shame in merging, especially for those of you whose board meetings are taking on the look of the activity committee of a Boca retirement village? Module 2 ends with this uplifting quote from the CEO of a $900 million credit union: “Most small credit unions are too proud to merge. They see merger as a failure rather than a benefit to members. So they will only merge at the inflection point of a CEO retirement or financial stress.”
What bothers me about the videos isn’t their content: NCUA’s ever so subtle nudge is a reflection of reality. There are approximately 275 mergers a year. Mature industries consolidate, particularly in the financial sector. Besides, the trend is by no means unique to the credit union industry. Just ask First Niagara. People want cheap, effective products and services and the only way of providing this grab bag is to hold down costs and increase economies of scale. And, let’s be honest, a credit union with a shrinking membership and no strategic plan for growing the base isn’t helping anyone by living off its excess capital.
What concerns me about the videos is that unlike the commercial banking sector, the credit union industry could literally merge itself out of existence. As of December, there were 481 credit unions with $500 million or more in assets and a little more than 200 of those have assets of $1 billion or more. From a purely economic standpoint, many credit unions with less than $500 million should consider merging. But, the credit union industry is unique. While it’s indisputable that the bigger credit unions can more cost effectively provide services and that many of our largest credit unions use their increased size to give people a better deal than they would get from banks, it’s doubtful that the industries not-for-profit cooperative model can survive politically as if the industry is comprised almost exclusively of billion dollar institutions. It’s ultimately the small guys – even the endangered home-based CUs – that keep the industry viable.
The industry is unique in that it needs a healthy mix of asset sizes. If a credit union has no chance to grow then, of course, merging makes sense and you should take a look at these videos. But, I’m afraid that there are too many credit unions that are willing to give up without a fight.
For instance, there is a great generation of community conscience, tech savvy millennials: why are they in such short supply on credit union boards? States like New York have made important changes to help credit unions grow by expanding their fields of membership: why have so few credit unions taken advantage of these changes? Credit unions exemplify the cooperative model: why are they so reluctant to form CUSOs to combine back office services? With so many aging boards, why are there credit unions without succession plans? With so many Americans looking to make the most of their money, why are there credit unions that refuse low income status even though it would help them grow and help their members?
NCUA’s right. There is no shame in merging, but there is shame in going down without a fight.
Ridesharing a Top Legislative Priority
When the Legislature returns from its late April slumber, the regulation of the emerging ride sharing industry will be a top priority according to Assembly Democrat John McDonald. In an interview published yesterday, the Cohoes Legislator argued that expanded ride sharing options and the traditional taxi medallion industry can co-exist.
“I don’t look at ridesharing as the threat to the (taxi) industry that most people think it is. Most of the taxi business here is medical transport. That’s what they do, 80 percent of it,” McDonald said. “We’re working on a parallel path with the taxi industry to Uber-ize them as well, bring them into the 21st century. It’s the technology.”
The Assemblyman’s comments are worth noting for a few reasons. First, with the biggest issues taken care of (paid family leave and the minimum wage) in the budget, ride sharing has certainly moved up the Legislative to-do list. Furthermore, the fact that an upstate Assemblyman is highlighting the issue demonstrates why it is so complex. Whereas, down-staters are understandably concerned about the regulation of New York’s existing medallion system, up-staters view ride sharing as a means of expanding transportation options. Your blogger will attest that the taxi service in the Albany area is nothing short of atrocious.
Remember that for credit unions the two big issues are proper insurance to protect the value of their auto loans and the value of medallion loans.
CFPB to Make Further Changes to TRID
In a letter to industry stakeholders yesterday, the Bureau said that it would be incorporating much of its informal guidance into proposed amendments to the TRID regulations by late July.
The Bureau has been doing a fair amount of letter writing lately. It recently responded to a letter from Tennessee Republican Senator Bob Corker, who asked the Bureau four questions:
- What is the CFPB doing to address the borrower confusion due to the discrepancies between federal and state law regarding the disclosure of title insurance premiums?
- What steps is the CFPB taking to prevent lenders from shifting liability to settlement agents?
- Will the CFPB consider forming an internal task force to identify and address issues arising from the implementation of the TRID rule? And
- Will the CFPB release technical guidance regarding what constitutes a technical error and potential remediation method?
Here is the Bureau’s response.
By the way, while lenders remain ultimately responsible for ensuring proper disclosures, there is nothing to prevent them from spreading the cost of liability to third parties, nor should there be.
Justice Department Oks KeyCorp Merger
KeyCorp and First Niagara Financial Group Inc. have agreed to sell 18 of First Niagara’s branches in and around Buffalo, New York, with approximately $1.7 billion in deposits, to resolve antitrust concerns that arose from KeyCorp’s planned acquisition of First Niagara,the Justice Department announced yesterday. Here is a list of the branch locations to be divested. https://www.justice.gov/opa/file/846646/download The Department said that with these branch sales it will no longer oppose the merger. Both Senator Schumer and Governor Cuomo have urged the federal government to block the merger which has to ultimately be approved by the Federal Reserve. They argue that it will result in a loss of jobs and financial services in the impacted regions.
