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The CU2.0 Podcast
This podcast explores contemporary, critical thinking and issues impacting the nation's credit unions. What do they need to be doing to not just survive but prosper?
The CU2.0 Podcast
CU2.0 Podcast Money Talks with Kirk Kordeleski on Merging Behemoths, the CU tTax Exemption and More
Here’s the question: Is the First Tech - DCU merger of behemoths a sign of mergers to come or it is an outlier, a one-off deal that arose because of unique circumstances and histories??
Kirk Kordeleski, onetime CEO at Bethpage, itself a member of the behemoth club, and now a SERP expert with PARC Street Partners, and he comes with strong opinions abut credit union mergers.
But there’s more on the show including Kordeleski’s musing about the longevity of the credit union tax exemption - and how important it is to the credit union business model.
Kordeleski also ponders the probable future of NCUA in an era of slashing federal spending and federal employee body counts.
Just about all the credit union hot buttons get pressed in this show..
And Kordeleski also addresses this question: if you are the CEO of a $10 billion credit union that just now merges with a $5 billion credit union should you ping the board the next day and ask for a 50% pay hike.
Place your bets now:
Is this RIP for NCUA?
Is it say goodnight to the tax exemption?
Are mergers the best way for a credit union to grow?
Or is interna; growth the shrewder option?
And should that CEO ask for the 50% pay boost?
Listen up.
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Welcome to the CU2.0 podcast.
SPEAKER_00:Hi, and welcome to the CU2.0 podcast with big new ideas about credit unions and conversations about innovative technology with credit union and fintech leaders. This podcast is brought to you by Quillo, the real-time loan syndication network for credit unions, and by your host, longtime credit union and financial technology journalist, Robert McGarvey. And now... The CU 2.0 Podcast with Robert McGarvey.
SPEAKER_02:Here's the question. Is the first tech DCU merger of behemoths a sign of mergers to come? Or is it a one-off outlier, a deal that arose because of unique circumstances and histories? Which do you think it is? Kurt Korteleski, one-time CEO at Bethpage, itself a member of the Behemoth Club, said, And Kordeleski now is a SERP expert with Park Street Partners. He comes on the show with strong opinions about credit union mergers. But there's more on this show, including Kordeleski's musing about the longevity of the credit union tax exemption. How long can you count on that? And how important is it to the credit union business model? In fact, how important is it? Kordeleski also ponders the probable future of NCUA and an era of slashing federal spending and federal employee body counts. It's almost like a horror movie in Washington, D.C. Just about all the credit union hot buttons get pressed in this show. Kordeleski also addresses this question. If you are the CEO of a$10 billion credit union that just now merged with a$5 billion credit union, should you ping the board the next day and ask for a 50% pay hike? Place your bets now. Is this RIP for an NCUA? Is it good night to the tax exemption? Are mergers the best way for a credit union to grow? Or is internal growth the shooter option? And should that CEO ask for the 50% pay boost and maybe more importantly, should he or she get him? Listen up. Let's talk about mergers, which is it's mergers. The first tech DCU merger announcement. Yep. And tell me if you agree with this. I think this kind of, this was like, this was like the LA fire. It was like the fire in Altadena and Pasadena where everybody said, what the hell? This can't happen. Why is this happening? And what does this mean? Do you agree with that? I mean, this seemed to come out of the blue. I hear from people that had been in the works for quite a while, but to me, it was like, huh?
