Greed is Good...

Greed is Good… 

     The 1987 film, Wall Street, introduced the world to a character that personifies greed. His name is Gordon Gecko. A son of an electrical supplies salesman, he grew up on Long Island and attended City College in New York City. He made millions of dollars in speculative real estate transactions in the 1970’s that launched his dominance on Wall Street in the 1980’s. Gordon Gecko’s most famous line that has catapulted him to the top twenty-five villains of all time is “Greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures, the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge, has marked the upward surge of mankind and greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the U.S.A.”
     Greed has been in world since time began, dating all the way back to the original garden. The world has experienced its consequences in five of the last twelve years noted by third worst recession of all time and the worst recession of all time. Although it should be noted that the Great Recession as measured by the gross domestic product was only one-sixth the dip of the Great Depression of the 1930’s. The irrational exuberance of the marketplace repeated itself in the 2000’s in less than five years. The stock market crash of the early 2000’s was followed by the entire economic meltdown of the late 2000’s.
     Recently, I attended the Credit Union Development Education training with the National Credit Union Foundation to gain greater insights to our extraordinary cooperative movement. Upon returning home, I was motivated to go visit our local payday lenders and check cashing establishments. This is what inspired this article on greed.
     The journey would be taken with a mindset similar to an explorer discovering a new island. As I entered the locations, I wanted to capture every part of the experience:
1. Atmosphere: The self-promoting messages were being played in both English and Spanish, the store was extremely clean with testimonials at every turn, the employees stood behind large bullet proof windows, the floors were tile, and it felt somewhat unwelcoming.
2. Store design: The stores were consistent in design. Two lines were well marked, one for check cashing, account set-up, money orders, bill pay, establishing direct deposit, wire services and the other line was clearly marked for those who needed an “advance.” The store also had two sets of operating hours. The check cashing and transaction services were open twenty-four hours a day while the lending side of the business operated with expanded hours from 9 am to 9 pm.
3. Customers: There weren’t any customers in line for an advance, but there were a minimum of three at each store waiting in line for the one employee to serve their banking needs. The interactions changed each time, as did the language in which they spoke. It wasn’t friendly or engaging, and yet people seemed to not be bothered by it nor by the over abundance of fluorescent lighting.
4. Employees: I spoke with both the lending employee to inquire about an advance as well as the transaction side to buy my free money order. The employee on the lending side was courteous and operated with a great sense of urgency. I felt myself wanting to respond in the same manner and potentially not thinking the transaction through completely. The money order purchasing experience was easy and the employee mumbled something about another product, although I was unsure as to what it was.
5. Pricing: This was the most troubling part of the experience. The pricing on the deposit side was inexpensive and not something I would see being an issue in affordability. The pricing on the advance side of the business was simply minimum terms of six months and a finance charge of $1.75 per $100 per day; that’s over 600%!! Yes, read that again, 600%!! They are very customer centric (did you hear the sarcastic tone), as they will reduce that in half if you provide your automobile as collateral. Yes, a 300+% car loan!! I know the majority of the population would find the pricing predatory and most would say something similar to “why do people even go there?” The fact is there are more payday lenders in this country than McDonald’s; obviously there is a segment of the market that utilize these services in almost every area of the country. Maybe Hollywood will move from “Supersize Me” to “Prey on Me” to create awareness about this epidemic in our country.
     Greed is good, for credit unions across the country. Wait, breathe, grab a paper bag; yes, we should be taking advantage of this market opportunity. For most loans, the maximum allowable interest rate to be charged by federally chartered credit unions is 18%. However, for small loans the interest rate can be increased given the cost structure to originate small or micro loans. In NCUA’s letter to credit unions, 11-FCU-04, they gave guidance as to the maximum allowable interest rate to be charged on a loan for a federally chartered credit union. The NCUA allows for a 28% ceiling for short-term small loans that meet the following conditions:
1. Principal Amount $200-$1,000
2. Term of 1-6 months
3. Application Fee of $0-$20
4. Fully Amortized (no balloon payments)
5. Rollovers must be prohibited
NCUA has designed the program to allow federal credit unions greater flexibility in providing alternatives to payday loans.
     Credit Unions are different by design and were created to serve those who couldn’t obtain affordable credit through the traditional lenders at banks. I would like to take a saying from a CUSwag.com T-shirt where they state “It’s Simple Math People.” The 18% rate equates to roughly $0.05 per day per $100 and the 28% rate equates to approximately $0.08 per day per $100. Payday lenders are charging $1.75 per day per $100 or an auto loan rate of $0.87 per day per $100; that is more than 10 times the regulatory maximum rate for small dollar car loans and 21 times the NCUA maximum allowable rate for small dollar unsecured loans. Most credit unions I have spoke with do not go above the 18% rate for any loans making the case even stronger for credit unions to enter into the marketplace to squeeze out the greed with our cooperative business models.
     Gordon Gecko is still around and wears many disguises. The credit union movement can stop the insanity and force him into hiding permanently. The movement must embrace the concept of “Carpe Diem.” Let’s seize the opportunity available in serving those who are victims of unethical lending and continue to provide the required balancing of the for profit/not for profit equation. Margaret Meade said, “Never doubt that a small group of thoughtful, committed citizens can change the world; indeed, it’s the only thing that ever has.” The movement can continue the progress started by credit union pioneer Edward Filene who defined progress as “the constant replacing of the best there is with something better still.”
 

