Fill out your brackets, folks.
As huge financial institutions and governments work their way to a stressful sixteen and perhaps an awkward eight, the Filene Research Institute convenes a panel of research fellows in Portland to talk about the fallout. Instant updates and Q&A below …
(a full tongue-in-cheek bracket courtesy of the Wired Epicenter blog is attached in Comment #1 below)
Robert Manning (Professor, Consumer Finance – Rochester Institute of Technology): We are already in a consumer-led recession, which is different from a business-led recession. We will only eventually come out of it when household debt levels normalize.
Barbara Robles (Professor, Latino Financial Issues – Arizona State University): Sophisticated Hispanic consumers are already seeing the results of a worldwide “event”, and even less sophisticated consumers are feeling the personal and family effects of the slowdown.
Peter Tufuano (Professor, Financial Management – Harvard Business School): The average American family spent $514 dollars on lottery tickets last year. During this uncertainty, lottery sales are up. “I worry that as consumers make a flight to quality [insured deposits], credit unions will make a flight to safety [by not serving new groups].”
Dorian Stone (Partner – McKinsey and Co.): “I’m bullish about the opportunity … for credit unions.” The cost of capital is rising for banks and companies. Well-capitalized institutions can make large market share gains in the next 24 to 36 months. BUT credit unions need very aggressive and much more sophisticated marketing.
Jim Wilcox (Professor, Financial Institutions – Haas School of Business, University of California, Berkeley): “We’re in a financial hurricane, the likes of which we’ve never seen before. It’s a Category 4 … and we don’t know yet if we’re at the tail end or in the eye. For credit unions, it’s going to be raining members.” Suddenly assets are no longer liquid, and liabilities are no longer stable.
“If IBM is paying 800 basis points above treasury bills, that means credit is tight.” The stock market is a sideshow in all of this. It’s the credit markets where the emergency exists. For institutions that have been husbanding their capital, now is the chance to use it.
“The Paulson plan has been labeled as a bailout for Wall Street, which it is not. The reason was to prevent the financial crisis we’re already in from turning into an economic crisis that will hurt all of us. It was designed to get credit flowing again.”
“I would put no limit on deposit insurance at this point. Infinity is a good number … for a while. The long-run doesn’t matter, if you can’t get through the short-run. We’ve got a financial fire in our house. We’ve got to put it out, and we’ll worry about the water damage later.”
Q: How can we convince our credit union board to take advantage of this market?
DS: The board understands the situation about as much as anybody else. It could be helpful to pair some macro numbers with case studies of real members. The answer is not binary. It’s not, ‘Do we make all these loans or do we make none?’ Rather than make 10/10 loans, consider your best two. People who take out loans with a credit union are less likely to default because of the affinity.
JW: There are very good, credit-worthy borrowers out there. They can’t get credit; their problem is your opportunity. When you see that AT&T and IBM can’t borrow, you see that other players have made mistakes and you have an opportunity.
BR: Local folks have to step up to the plate, when multi-national companies stumble.
PT: Beyond economics, this is a philosophical reasons. The people asking for loans are members.
RM: Credit-worthiness for individuals changes because of underwriting, not because Wachovia goes under. We shouldn’t let the national news dictate to us how we should lend at the local level.
Q: With FDIC capitalized at $45 billion or so, do you think they sufficiently capitalized? What would the consumer sentiment be if people see deposit insurance ‘running out’?
JW: It doesn’t matter how big the reserve at the FDIC is, if it did, we’d all have our money under mattresses. Taxpayers are always going to provide enough money. “Hurricane insurance doesn’t prevent hurricanes.” Deposit insurance is the only kind of insurance that prevents what it is designed to repay.
PT: The greater risk is in the PBGC (Pension Benefit Guaranty Corporation), which backstops defined benefit plans.
Q: Are we going to go back to the ‘80s with extremely high interest rates?
JW: Many banks are raising interest rates to prevent a “walk” that could turn into a run on the bank.
Q: What can we do as a movement to educate the media on the credit union structure and credit union difference?
DS: There’s a blind spot in the media that afflicts credit unions. “I don’t care as a consumer why you’re different unless I’m getting a better deal. Very few people buy from mutuals because they’re mutuals. It’s the difference between telling me you’re funny and telling me a joke.”
BR: Alternative news media are often looking for information and are often very eager to work with you.
RM: Every credit union should call up their local paper and ask to have lunch to explain the key issues about the crisis, then explain how credit unions can play a place.
Q: Regulatory fallout?
PT: The tax advantage is going to be back on the table when this is all done, and if credit unions can show what they did both before and during the crisis, they will be in better stead.
BR: If credit unions use this opportunity to begin to serve emerging markets and bolster
JW: With the weakening of government-sponsored competitors, it will be a good time for retail financial institutions to improve their buy-and-hold mortgage model. The credit bubble is over, which will end the powerful downward pressure on our margins.
RM: As you personalize underwriting – compared to big banks, which use complex algorithms that are often off the mark – you’ll have good stories to tell and those good stories will flow to your representatives.
Comments
4
Download the full September Madness bracket here
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Ben,
This is brilliant – don’t forget to update the bracket – Wachovia down but Wells Fargo the winner….in a surprise upset in the 4th quarter with just seconds to go.
D.
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Indeed, Denise. And the payday loan folks right above you apparently want in on the bracket action.
I have them beating the U.S. Congress in Round 2, but falling to JP Morgan in the Stunted Sixteen. Should be a tough game though … they’re scrappy.
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Credit unions do have a once in a generation chance to differentiate themselves in the midst of this upheaval. My concern is that even this is not enough to shed the malaise that’s crept in to the movement over the past several years. We should have started by publicly announcing that credit unions collectively refuse to participate in the Troubled Assets Relief Program.
I do tend to agree with Dorian Stone that most consumers don’t get, or care about, the mutual aspect of credit unions. However, it’s possible that we’re on the verge of a sea change in the thrift attitudes of Americans. If we can tell our story effectively, with the aggressive and sophisticated marketing that Dorian suggests, I believe we’ll be able to capitalize on that difference and continue to thrive.
This will require CEOs with heart and vision and commitment that can pursuade their boards, management and staff to take advantage of this opportunity. It will also require the same from CUNA, the state Leagues and all organizations involved with the movement.
It would be nice to see the Credit Unions on the bracket and make it to at least the ‘flourising four!’
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