SPEAKER_01:Yeah. So I have some specific background information that I'll use to put in context first. And then... dissected a little bit more. I think you remember, and maybe our listeners remember a little bit about OTS and S3, and those two large QSOs that got formed in 2002 and 2005 with Belco and Bethpage. You might remember that the first partnership was with First Tech, and that was before they merged. They have had in their history these large mergers three times. The first time was way long ago, in a generation long past, when they had a partnership with Patelco, First Tech, and Seattle Telco, and that fell apart via regulators. First Tech then went and started talking before they merged with Addison Avenue in the early or mid-2000s with some other large credit unions that will go nameless at this point, but were in significant conversations with them. Then they merged with Addison Avenue. They pulled out of OTS and S3 for very good reasons, in my opinion. They just had too much on their plate in merging those two large organizations. to be a partner in moving a business model aside as well, a new business model input into running backroom operations in S3. Benson Porter was there during that merger, and then he moved on to BECU. And First Tech, I think, has always had that sort of partnership idea in the back of their minds. I'm not surprised to hear what you just said, that they have been contemplating mergers. I don't know if it's been... specifically with digital or others in a long time, but digital makes a lot of sense given their common membership. They did this last time with Tom Sargent. The board is used to this model. Am I surprised that they reached all the way across the country? That is somewhat surprising, although we're in a much more digital and virtual world, and that's certainly much more plausible than it was a decade ago. And they have
SPEAKER_02:the same DNA. Correct.
SPEAKER_01:Exactly right. Yep. Same DNA and very much connected in how they viewed their membership, how they viewed service, and how they viewed operations. Now, Beyond that, Firstack and Digital are very different companies. They'll find a path to come together. There is a unique set of circumstances that we just both described that makes this, I think, a unique set of opportunities. Because I think if you look over the last two years of the larger credit union mergers announced A couple of them have consummated, many of them, an equal number, let's put it that way, not to exaggerate, an equal number have fallen apart. Without a stock ownership situation where there is a reward for the acquired, a financial reward to hold everyone at the table and negotiate properly, any sort of disruption from a board or from a senior staff member can lead to the failure of that merger. I think we see that pretty significantly in the larger. There's one in Florida that was just called off last month. I don't know if it's a trend or not. I think scale is definitely a trend. There will be more conversations about the mergers. There's not one large credit union in the country right now that I know of that isn't talking about a merger and sometimes and often significant mergers. But they're still hard to complete, Robert. Well,
SPEAKER_02:I've
SPEAKER_01:talked
SPEAKER_02:with lawyers who've worked on mergers. And one guy who's done the most bank credit union mergers said that over 90% of them fall out before it's consummated.
SPEAKER_01:I would have said 70%, 80%. But yeah, that is not a shocking number to me.
SPEAKER_02:Yeah, and it's already proceeded to the point where they retained a lawyer to kick the tire. It's not just conversation in a bar at GAC. It's gone beyond that. And still, he said over 90% just don't happen.
SPEAKER_01:And because you're talking about people's you're talking about in board members' cases, unless they're merging with a credit union board that is getting paid, there is very little reason for them to see it through. And when you're talking about similar size organizations, they're already large enough to survive and likely have the capital to survive. If they don't, the regulators aren't going to let them merge anyway. Or they're not going to let them merge without a regulatory or without a requirement by the NCUA. And that takes them to shrink down capital to a very small level before that conversation could be forced by the NCUA. Now, is there
SPEAKER_02:any way to offer some deal sweetener to board members, let's say, of the acquired institution who usually are the ones who are less likely to go along on this
SPEAKER_01:ride? No. Not that I know of. Their traditional three models exist where they work in that field. One is a number of board seats. Let's say it's a nine-member board and you go 5-4 and you bring the chairman out of the acquired credit union. That's pretty tempting, but you still have four or five board members on either side that may not be happy. You can extend the size of the board. for at least a period of time so that most everybody is happy.
SPEAKER_02:You can create an advisory. ED HARRISON That becomes unwieldy, though. If you go from nine members to 13 members, if I'm the CEO, I have enough trouble dealing with nine members, man. 13
SPEAKER_01:would be really impressive. ED HARRISON That's right. It's a crappy situation for the CEO. It's a crappy situation. Because he not only has more board members, he has an equal number from the two different cultures of the boards and the two different strategies of the board. And now he doesn't have a hammer. He doesn't have the votes. And that tends to put everyone in quicksand for a couple of years as they figure out their strategy.
SPEAKER_02:And that's the worst time to be in quicksand. To me, there's a naivete of a$10 billion credit union merges with a$5 million credit union. Therefore, it's a$15 million credit union. I'd say somewhere between 12 and 13 and a half. I think there's going to be attrition there.