Written by:  David L. Tuyo II, CLE, CCE, CUDE, CIMA, MBA, AIF

Emotional Intelligence

Emotional Intelligence: Overcoming Fear and Greed

Throughout history there have been many economic peaks and troughs. There have been both significant and minor swings. Over the past five years, we have witnessed the worst recessionary swing in history and it was still one-sixth of the decline during the Great Depression. The two primary emotional culprits are fear and greed. One of the early documented financial bubbles that led to a catastrophic burst was Tulipomania.
​Tulipomania originated in the early seventeenth century in the Dutch Republic when optimism was on the rise, textile trade was booming, and housing was expanding as mansions began to spring up seemingly overnight. The desire of people to chase after the illusive bulb producing black tulips led to foolish gambling rather than looking at the facts to see how they differ from historical trends and in most cases, common sense. The bubble was burst by the discovery that black tulips could not be replicated and later that they were actually caused by a fungus. It is also important to note the pendulum of irrationality swings both ways. Tulipomania gave way to Tulipophobia, providing opportunities for the value investor who focused on the facts versus emotional swings between fear and greed.
Recently in the Credit Union Times, the NCUA Deputy Director stated the paradigm of the trade-off between risk and reward holds for credit unions as well. He stated that credit unions that took more risk ultimately made more money. The article can be found at http://www.cutimes.com/2012/10/07/ncua-examiners-look-at-the-bigger-picture. I know this may be surprising; not the relationship of risk and reward but the fact that leadership at NCUA is stating credit unions should be taking more risk to make more money. This is evidence that NCUA is recognizing what we are seeing across hundreds of credit unions in the United States. When analyzing financial performance ratios and balance sheets, bottom lines are improving throughout the country. However, when looking at the details, there bottom line is misleading. Most credit unions are experiencing improved earnings only due to decreasing provision for loan loss expense and further reductions in cost of funds. The NCUA is recognizing this and attempting to communicate that our industry needs to grow revenue through lending. One of my mentors once said, “in order to have an extraordinary lawn, you must focus on growing grass versus killing weeds.” We can apply this today, as only focusing on killing weeds will leave our yard spotty with weak grass susceptible to more weeds. We must go back to basics and execute our forefathers’ wishes of serving those of modest means. NCUA also communicates this on their website at: http://www.ncua.gov/Legal/Pages/FCUAct.aspx. The pendulum is starting to swing with Chairman Matz's comments about examiners taking a more sensible approach in helping credit unions increase their ability to serve their communities.
We cannot afford to put our members through what we experience with the pendulum swinging. We must find ways to manage risk appropriately and implement a discipline of best practices within our organizations. This is the reason Lending Solutions created HYLS, a web delivered solution to act as both a underwriting tool and a risk management tool. HYLS was originally coined as “High Yield Lending Strategy” but recently a brilliantly creative President/CEO of a $2 billion credit union called it “How you lend smart.” I agree with her statement as it is a forced discipline in underwriting to help as many people as possible while managing the risk for the organization and operating as an effective cross selling tool. HYLS looks at 27 factors versus the traditional models’ 5 factors while providing support for the front line to use for better interviews resulting in more effective decision-making. HYLS should be integrated in operations and noted in ALM policies as a tool to effectively manage risk. Soon you will see communication from LSCI on best practices to implement HYLS as a risk management tool. The examiners have already commented about how HYLS accompanied with appropriate training provides outstanding results in serving membership and increasing safety and soundness. Also, one of the credit bureau's recently stated HYLS is a better predictor of bankruptcy and recommended the tool for a credit union versus their product offering.
As we start and finish the planning session season, remember that we only have so many grains of salt and we need to use them wisely. I believe authentic leadership in our industry today can convert our industry back into something much larger--a movement. As leaders in the industry, we need to hear NCUA’s recommendation and go back to our roots of people helping people. I recommend spending time reflecting on why and how we were founded, to promote thrift and provide credit to those of modest means. NCUA is doing their part to swing the pendulum in the other direction with communications and actions to increase the number of Low Income Designated Credit Unions. Remember, we may only be one person to the world, but to one person we can be the world!

