Four Lessons To Learn When George Bailey Gives Up

September 4, 2012 at 7:24 am Leave a comment

In the week I was gone, the news that credit unions can learn the most from was M&T Bank’s purchase of  New Jersey based Hudson City.

All you need to know about Hudson City to be impressed is that it had such a good reputation for sound management that its stock actually rose to an all time high  the day after Lehman Brothers went bankrupt.  MSNBC’s Jim Cramer bestowed his George Bailey Award on the bank, which only went public in  2005. As summarized by Crains New York this past March:

Last year proved to be an absolute disaster for Hudson City—and the future of a local financial institution that dates back to 1868 is now very much in doubt. It posted a whopping loss of nearly $750 million in 2011 after a bet that interest rates would rise soured, and the fallout from that fiasco may be a long way from over. In addition, Hudson City got smacked by a key government response to the financial crisis that forced the modest institution with $45 billion in assets to compete against the federally controlled mortgage guarantors Fannie Mae and Freddie Mac.

The more I read about Hudson City the more it reminded me of a well run credit union and its demise  has lessons for the industry.

1.  These are still dangerous times for credit unions.  Hudson City was forced to merge,  in part, because of mismanaged interest-rate risk at precisely the moment when NCUA is expecting credit unions to have policies in place to monitor these dangers.  According to one press report,  as part of its growth strategy when it went public in 2005, the bank took out a 4% loan from New York’s Federal Home Loan Bank with a commitment to take out loans at similar rates in the future.  In 2005, it seemed more than logical to assume that interest rates would soon be higher than  4%.  Instead,  they have tumbled to rates not seen since It’s a Wonderful Life. 

2. Government policy is hurting, not helping, all but the largest financial institutions.  Big financial institutions caused the financial crisis and it is small ones that are paying the price.  Hudson City was hurt by a quantitative easing program which keeps mortgage rates artificially low and a housing policy which makes our government more, not less, involved in real estate.  In the past, banks like Hudson City didn’t worry about the secondary market driving down the cost of jumbo  loans.  Not anymore, as the size of mortgages that can be purchased by these GSE’s has increased. 

3. Credit unions need credit union lifelines.  Hudson City was in an interest-rate bind in part because it was committed to  pay back loans from  private banks and the New York Home Loan bank at rates higher than it could afford.  To be clear, these were not emergency lines of credit.  Still it should serve as a fresh reminder for those credit unions indifferent to recapitalizing NCUA’s Central Liquidity Facility.  If you are ever in a jam, who do you think is going to give you more help:  the Federal Reserve, a Home Loan Bank or the credit union system?

4. Credit unions are the last community banks.  About the only people  who think that Community and independent banks  exist  in anything but name anymore are banking lobbyists and the politicians anxious to support them.  There are two types of Community Banks: large ones and those hoping to get large before they get gobbled  up.  Unfortunately, federal law continues to make it more difficult for credit unions than banks to invest  in small businesses  in their communities by providing  member business loans and states like New York make it impossible for them to  aid their communities by allowing municipalities to deposit money in credit unions when they can get a better return for taxpayers.

Entry filed under: Advocacy, Compliance, New York State, Regulatory. Tags: , , , , , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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