SPEAKER_01:If
SPEAKER_02:you want to limit that attrition, you've got to be in action pretty much from the day you've announced the merger.
SPEAKER_01:That's right. And even if the attrition doesn't happen, it is similar to a conversion or other any extraordinarily large project, you can't expect to grow over the next two years. So that's a different form of attrition, but it's the same attrition.
SPEAKER_02:Let's back up a second. One reason I wanted to do this show with you is because if anybody's the contrarian spokesperson about why mergers aren't necessary, it's you. Because you grew a Bethpage at an extraordinary rate, a wonderful rate. Primarily, you might have done a few mergers in there, but they were tiny and inconsequential.
SPEAKER_01:They were micro. You were
SPEAKER_02:just doing NCUA a favor. And yet, you grew at an extraordinary rate. And I think Navy Federal may have done a few mergers over the last 20 years, but not very many. nothing consequential uh whereas their their competitor down the street has done gazillion of them and navy federal has grown at a much faster rate much faster it's uh and that's through internal growth just like beth page so i think at two credit unions that i just look at the growth rate and i i'm like wow this is great how'd they do this internally man they did it internally Merger isn't the only strategy here. Merger's got to be a lazy person's way. Oh, I'll get 50% bigger. I'll buy a$5 million credit union or a$5 billion credit union. Cool. I'm bigger.
SPEAKER_01:So another three reasons why I would do that. First of all, and I think you're hinting at this and talking about it, and that is that executing a strategy and brand strategy and performance is going to be taken off the tracks during a merger conversation and discussion, and then the subsequent merger process. I would argue two to three years of disruption. Remember that disruption is deep. It is the executives wondering about whether they have jobs. It is politics with the board and with the membership. It is regulatory compliance and operations. And if the merger is consummated, then it is system conversions and product mergers. It is an immense amount of work that deteriorates productivity for a significant period of time. If you look at Berkshire Hathaway and how they run their individual companies, they leave them alone. They don't merge them in. because the significant piece of taking a piece of business and putting it together, the holistic piece of business and putting it together, is a tremendously large project and sets you back culturally and operationally and strategically for two to three years. Secondly, there are other options for scale, and that is CUSOs, S3 and OTS, where our means to that scale to get to the same level operating cost expense ratio opportunity as there is. I will tell you, Robert, in this discussions at the symposium this last week in Hawaii, there is a new enthusiasm for CUSOs and this operating backroom core operations CUSOs to create scale than I have seen in quite some time. I'm going to be doing some speaking on it in the near term. There is an option to get there. Then the third piece is what you and I talked about to start the conversation. You can go through all of these things and still some 70% to 90% fall apart. It's not even a good bet that it's going to conclude for all of these other reasons. And then I'll give you a fourth piece to that, is that credit unions who do consummate that merger promise too much in the merger negotiations, meaning that everyone's going to have a job. What kind of scale are you going to get out of that? So now you have a two-year project, and then another two years of getting to scale. It loses its
SPEAKER_02:financial vigor. Say I'm the CTO at the smaller of the two credit unions. As soon as that's announced- I will begin taking the calls from headhunters that are coming in. Whereas six months earlier, I might have ignored them because I was happy. I thought I had a pretty secure job. Now I'm looking at this, my job is toast if this goes through. I'm the little guy in this deal and I'm gone. You don't need two CTOs. You don't need two CFOs.
SPEAKER_01:Actually, it is not only do you not need, it is culturally important. suicide, right?
SPEAKER_02:You can't afford them and it's cultural suicide. That's right. It
SPEAKER_01:makes no damn sense.
SPEAKER_02:Does that mean bank managers, branch managers will be downsized? Probably not. Maybe in a few cases.
SPEAKER_01:Yeah, that's right. There's so much attrition in those jobs. That's not your problem. It's the senior team that's the
SPEAKER_02:problem. It's the C-suite people and maybe one layer below them. Correct. That are going to say, geez, I'm in a little credit union here. No, I'm out of here. That's right. I see the best people fleeing, leaving you with the people you don't really want. And if you promise them jobs, you've really made a mistake. Exactly.