Changing the world from Pensacola,
David Tuyo

New Years Resolutions

Is it too early (or too late) for New Years Resolutions? As we enter the fourth quarter of 2011, I am finally blogging from my iPhone awaiting a flight to Chicago to speak at CUES Advanced School of Risk Management. I find myself having random thoughts this early 4 am. Banks and Credit Unions continue to spend millions fighting each other and the government in a grid lock fight that we can only hope politicians in DC can mirror. I say this with slight tongue in cheek because so often the media or our environment dictates what we think instead of what to think about. Case in point: new years resolutions, politics, and banks versus credit unions.

New years resolutions are traditionally the same(readers insert smiles here): losing weight, financial fitness, various goals doomed to failure set in what not to do this year such as eat less and spend less. In order to succeed, one must focus on what you want to do not what you don't want. More to come on this later.

Political views are absolutely skewed and biased by the media as well as our environment. We need to understand these inherent biases in order to see the truth and develop real thoughts. Be mindful to remember the press attempts to tell you what to think versus what to think about!

Banks versus Credit Unions: a fight with no victory. If credit unions win, then there will no change except great amounts of money will have been wasted through the years not including the energy and resource drain which could have been focusing on helping individuals and businesses. If banks win, create unions will no longer exist in which case the market will be served by like minded institutions serving like focused targeted market segments. The financial world will not become polarized but just become a scale which can never provide balance to the markets due to all suppliers on one side of the scale.

Risk: doing what you have always done and expecting different results.

My New Years Resolution: eat foods which help my body operate better, exercise to help support the way I want to live, spend more thoughtfully, save with a destination in mind, lead through inspiration, be involved and engaged in all activities, choose the activities I feel I am most passionate about, focus on family and the legacy I am leaving this world, spend time with God each day, and finally, be self aware to enjoy every moment!

What are your New Years Resolutions?

Find the Cure with Competition

So in a feable attempt our elected "representatives" will vote shortly on continuing their display of lacking the basic business understanding of what makes the United States of America the best place to work and live. I will spell it out, it is "C-O-M-P-E-T-I-T-I-O-N" or competition for speed readers! The goal of this congressional financial reform should be to encourage competition rather than protecting their own self interests such as catering to legislation that will put greater revenue in their own pockets. Let's take a different perspective on this, let's try to address the illness instead of the symptoms. Banks were too big to fail, so Congress is strengthening the big banks to....make them bigger? Congress should be encouraging greater competition with smaller community banks and Credit Unions not Wall Street, Chicago, and Charlotte. With greater competition, the consumer will win as the pricing power will shift back to them via choice. In competition there are winners and losers, there will be failures and there will be all-stars. In today's world, all too often we accept that no one should lose without accepting the fact that our actions mean no one shall win either. Even in youth sports, there are programs where the teams will compete without keeping score. Without score keeping, there is no focus on accountability or results. How do we know if we are improving? How do we know what to work on, what is our strength, what is our weakness, and doesn't this make us lose motivation at least at some level in society? Russia, one of the socialist republics is starting to change learning from their mistakes while our country is heading that direction. Russia, recently started building suburban style american neighborhoods with individual houses versus the standard apartment living most are accustomed to; the reason, they have found that people act/work differently when they have their own home. Wow, what a concept. When people work hard toward a goal, then achieve the goal, the action breeds more of the same action. Hmmm, what a breakthrough......

Each day we have an opportunity, as my Coach Hopper used to say "Did you practice or improve today?" We were driven to be the best and only accomplished that by COMPETING against the best. The score told us who won......as will the upcoming vote tally.

If you want to voice your opinion, check out http://capwiz.com/cuna/home to contact your representative and let them know we want to go back to basics and stop addressing the symptoms but rather find the cure!

As always, thank you for taking the time to read my random blabberings....

Turning the Corner?

