Technology Credit Union (Tech CU) Annual Meeting (2018)

All of us suspect financial institution executives are SOBs, but most of them have the decency to act dignified in public. Not San Jose, California-based Tech CU. The annual meeting on April 25, 2018 was a doozy, with Mical Atz Brenzel, the Chairman of the Board, getting angry while flubbing questions and President and CEO Todd M. Harris making comments that unknowingly contradicted his colleague. 

The spread for members, which will be noteworthy later.

I might have crossed a line by saying a "monkey" could have run a bank in the last four years because of record-low interest rates, but financial institutions, as stewards of our assets, are supposed to be conservative creatures able to withstand criticism, especially from their members. If you're part of an institution that refuses to stress-test its culture, you're going to have problems eventually. If you're part of a financial company so tone-deaf it decided to convert its member-based structure into a corporate banking entity without adequately vetting the move with its own members, humility ought to be your motto thereafter. Well, not if you're Tech CU. 

Regarding the failed conversion: "'Our members have voted and overwhelmingly indicated their preference to remain a credit union' ... there are no plans for executive departures as a result of the vote..." [Emphasis added.] In a nutshell, the same failed managers at the helm of a debacle so bad it will be part of an MBA textbook someday are still guiding the ship. They also seem convinced cultural cracks in their hull concealed by consecutive years of ultra-low interest rates are evidence of their own deft maneuvering. 

At least one of their own slides at the annual meeting indicates otherwise. One showed a loan-to-deposit ratio of 60% in 2013 that jumped to 87.79% in 2017. In other words, Tech CU, right after botching its conversion, might have taken a too-conservative approach with its loans, only to right its sails through low interest rates to a more balanced portfolio. 

In another example of hubris gone wild, Todd Harris said he was pleased with Tech CU's solar loan program, which has "12% national market share." I'm not an expert on solar power, but I know many solar companies and consumers rely on direct or indirect subsidies, and those subsidies can change overnight. In other words, the loan portfolio CEO Harris highlighted as part of his successful management might be its most risky. 

Update: seen in Singapore business newspaper, December 17, 2018

I was the only person at the meeting who asked questions or made comments. I mentioned being locked out of my ATM account while traveling internationally and being asked to call an American-based number, which anyone with travel experience knows is problematic. I suggested a simple solution involving secure email or secure messaging on the app. (How this team will screw up such a simple suggestion is an event I eagerly await.) 

I also asked why publicly available quarterly reports aren't available on the credit union's own website. Here's where it got really interesting, and by interesting, I mean shameless. Todd Harris told me Tech CU wasn't a public company and follows laws applicable to credit unions, which don't require making reports more accessible to members by putting them on its own website. 

No results found on gov website. It's a lil' clunky.

Let's back up a minute. No one is disputing these quarterly financial reports are available on some strange government agency's website. 

Found it!

No one is disputing these documents are harder to find if not disclosed directly on Tech CU's own website. No one is disputing greater transparency helps build trust, or that trust is important when competing for customers giving you money for safekeeping. Everyone agrees complying with a minimum standard in ways that reduce transparency isn't helpful to gaining clients or confidence. And yet, here we are, with Tech CU's management fighting to do as little as possible when it comes to transparency and simple convenience for their members. 

It gets even worse, especially if you, like me, believe banking culture is one factor in evaluating a country's ascent or descent. Most companies have rules relating to shareholder meetings that limit cranks, but they're written tastefully or at least in ways circumventing an accusation involving East German artillery. Here, Tech CU, blind to its cultural deficiencies, managed to outdo itself once again. Its rules for the meeting are so subjective and overbroad, they provide total control over any kind of direct questioning deemed unpleasant. From number 6 in "Rules of Procedure and Conduct of the Annual Meeting":

The Chancellor, er, Chair or the CEO will stop discussions that are: 

* irrelevant to the business of the Credit Union or the conduct of the operations;
* derogatory references that are not in good taste; 
* unduly prolonged (longer than two minutes); 
* substantially repetitious of statements made by other members; or 
* related to personal grievances. 

Remember: we are discussing a client-facing institution. If a member had an issue with an employee at a specific branch and wanted to alert the board in person at the annual meeting--the one and only time a year any member may do so publicly--the board doesn't have to listen. It could deem the comment a "personal grievance." Or perhaps it's derogatory or not in good taste. Who knows? Anything goes, comrade. 