SPEAKER_01:None of it makes any sense that way. It sounds great to boards, and boards ask for it for reasons that are beyond my business sense, but it happens. What also happens in those cases, and there are some tools. Let's talk about, for those that are down the path, what can you do productively to counter what we just talked about? There are a couple of tools, one of which is a SERP. that you could use in these situations. First of all, what you see is for that CTO that you just talked about, a short-term one, two, three-year bonus structure that say, you stay to this time, you're going to get 1x of salary. You have a reason to keep it there. Now, I'm not sure you keep their attention, as you just described, because they're still looking for a long-term job that money is not necessarily enough for them to have their kids go to college and pay the mortgage for the rest of their foreseeable future. The second thing is that if it is truly similar in asset sizes or within a range of being similar in asset size, say 20%, 30% of size, you could put in some split dollar SERPs or other SERPs that would keep the executive team positive, meaning they reach a certain point in the future of the merger, then that CERT becomes vested. And let's say it's for$25,000 a year tax-free for 20 years. Well, that's real money. That's a real addition to your plan. And it's contingent on you positively supporting the merger. or more money than that, depending on age and other circumstances. So there are some tools that can start to look like stock options that you can put in place to favorably promote the idea that someone is going to stay through the merger and be positive about the merger. Because I think it's and be positive about the merger that is essential. If you have a CFO- or CTO or CMO, whatever, whoever also has the ear of the board underbinding it because they don't see their future with a new company, then you're going to turn a few board members. And when those few board members turn, the merger is going to fall apart.
SPEAKER_02:I also think there's probably going to be some attrition at higher levels, even before the merger is consummated. And then what happens if it's one of those rare cases when the merger gets rejected by the membership of one of the credit unions? So there's been attrition, and you're not going to get married anyway. I admit that the member rejection of the merger is not a common thing, but it's happened.
SPEAKER_01:Yep. So it's fascinating, right? And I'm sure you hear the same thing, is that every credit union is enthusiastic about mergers. You know, Robert, I'm the old guy, right? And so I've heard these conversations now forever. And indeed, we've seen credit unions shrink from 15,000 to 5,000 or below 5,000 now. And so a lot of the smaller credit union asset sizes have merged away, and some middle-sized ones have. And we do see announcements every month of two or three. And But ultimately, there isn't enough financial reasons for the individuals and often even for the organizations to merge. And until that is solved, these are more discussions about people retiring from jobs and boards either not wanting to look effectively or maybe have found somebody that happens to be at another credit union and they're merging. You do see a trend. I had probably three conversations last week about a trend of a younger CEO whose credit union would be acquired being the real value in the equation for the larger credit union. meaning that they're looking for seasoned leadership and they can find it in the team or at least the CEO of the acquired credit
SPEAKER_02:union. 20 years ago, Cisco Systems, which at that point was a really high-flying Silicon Valley company, was doing an acquisition a month. And I did a story where I asked the guy who was driving the acquisition effort, what the hell are you doing? Most of these companies are going to fail. And he said, looking at me as though I was dumber than dirt, I know that. What we're doing is acquiring talent. Before we go in and do a deal, we get work agreements from X people whom we've designated before we do the deal. It's contingent upon the deal going through that they're going to agree to work for Cisco for X years. And as we tell them, I don't get these signatures if we ain't doing the deal. Period. Not going to happen. But it was pure talent acquisition play. And at that point I said, this makes perfect sense. And if you're doing an acquisition for a talent play and you've already assured yourself that the person or people you most want will come along for the ride, which you really got to do because that's what Cisco did. You can't assume, oh, well, they want to be with us because we're big. No, you can't assume that. You got to get this verified.