I have some good news and some bad news for those of you working yourself into a panic over the Federal Accounting Standards Board proposal on accounting for Current Expected Credit Loss. The bad news is that the FASB decided to go forward with the proposal and expects a final standard to be issued in June. The good news is that the FASB decided to delay by a year, until December 2020, the compliance deadline.
In addition a sharply divided board also decided to scale back a requirement that financial institutions disclose credit quality indicators by year of origination. Specifically, as explained by FASB board member Hal Schroeder, “Current GAAP requires banks to disclose “credit-quality indicators” for each class of loans. The new requirement would further disaggregate those disclosed amounts by year of origination (or vintage).”
Community banks and credit unions argued that such detailed break downs are not necessary for smaller thrifts that don’t have large institutional investors. They argued that members in credit unions and investors in traditional thrifts are already familiar with their institution’s finances. The Board agreed yesterday so now you won’t have to disaggregate and disclose data. This is a small narrow but important exception but it doesn’t exempt credit unions from complying with CECL . http://www.fasb.org/jsp/FASB/Document_C/DocumentPage&cid=1176168100698
Although the delayed effective date is welcomed for those credit unions most impacted by this proposal, the new accounting standards could have an impact analogous to the Risk-Based Weighting Requirements since portfolios may have to be adjusted to account for the recognition of potential losses earlier in the lending cycle. This is not one to put on the proverbial back burner. http://www.fasb.org/cs/ContentServer?c=FASBContent_C&pagename=FASB%2FFASBContent_C%2FNewsPage&cid=1176168101253
An IPhone Inspired Reminder?
Lest any banks out there were considering beefing up their encryption too much, the OCC issued a concise warning – I mean Guidance – yesterday reminding banks that examiners have the right “to require prompt and complete access to all of a national bank’s relevant books, records, or documents of any type” and that it is therefore “inappropriate.to use technology designed to permanently delete internal communications, especially if occurring within a relatively short time frame.” This just applies to banks, but I wouldn’t be surprised to see NCUA come out with a similar guidance in the near future. Security officials and apparently examiners are concerned by the development of technology that both encrypts and quickly erases messages. http://www.occ.gov/news-issuances/bulletins/2016/bulletin-2016-13.html The IT job is becoming more thankless by the day. Tech people are told to make their financial institutions as safe from hackers as possible but not so safe that information can’t be easily accessed by examiners.
Fed Holds Interest Rates Study
I’m beginning to long for the days when the Federal Reserve’s Open Market Committee shrouded its deliberations in silence. That way we could all convince ourselves that the stewards of the economy were maestros overseeing economic growth with scientific precisions. Instead, we get bland equivocal announcements about the state of labor and employment that make it quite clear that the Fed is as confused as everyone else about where inflation is headed. So it decided to put off, at least until June, another interest rate hike. Here is its latest statement. http://www.federalreserve.gov/newsevents/press/monetary/20160427a.htm.
The Home Based Credit Union Lives!!
Remember when the NCUA proposed doing away with home-based credit unions? (https://newyorksstateofmind.wordpress.com/2014/04/07/matz-to-home-based-cus-drop-dead/)
It argued that they were potentially unsafe for examiners and that banking had just grown too complicated to be run out of a basement. Well, common sense and nostalgia prevailed. The WSJ reported last week (Sorry, I just missed this one) that NCUA has decided not to push the proposal, meaning that the 85 home-based credit unions can continue their unique brand of banking. Still, Chairman Matz insists NCUA “is doing its best to help home-based credit unions transition to more appropriate office space that will better serve consumers, provide greater security and, ultimately, give these credit unions a chance to grow and thrive.” Of course, there are many credit unions that naturally grew out of the homes where they were started. There isn’t a need for NCUA to push them out the door. http://www.wsj.com/articles/home-based-credit-unions-dodge-regulatory-threat-1461255599
It’s All Over But the Counting
Newsday is reporting that Democratic Assemblyman Todd Kaminsky increased his 780-vote lead over Republican Chris McGrath by about 200 votes as the Nassau County Board of Elections began to count paper ballots for the 9th Senate District special election. If, as appears likely, Kaminsky takes the seat previously held by convicted former Senate Majority Leader Dean Skelos, Democrats will hold a majority of seats in the State Senate even as Republican John Flanagan remains the Senate Majority Leader.
Given its size and complexity, it’s not surprising that just about every year there is a provision or two in New York State’s budget that has unintended consequences. Unfortunately for those of you with escrow accounts, this year there is a glitch that affects you (See A.9009-c, Part A).