After my final "monkey" and "low interest rates" comment, plus the fact the Bay Area had seen large inflows of private and public investment in the past four years, making it virtually impossible for Bay Area banks to fail, Mical Atz Brenzel launched into some angry gibberish. Still trying to temper her arrogance, I slipped in a question about whether any banks in the Bay Area had gone bankrupt in the last four years, to which she initially stood, jaw agape. After avoiding my question, she tried arguing banks don't really fail any more, they're absorbed into larger banks, which of course had nothing to do with my actual question. (I don't know of any Bay Area banks or credit unions requiring government intervention in the last four years to prevent bankruptcy, but if you do, please enlighten me.) 

Not satisfied with looking like a loon, Brenzel then argued lower interest rates made it more difficult for Tech CU to do well. I asked, "Are you denying lower interest rates encourage banks [and CUs] to make more loans [and therefore higher profits]?" It took her a few seconds to accept this Economics 101 fact, after which she advanced a spiel about Tech CU having to compete with numerous financial institutions in the Bay Area and still doing well. I let her have the last word, saying, "We'll agree to disagree." 

As I got up to exit the meeting room, a belligerent Todd Harris, a bowling ball of a man, approached and told me I was "frustrated." He continued trying to score points by telling me I mistakenly used the term "bank" instead of "credit union" in my comments. Pleased I'd gotten a Tech CU executive to mention a term relating to its largest management debacle without a sense of irony, I explained I wasn't frustrated, but we'd get to see how good he and the team really is over the next four years as interest rates rise. In addition, I told him his colleague can't argue that Tech CU's management did well because it successfully competed with numerous banking institutions, including public ones, while he favors a transparency standard far below all the public banks against which he's allegedly competing. As I left, I noticed employees bringing juices and mineral water into the meeting room, giving themselves a much better selection than offered to their own members. 

Tech CU's management didn't listen to their members in 2012, and they're still not listening. Worse, they're getting upset at a member trying to remind them to do exactly what a bank or credit union ought to do in an era of rising interest rates: be humble.

© Matthew Mehdi Rafat (2018)

Bonus: Gloomy Sunday (1999) is Netflix CEO's Reed Hasting's favorite movie. Consider the conversation below in light of Tech CU's Rules of Procedures and Conduct of the Annual Meeting: 

Schnefke: "But we must be careful not to stray too far outside the law." 

Hans: "Of course. But the beauty and vibrancy of the law lies in its flexible boundaries." 

[Two Nazis in Hungary around 1939 discussing their future.] 

Richard Fisher on Banking

Richard Fisher once again proves he's one of the few honest government officials left:

http://www.ritholtz.com/blog/2010/06/financial-reform-or-financial-dementia/

My message to you tonight is to remember where we have been. We have collectively been to hell and back. Let’s not go there again. Let’s remember that bankers should never succumb to what is trendy or fashionable or convenient but should instead focus on what is sustainable and in the interest of providing for the long-term good of their customers...

This leaves us with only one way to get serious about TBTF [too big to fail]--the “shrink ’em” camp. Banks that are TBTF are simply TB—“too big.” We must cap their size or break them up--in one way or another shrink them relative to the size of the industry.

Ah, common sense. Capitalism can't survive without it.

Banks: an Immodest Proposal

Jamie Dimon's shareholder letter inspired me to evaluate ways around another banking crisis. The primary reasons for our current economic crisis are as follows: one, too many banks had lax lending standards; and two, financial and corporate institutions were interlinked to such an extent that conservative behavior was not appropriately rewarded.

In attempting to fix our current problems, we may have sown the seeds for another banking collapse. Currently, too few financial institutions hold too much of consumers' assets. This problem has gotten worse as concerned consumers have withdrawn their assets from smaller entities and placed them in larger institutions. In addition, the government has allowed large banks to take over smaller banks' assets. This has benefited large banks by giving them more assets but has also increased systemic risk. Whenever fewer players exist in any game, power becomes concentrated and competition decreases, which hurts everyone on the outside, i.e. consumers. Right now, Wells Fargo (WFC) currently holds over a trillion dollars in assets. But in 1950, Wells Fargo's combined assets were less than $3 billion. In 1985, the number increased to $50 billion. Prior to the Wachovia acquisition, it held $610 billion, still well short of its current $1.5 trillion. JP Morgan (JPM), after its WaMu acquisition, is now the largest credit card issuer in the nation. There is some good news--after the recent financial turmoil, several investment banks, such as Goldman Sachs (GS), have become mere banks, falling under broad government regulation for the first time. Even so, with fewer financial institutions holding more assets and liabilities, it is unclear whether derivatives and other risky contracts have been sufficiently curtailed, or whether the new assets given to the larger banks have allowed them to maintain the previous system, which led to our current banking collapse.