SPEAKER_01:So that's why the SERPs or some other tool makes sense, because you can lock those people in. So you give those folks a 10-year or retirement SERP, you lock them in, and you ensure that they're going to be with the organization going forward. And you give them reasons not only to be positive, but to financially be rewarded for supporting and staying. I do think, though, that that the challenge with that in the credit union space is that most of the mergers you hear about are not the ones where the acquiring credit unions CEO is retiring. That's the other way around, where the acquired credit union CEO is retiring. Most of the people within that C-team below may not have been in a succession plan But in their own minds, they were thinking that they were in that game, right? They were in the hunt. And so it's just really difficult to get these things to fall off. When I was doing my consulting work, I had two very large credit unions in a merger conversation. And it fell apart for, appeared to me, might not have been to them, but appeared to me to be very small reasons. And one was a product and one was a relationship, a partner relationship that was a minor part of the business. And so you look back at that and you ask, why does that happen? Well, it happens because CT members that were in the acquired credit union weren't on board and they influenced the board members who really weren't on board. And then for reasons that are not financially important, it fell apart. And I think that's what we're seeing. While you do get a unicorn event every three or four years where you get two large credit unions coming together, I don't believe it is a trend.
SPEAKER_02:Well, I also think you hear... Credit unions need to merge because of economies of scale. Now, you hear that from consultants. You don't hear that necessarily from people inside credit unions, although some of them have drunk that Kool-Aid and are saying it. And what I would say, you know, if I'm right, better than I do. Let's say Navy Federal goes out and merges with every major defense credit union, every single one. There's about a dozen that are pretty big. Yep, yep. Navy Federal still does not have the scale that means anything to Chase. Not a thing. I've seen the advantages that Chase and B of A have with economies of scale. I've seen that. You could add all that stuff into Navy Federal. It'd be a monster credit union. But it's just a blip on the screen for Chase. I mean, Chase bought the Silicon Valley Bank or took it over. A pretty big institution, and this was like lunch money for Jamie Dimon. Yeah, it's like, well, yeah, we can handle this. That's right. You're not going to close that economy of scale gap with these guys. You need to do what you did at Bethpage. Pick your fights strategically. Correct. Hope that Chase doesn't look at this saying, they're annoying me. I'm going to fight back.
SPEAKER_01:MIKE GREEN That's right. It never happens. They never fight back on that. ED HARRISON
SPEAKER_02:Chase didn't know you existed.
SPEAKER_01:MIKE GREEN It doesn't care. That was one of the most foolish arguments I'd ever heard about our strategy was that, well, Chase or B of A could match our home equity price. No, they can't. Because if they did, it would cost them billions in price movement, and they're not even on their radar screen. They don't give a
SPEAKER_02:damn. ED HARRISON And they don't want to do geographically targeted things like we target one third of Long Island with
SPEAKER_01:this sweet, sweet deal. That's the point, right? What is our whole world is just tiny, tiny, tiny little piece of who they are. They're not going to do that. That's actually an advantage of small organizations can attack those market segments, those niches in ways that are productive. It's so important Because this is what it comes down to, Robert, and you know this, man, and I think most people know this, but somehow it gets lost in all of these more exciting opportunities. And that is that it comes down to strategy and financial strength and financial performance. In doing so, if you stick to that strategy and build your brand and build your market opportunity, and then pick the pieces of strategy, mergers, or CUSOs, or brands, or sponsorships, or people that fit that model, that is what success is. Maybe mergers make sense. I'll take Bethpage if I was in their shoes today. and I now have a national charter because of the taxi medallions acquisition, and I wanted to go into Connecticut. Maybe a merger with four or five branches in Connecticut now makes sense to me. It's similar suburbs to Long Island. It is a low-cost way of acquiring those branch facilities, and it comes with a membership even if I keep 60% or 80% of it. That's strategic. None of us are perfect in our strategy performance. It's a little bit of challenges and economics and timing and other things. I'm just saying that there are times when mergers strategically make sense. The times that they don't are when these things don't work. or they don't produce nearly the results that they were drawn up by the consultants and the internal analysts. There are times when entering new markets and entering new situations that they are the low-cost way of acquiring that market.
