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The Cooperative Model

How Credit Unions Survived the Crash

by RALPH NADER

While the reckless giant banks are shattering like an over-heated glacier day by day, the nation?s credit unions are a relative island of calm largely apart from the vortex of casino capitalism.

Eighty five million Americans belong to credit unions which are not-for-profit cooperatives owned by their members who are depositors and borrowers. Your neighborhood or workplace credit union did not invest in these notorious speculative derivatives nor did they offer people ?teaser rates? to sign on for a home mortgage they could not afford.

Ninety one percent of the 8,000 credit unions are reporting greater overall growth in mortgage lending than any other kinds of consumer loans they are extending. They are federally insured by the National Credit Union Administration (NCUA) for up to $250,000 per account, such as the FDIC does for depositors in commercial banks.

They are well-capitalized because of regulation and because they do not have an incentive to go for high-risk, highly leveraged speculation to increase stock values and the value of the bosses? stock options as do the commercial banks.

Credit Unions have no shareholders nor stock nor stock options; they are responsible to their owner-members who are their customers.

There are even some special low-income credit unions?thought not nearly enough?to stimulate economic activities in these communities and to provide ?banking? services in areas where poor people can?t afford or are not provided services by commercial banks.

According to Mike Schenk, an economist with the Credit Union National Association, there is another reason why credit unions avoided the mortgage debacle that is consuming the big banks.

Credit Unions, Schenk says, are ?portfolio lenders. That means they hold in their portfolios most of the loans they originate instead of selling them to investors, so they care about the financial performance of those loans.?

Mr. Schenk allowed that with the deepening recession, credit unions are not making as much surplus and ?their asset quality has deteriorated a bit. But that?s the beauty of the credit union model. Credit unions can live with those conditions without suffering dire consequences,? he asserted.

His use of the word ?model? is instructive. In recent decades, credit unions sometimes leaned toward commercial bank practices instead of strict cooperative principles. They developed a penchant for mergers into larger and larger credit unions. Some even toyed with converting out of the cooperative model into the shareholder model the way insurance and bank mutuals have done.

The cooperative model?whether in finance, food, housing or any other sector of the economy?does best when the owner-cooperators are active in the general operations and directions of their co-op. Passive owners allow managers to stray or contemplate straying from cooperative practices.

The one area that is now spelling some trouble for retail cooperatives comes from the so-called ?corporate credit unions??a terrible nomenclature?which were established to provide liquidity for the retail credit unions. These large wholesale credit unions are not exactly infused with the cooperative philosophy. Some of them gravitate toward the corporate banking model. They invested in those risky mortgage securities with the money from the retail credit unions. These ?toxic assets? have fallen $14 billion among the 28 corporate credit unions involved.

So the National Credit Union Administration is expanding its lending programs to these corporate credit unions to a maximum capacity of $41.5 billion. NCUA also wants to have retail credit unions qualified for the TARP rescue program just to provide a level playing field with the commercial banks.

Becoming more like investment banks the wholesale credit unions wanted to attract, with ever higher riskier yields, more of the retail credit union deposits. This set the stage for the one major blemish of imprudence on the credit union subeconomy.

There are very contemporary lessons to be learned from the successes of the credit union model such as being responsive to consumer loan needs and down to earth with their portfolios. Yet in all the massive media coverage of the Wall Street barons and their lethal financial escapades, crimes and frauds, little is being written about how the regulation, philosophy and behavior of the credit unions largely escaped this catastrophe.

There is, moreover, a lesson for retail credit unions. Beware and avoid the seepage or supremacy of the corporate financial model which, in its present degraded overly complex and abstract form, has become what one prosecutor called ?lying, cheating and stealing? in fancy clothing.

RALPH NADER is a consumer advocate and three-time presidential candidate.