Under New York’s STAR program, property owners are exempt from paying a portion of their school property tax on their primary residence (see generally Section 425 of the Real Property Tax Law). The way the program has traditionally worked, the school property tax bill that the homeowner receives, usually in early September, reflects the amount of taxes they owe after the exemption is calculated, i.e. already taken out. This means that escrow accounts reflect the amount the member owes.
Here’s where things get complicated. At the urging of Governor Cuomo, this year’s budget begins a transition converting the STAR tax exemption into a STAR tax credit. Under the new approach, taxpayers will be billed on the full amount of their school tax assessment and then receive a tax credit reflecting the amount of their STAR exemption. In other words, they will bear the upfront costs of the assessment and get reimbursed when they file their taxes.
These changes are generally meant to apply to new homeowners, but because of the way the language was drafted if you weren’t in your new home on tax levy day of the 2015-2016 school year, they apply to you.
As an astute reader of my blog recently pointed out, this change creates a whole bunch of issues for mortgage escrows. For instance, since the amount in escrow has to reflect the amount of taxes due, members will have to put more money into their escrow account than they will need. Furthermore, holders of escrow accounts will presumably have to return this extra money to members.
This is one we will be keeping an eye on. Stay tuned.
My brother in-law loves to say that everyone has an angle.
I’ve been pondering this admonition the last couple of days with the news that Goldman Sachs is following up its recent acquisition of approximately $17 billion of GE Capital Bank deposits and it’s online retail deposit-taking platform by offering online savings accounts to the masses. Consumers are now being offered savings accounts with no minimum deposits and no transaction fees as well as very competitive certificates of deposits. GS is also considering offering consumer loans. (https://www.gsbank.com/en.html).
According to the Fed, which approved the acquisition in March, Goldman Sachs, has approximately $859.9 billion and is already the fifth largest insured depository organization in the United States by assets. In understated bureaucratic ease, it describes Goldman as a wholesale bank “whose activities are focused on high-net-worth individuals, institutional clients, and corporations.” According to NBC news it takes about $10 million to open a wealth management account .
Something doesn’t seem quite right to me. It’s as if Donald Trump started staying at Econo Lodge. Plus with low interest rates and regulations squeezing fee income this seems like a strange time to start slumming it with retail banking. What’s behind this sudden interest?
One reason for the move towards consumer banking is undoubtedly diversification.
My guess is that another prime reason is that Goldman Sachs feels that the real future growth in consumer banking is going to come from the integration of financial tech firms into the stodgy old banking industry. According to the WSJ there has been an “exodus” of Wall Street talent, including from Goldman, to the West Cost. With the acquisition of GE’s online bank, has a scalable platform with which it can compete against the tech based bankers of the future.
As banks morph into tech companies and tech companies morph into banks where does this leave traditional brick-and-mortar banks and credit unions? If I knew the answer to that question I’d be in Vegas.
Here are some links if you want some more information.
Late last week, Uber announced it had settled two class action lawsuits brought by drivers claiming, among other things, that the ride sharing service was violating the labor law by classifying drivers as independent contractors. For those of you with either a direct or indirect stake in the taxi industry through the financing of medallions, the settlement of these lawsuits is another blow. Here’s why.
The Uber model is based fundamentally on the assumption that the company is nothing more or less than the provider of an App that enables individuals in need of a ride with those willing to provide one. In Uber’s view of the world, ride sharing allows the mom on the way to the store to make a few extra dollars by taking Sally down the street along for the ride. Under this best case scenario, our mom is an independent contractor picking and choosing what rides to take as she makes her way through her busy day.
To critics of Uber and other ride sharing services, the mom is not so much an independent contractor as a poorly paid employee. For instance, under Uber’s model drivers who consistently turn down rides can be dropped from the service and each ride comes with a suggested price and gratuity.
If the critics are correct, the Uber model is illegal and the traditional taxi medallion model is alive and well. This is why the settlement is such a big deal. Uber agreed to pay drivers up to $100 million and end its practice of automatically removing drivers who refuse too many rides. At the same time, the drivers will continue to be classified as independent contractors in Massachusetts and California.
Uber is by no means out of the woods. Similar lawsuits are still pending. And just last week California’s Commissioner of Labor ruled that an Uber driver was an employee rather than an independent contractor. But this ruling is being appeal and is not binding on anyone beyond the employee involved.
While the settlement of the Massachusetts and California cases leaves the independent contractor issue undecided, in my ever so humble opinion, anyone looking for the courts to provide a silver bullet, at least in the near future, when it comes to regulation of ride sharing businesses is likely to be disappointed. For those of you who feel that the system should be better regulated in order to put medallion taxi and ridesharing service on an equal footing, the places to look for relief are State legislatures.