SPEAKER_02:Now, if I'm the CEO of a$10 billion credit union and I merge with a$5 billion credit union, the day after that merger, do I go to my board and say, I want a 50% pay increase? Yes. You do
SPEAKER_01:do that. MIKE GREEN Well, I think you have to. Two reasons. I'm not sure it's the day after, but when the next contract comes up. First of all, if you go up by, and I'm going to come back to a$10 billion question in a moment, but when you go from 10 to 15 billion, you are indeed in a different compensation structure. It won't be 50%, but it might be 20%, 25%. You only have, as an executive, moments in time when you have leverage, when you're getting to a new job, when you're in a merger situation and the contract comes up during those conversations, those are points where you need to right-size the market compensation. And it's not only just for your own good. It is for everybody else that you want on that C-team or within that organization to be right-sized in their salary for their asset size and for it. Because right now, once you go from 10 to 15 billion, let's assume three things. Let's assume a much broader market. Let's assume a deeper product line. And let's assume more compliance and risk on the balance sheet. All of those require the skill sets of a$15 billion and the compensation of a$15 billion credit union, not a 10 billion. And if you do all this work, and then you don't pay the right amount for the new complexity of that model, you will not perform to what they forecast suggested. Talent means everything.
SPEAKER_02:I think you're right that just because of that first tech DCU merger doesn't mean that suddenly every of the handful of$10 billion plus credit unions are all calling around looking to merge with another big credit union. Everybody's looking to merge with somebody.
SPEAKER_01:MIKE GREEN Yeah, everyone is, mostly acquire. It's not mergers of equals. Mostly, it's an acquisition strategy.
SPEAKER_02:ED HARRISON Yeah, well, even there's like$300 million credit unions that are sitting around hoping to get this call to get married. MIKE
SPEAKER_01:GREEN Correct. Most of them are hoping for$100 billion merger rather than being acquired by$500 billion, but some of that happens. MIKE GREEN Robert, you brought up an interesting point, and that is the$10 billion and$5 billion. So I have a theory, not necessarily deeply in math, but I think it holds true. And that is that you see a lot of credit unions hold below$10 billion because of the cost of energy. ED
SPEAKER_02:HARRISON You've talked about this on the show before, and you're absolutely right. MIKE GREEN You want to get to$13.5 billion. ED HARRISON This is absurd. This is absurd. And when you said that, it blew my mind because I've talked to a lot of institutions that are nearing 10, and they all have these elaborate strategies for reducing, never crossing that line. It's like setting foot into North Korea. I'm not going to cross that line. And it's like, okay. And your point was, this is silly.
SPEAKER_01:It's silly. You think you can predict the future if you do that, and that's a crazy idea. You're saying, well, there'll be a great time for me to do this. It's just as likely it will be a terrible time for you to do it. There is a merger strategy at$9 billion to get you to$14 billion or over$13 billion or over$13.5 billion where you make up for that interchange income and you make up for that overdraft with scale. I buy that strategy. I just think it's very hard to thread that needle. You do see it in banks as well. You'll see banks hover around 30 or 40 billion and looking for a merger because they know over 50 billion, they have these complex regulatory and compliance issues. There are times when that makes sense. I would argue that if you can afford it and you have enough capital at 9 or 10 billion, the best way to do there is to acquire a bank. And jump above the$13 billion. But you've got to have a lot of cash on hand to make that transaction.
SPEAKER_02:Now, the credit union tax exemption, was that important to Bethpage?
SPEAKER_01:Critically. The whole model is based on it. I think you do hear conversations from time to time that people say, oh, well, let's just get taxed. I think that makes no sense at all. I'm sure I've insulted people on mergers and now I've insulted them on the tax issue, but be that as it may. Let's talk about it from both a financial perspective and from a business perspective and an ownership perspective. From a financial perspective, it's somewhere between 15% and 30% of the bottom line. You would materially manage your tax costs, and you probably bring it down to that 15% or so additional costs rather than the corporate tax rate of 27%, 28%, whatever it is today. But it is significant. But not only is it significant, it changes the way you look at the business from a board perspective on down. Soon as you're taxed, another significant consequence happens. Now, if you remain a credit union, and we accept that there are not additional changes to the charter model, meaning access to capital, then you'd be foolish to stay as a credit union with an additional cost and without access to capital. The second situation that is a change to the business model very quickly much like what happened to mutual savings banks, and the industry goes away, including the regulator being merged into the other regulatory constructs. So for those three reasons, the industry quickly deteriorates along the lines of Australia and Canada. where there are many, many fewer credit unions. There are some survivors. And there are different models. And I'm sure that there potentially would be trade-offs in the taxation issue on capital opportunities or other mechanisms in place, at least in the short term, to support the credit union transition to taxes. But I think it is a fatal blow to the industry,
SPEAKER_02:bottom
SPEAKER_01:line.