Last week as I was reviewing our financial statements before publishing for our Board of Directors, I noticed that there was an strong indication of the potential start of a recovery trend. Shortly after the analysis, I started to notice some prognosticators are saying we are past the recession and have started the recovery. The most famous of these: author, television host, and economist Larry Kudlow. The old rule of thumb is that the stock market will signal the recovery by trading higher 6 months prior to the justifying economic data. In case you have been too busy (probably working 4 times as hard as layoffs have increased work loads), the Dow Jones Industrial average which tracks 30 stocks that is designed to give a fair representation of the US Market has traded from 6,500 to 8,500 this year. I believe this is speculative trading in hopes of positive third quarter GDP however even in my organization we are seeing signs of a turn around. The turn around I am seeing is in our loan delinquency, loan charge offs, and our allowance accounts. There appears to be a curtailment in non-performing assets. So what does this mean? This further supports the current stock rally as well as give businesses and consumers hope that this is all behind us. The bad news is that all the pseudo government help that is no longer needed will continue to plague the economy in the form of capped growth. For every floor (government stimulus), there must be a cap. The cap will not be removed until the government realizes that people make mistakes to learn from them and improve. We don't need the intervention, focus on balancing the budget or reducing our national deficit and not on running our corporations. Lastly, I cannot post this blog until I bring attention to an area of the financial services sector that the media and government refuse to recognize. Credit Unions have not caused the tax-payers any money, has required no government intervention, and continues to thrive. President Obama, you are looking for a "new" financial structure to cure our ailing financial system; here is your answer--Turn banks into Credit Unions. The not for profit financial cooperative movement has been successful for over 100 years and continues to be the only beacon of light in the present economic storm.

The Great Trainwreck

I have been silent over the past few months as there has been so much transpiring. We have a new President, a change of power in Congress, a trillion dollar stimulus package, the most lost jobs in any 14 month period since 1939....

A friend of mine coined the current environment "The Great Trainwreck." He is using this term as the lead engine first derailed with the rest of the cars being pulled off the track by it, leading to what most refer to as the domino or trickle down effect.

In my mind there are two questions:
1. What started this?
2. What is the solution?

I am going to point a finger somewhere that no one else has. I am going to blame ACADEMICS, which I do consider myself one as I have studied all over the United States with numerous degrees and certifications but have only a decade of work experience.

ACADEMICS preach great information that sometimes is applied in a vacuum by practicioners. One in particular is the use of debt or leverage to acheive greater returns. I recently spoke to a large class of undergraduate students at a major university. The class was convinced to use student loans, car loans, home loans, to leverage their future income to get these items now. The ACADEMIC premise of the time value of money and that incomes rise over time so buy as much as you can now! This is the exact mentality that has gotten us into the Great Trainwreck. The use of leverage from a business perspective does have solid footing however its spill over application to personal finance is completely flawed. If a corporation implements a leverage strategy to increase ROE, the what-ifs can be addressed through modeling the risks and potential ooutcomes. In personal finance, no one addresses the fact that unemployment happens, the economy can have a severe recession, wages can decrease, and home values do go down. In business, they can divest themselves of problems areas, sell off divisions to raise money, issue new debt or even new equity to raise capital. Individuals don't have this ability and in poor economic times, cannot replace the cash inflow stream.

I would also like to address what I consider the biggest scam in the history of the United States. The argument of carrying a mortgage for the interest rate deduction. You will hear people all the time say, "why should I pay off my mortgage and lose the tax deduction?" I will tell you why, lets do some simple math. If you pay 5% in interest and are in the 20% tax bracket, then you still pay 80% of the interest or 4%. The argument is that over the long term, they can put the cash to work in the captial markets and earn a positive margin. That hasn't worked in this millenium yet.

In Canada, there is no mortgage deduction for tax purposes. The average canadian pays off their home in 7 years. Prior to the mortgage deduction, only 2% of homeowners had a mortgage. Post mortgage deduction, only 2% do not have a mortgage.

We need cleaner balance sheets, not in corporate america but on the balance sheets of individuals. We must learn to be more prudent with our earnings, pay down debt, recession proof your household, and when accomplished, the US will be recession proof.

Thanks for reading the long post and I look forward to your replies.

Better consumer balance sheets solve long term economic woes

So the poor performing economy is the number one topic in todays conversations. The long term answer is a better balance sheet and I am not talking about our national deficit. Consumers in the US currently have over 140 percent debt to disposable income ratio. This basically means that debt is unmanagable in any economy, good or bad. This is long term in that incomes need to grow and debt needs to be paid down. This will take years as consumers will not embrace the idea in the short term. Credit unions were chartered to promote thrift and provide credit. I believe if Credit Unions educate their members then we can shorten the adoption of cleaner balance sheets. A stronger consumer balance sheet means a stronger economy. It's not about taxes, government spending, or any political jockeying but about improving peoples financial situations to have a more stable economy. Too often we see politicians lose focus of why they are caught in economic minutae.
Simple solution, tough execution!

Signed an improved balance sheet due to my CU advisor,