Second throught of credit union | General financial discussion | Discussion forum

The problem at Home Capital Group was ALSO the management, and that's a publicly traded company.
I believe that in both cases the management had to be relieved of their duties when regulators intervened.

In both cases, disaster was averted, but the situation at HCG appeared more perilous than at PACE. Many depositors were seriously worried about losing money at HCG.

I feel that management is largely out of my reach in both cases. Most individual bank shareholders do not attend AGMs and they could never get a seat on the Board. Most CU members never attend AGMs and, with the exception of some of the smaller ones, could never get a seat on the Board. The Credit Union system does run courses to train board members; I'm not sure what happens in the corporate sector.

The question for me is whether there is anything better we can do in terms of regulation. I don't mean MORE regulation necessarily, but BETTER.

Large institutional investors may indeed have more influence.
They can hire and fire the CEO if they have a seat on the Board. They can lunch with senior management, lobby them, threaten to withdraw, etc.
One could argue that the very fact that they do have very substantial amounts of capital that they can pull out if they want contributes to making the FI potentially unstable. With CUs, by contrast, it's one member one vote.
Does the influence of employees of large investing organizations on FIs make their decisions necessarily any wiser or the business any more sound? Not necessarily. It just means they are all in bed together, for better or worse. They are all out of our reach.

The representatives of large investing institutions may or may not have a personal stake except inasmuch as it affects their jobs. Their wisdom, such as it may be, is based on what they think will provide the biggest return for shareholders. How is that different from CU boards? Do they not also intend to make decisions which bring the best return for their investor-members (which include themselves personally)? Nobody gets on a CU Board without being a member, i.e. without having a personal stake. And as far as I know, they are all unpaid volunteers - but willing to be corrected if that is not so.

Rather than looking at it hypothetically, it would probably be more fruitful to look at the history. What is the failure rate of banks, trustcos and CUs historically? (And don't tell me that CUs get off the hook by merging. Banks are constantly looking to take over other financial institutions, especially when they are in trouble, i.e. cheap.)

I wish I had a clear answer to this question but I don't. All I know is that, quite some years ago, I read that during the Great Depression, in a particular area, I am pretty sure in the US, several banks failed but no CUs did. That was then and this is now, and I think CUs have become generally larger and more anonymous, but many continue to operate in and serve small communities well.

I also know that, of the several CUs I belong to, the one I know best, one of the smallest, has much stricter criteria for issuing mortgages than do the big banks. Not being able to afford the loss has made them more prudent and their defaults are extremely low. Their members don't always accept this decision, but many see the wisdom of it and buy less expensive houses and carry less debt, while I am getting a decent return on my money. I call that sound management, and it doesn't take an institutional investor to figure it out. Quite the opposite with HCG.

When we shake our fingers at people who carry too much debt, we somehow forget that it's primarily the banks that allowed them to get into this position. Where were the institutional investors when this was happening? They may have been largely indifferent. Banks may not care too much if some of us go broke because they will repossess the house and still make their profit and keep shareholders happy. But a CU's survival may depend on you keeping your house.

OSC got involved with HCG because the management at HCG had been making loans to people who didn't qualify, through mortgage brokers whom they did not adequately screen. And you are worried about private lenders??
OSC was doing exactly what it's supposed to do.
If I remember correctly, the errant managers lost their jobs and I believe one or more of them were forbidden to work in this kind of job.

Whether or not people appear to be affluent has nothing to do with whether they are in debt up to their eyeballs or living on the edge financially. And it has even less to do with default rates in CUs.