SPEAKER_02:Is it a fatal blow to the majority of credit unions that are small?
SPEAKER_01:MIKE GREEN It's a fatal blow to many, many, many credit unions. Think about this perspective. If we talk about credit unions and strategy merger-wise, financial-wise, fintech investment-wise, a lot of ways. There are only a handful during any generation of credit union leaders that are really on the top of their financial gain, and there's good reason for that. The boards are not deeply rooted in finance or financial performance, and the executives aren't. They haven't had to. The tax advantage and the cooperative structure has allowed them not to be. This would be an overnight, a virtually overnight transition to a financially effective organization. That means cost control. That means capital acquisition. That means finance at a different degree in tool sets that are available today. It means managing expenses in a way that most organizations haven't come close to doing. Those are all humongous cultural, strategic, and organizational changes that are not in the DNA of credit unions today.
SPEAKER_02:MIKE GREEN Well, you make an interesting analogy with SNLs, which had been a fixture of the American financial landscape up until the early 1980s, if my memory's right. And then kind of like a bomb went off or a disease spread, and they were all out of business within a few years.
SPEAKER_01:And you see, that's really what I'm arguing a little bit here is that, so there's two different crises to look at, the mutual savings banks and the SNLs. In a mutual savings banks, they just slowly went away. They just became for-profit organizations, stock-owned organizations over time. I think that's how many of the larger credit unions would react. The S&L crisis was also a change where they were now given all of this capacity to do things. They went off without the skills and built large home marketplaces in places like Phoenix and Scottsdale. ED HARRISON
SPEAKER_02:And Southern California, too.
SPEAKER_01:LARRY HRYB And Southern California. And then the economy turns on them, and they didn't have the skills.
SPEAKER_02:ED HARRISON Lincoln's savings and loans was one of the biggest offenders, and that was LA. LARRY
SPEAKER_01:HRYB There were a bunch of them here in LA. And yeah, so those all went passed their skis. They went past their strategic ability. Sometimes timing will kill you as well as it'll save you. In their cases, the first few years, the economy was strong. They go out and stretch themselves into areas that they weren't experts in. They chased yield. They got the yield. Then they got convinced that they knew what they were talking about. They overexpanded and they And
SPEAKER_02:the funny thing or sad thing about that, Kirk, is that the San State financial meltdown, the mortgage meltdown was really a preview of 2008. It was. The San State one was much, much smaller. It was California, Arizona, parts of Texas. It was a handful of states. And I lived in California at the time. It was big in California, particularly Southern California.
SPEAKER_01:You know what's funny about that? I'd never thought of it that way, Robert, but you know what's funny? It's the same states went down on a massively larger scale than the S&L crisis, but it was the same areas of the country.
SPEAKER_02:Yeah, so why this 2008 thing happened, it was kind of like, guys, this is a rewrite. I've seen this before, and it ends badly.
SPEAKER_01:Yeah, think about really the 2022, 2023, 2024 timeframe for credit unions, liquidity and interest rate crisis. That all has happened quite a few times in the past when interest rates have gone up. Now, interest rates had not gone up by 5.25% forever, but they had gone up 300% or 400% quite a few times, and yet we repeated many of those errors within the industry.
SPEAKER_02:Yeah, it's- It is funny how these things repeat. So you are really a big, you see the tax exemption as an existential issue for credit.
SPEAKER_01:I do. It is existential. That is a great term for it.
SPEAKER_02:Well, we'll see how that plays out. It's because the bankers really have all their guns loaded, locked, ready to roll.
SPEAKER_01:Yeah. MIKE GREEN So here's an interesting couple points of view on that, at least I found from other people that I've been talking to, not mine. First of all, that the threat is much more real than many people are giving them credit to. I will tell you that two-thirds of the executive I spoke to at Symposium are not worried about it, and it wasn't even a subject at Symposium. Shocking to me. Second is GAC will be as vibrant and as exciting as we've had in decades because of this issue. And third is that the worrying that is occurring within the lobbyists and within our movement is that the current administration, the Trump administration, does not have the old school credit union advocates Either in them or within the Senate or within Congress, most of those people have retired. We don't have a lot of friends or at least a lot of people that remember 1997 and 1998. Additionally to that, this administration makes decisions in different ways than previous administrations. banking influence as well as the opportunity for 11th hour changes to bills in what is the highest priority, the reduction of taxes in the administration's game plan is all problematic. In my view, I think the insider's view, I'm not an insider, is that we are at more risk than we've been in decades. And my belief, this is mine only now, it is an existential risk.
SPEAKER_02:I agree with you. I've never taken this threat seriously, but I think now it is a serious issue. And I don't know how this administration makes decisions. I think there's a Ouija board. I
SPEAKER_01:would say that there has to be some sense to how they make decisions. I just can't quite put my finger on
SPEAKER_02:it. I also think downsizing NCUA into a desk in the Treasury Department is a distinct possibility.
SPEAKER_01:Yes. I think it's an obvious possibility for the administration. I
SPEAKER_02:think that might be more likely to
SPEAKER_01:happen than the tax issue. I agree completely. That would be significant and detrimental, not as existential as taxes, but critically important. Now, we exist with a lot of state regulators with credit union divisions today. That's why I don't think it's existential, but it is material.
SPEAKER_02:It's also, it's just chipping away at when do credit unions just become banks? And if you're a desk and treasury, you just kind of become a bank with a different name. I think USAA early in its life was a mutual association. And then it became more straightforward bank.
SPEAKER_01:This is why almost everyone that does business loves to have administrations, political administrations that are divided politically, Congress and Senate and White House in some ways, so that there is more influence that you can put within the organizations. We're in a situation where one major party has control. Depending on the influence within that party, within a couple individuals within that party, may indeed define our existence.
SPEAKER_02:I think you touched on something I hadn't thought of, too, which is that the old warhorses in the House and the Senate, you know, where the credit union fanboys are not there anymore. Correct. And those were people who knew how to block legislation.
SPEAKER_00:Yeah.
SPEAKER_02:You know, would never see the light of day because they knew exactly how to make that happen if they wanted to. Those guys aren't there anymore. That's right. That's right. So now what's to stop this from just speeding through? Nothing.
SPEAKER_01:Yeah, right. I mean, there are, you and I remember the grassroots campaigns and other things. I remember in those grassroots campaigns, a number of things were different because they were indeed almost 30 years ago now. One was there were a lot more credit unions. Two, they were a lot more single sags and purists. Three, we had a significant influence politically. Now, we have bigger lobbying budgets, and we may or may not have more influence today. I worry that the merger of NAFQ and CUNA, now America's Credit Unions, came at the wrong time. DCUC and America's Credit Unions are fighting the fight right now, but I wonder if we're going to have enough horses in the race.
SPEAKER_02:and enough money on the table, et cetera, et cetera. One thing about this current government is money talks. That's right.
SPEAKER_01:And it's not just money, right? It's humongous money.
SPEAKER_02:Before we go, think hard about how you can help support this podcast so we can do more interviews with more thoughtful leaders in the credit union world. What we're trying to figure out here in these podcasts is what's next for credit unions. What's next for credit unions? What can they do to really, really, really make a difference in the financial scene? Can't all be mega banks, can it? It's my hope it won't all be mega banks. It'll always be a place for credit unions. That's what we're discussing here. So figure out how you can help. Get in touch with me. This is rjmcgarvey at gmail.com. Robert McGarvey again. That's rjmcgarvey at gmail.com. Get in touch. We'll figure out a way that you can help. We need your support. We want your support. We thank you for your support. The CU2.0 Podcast.