In 2002, one bank, J.P. Morgan Chase, accounted for $26 trillion of derivatives all by itself. (Again, that's $26 trillion, not $26 billion.) Thus, it's fair to say that JP Morgan knew about the massive risk inherent in its derivatives in 2002--or at least five years before systemic risk spiraled out of control, causing our current economic collapse. Yet, JP Morgan survived through 2009 and appears to be one of the last standing well-managed banks. You can draw two conclusions from this result. One, derivatives or increased financial regulation is unnecessary. JP Morgan being able to extricate itself from derivatives to avoid collapse shows that individual decisions matter, not regulation. Or, two, even though JP Morgan and other banks knew about the massive danger of derivatives in 2002, the system allowed this massive risk to continue unabated for years. As a result, other banks continued to trade derivatives and caused the entire banking sector to suffer, leading to a recession affecting all banks, not just poorly-managed ones. Ergo, we cannot rely upon all banks having excellent CEOs, so we must strictly regulate banks to avoid systemic collapse.

Even if you ascribe to the second conclusion, you must still draft reasonable regulation. To this end, I offer the following:

1. No individual financial institution shall hold more than $75 billion of consumer [non-business individual] assets.

2. No individual financial institution that holds consumer assets shall have liabilities, including derivatives contracts, of more than $1 trillion.

3. Financial institutions may have liabilities of more than $1 trillion only if they meet two conditions: a) they must not hold any consumer assets or consumer loans, such as credit card debt or home mortgages; and b) they must buy insurance covering at least 75% of their liabilities. (This regulatory framework shifts the burden to insurance companies, not the government, to determine appropriate risk pricing. One problem with this framework is that the government must rely on Moody's (MCO) and other ratings agencies to act as ethical middlemen, but the government can more easily regulate ratings agencies than financial institutions. The government can also create its own financial ratings agency, like a "ratings USPS," while Moody's and S&P become FedEx and UPS. You're probably wondering how this framework would prevent another AIG bailout. It wouldn't, but if ratings agencies do their job and evaluate risk properly, an AIG won't ever happen again. The real issue is eliminating conflicts of interest in the ratings agencies, which probably shouldn't be publicly traded companies. Ratings agencies should be focused on prudent accounting, not increasing growth and profits per share.)

4. The FDIC insurance cap on all financial accounts (not investments) shall be raised from $250K to $650K permanently. (On January 1, 2010, FDIC deposit insurance for all deposit accounts—except for certain retirement accounts—will return to at least $100,000 per depositor.) This change may encourage Republican support, because it would help one of their core constituents, the rich. It would also help blunt cries of socialism, because again, this change helps mainly rich people. What rich person wouldn't want the government to insure all of his or her personal accounts up to 650K? This change may also cause the rich themselves to spread their wealth among different banks--increasing overall systemic health--instead of having their money with just one or two financial institutions.

5. Financial institutions that fall under these new regulations shall have five years to comply. The government stresses that there is no single way to comply with these new regulations. For example, financial institutions may spin off new entities to shareholders; they may sell assets to other entities to meet their new threshold; or they may use other methods to fall under the new threshold amount.

6. The Federal Reserve shall, in its sole and independent discretion, have the authority to raise the "trillion dollar" liability threshold once every calendar year, but if it wishes to increase the existing threshold by more than $750 million, it must receive Congressional approval.

Credit unions would benefit from this new legislation, and rightfully so. Did anyone notice that no consumer credit unions have collapsed? (Two corporate ones have collapsed, but these are different from credit unions that serve consumers.) Financial institutions which stayed true to their bread-and-butter business--making conservative loans and paying consistent dividends to shareholders--did well. Why not encourage them instead of the bad banks like Citigroup (C) and Bank of America (BAC)?

As for the inevitable lawsuits, the government would be acting under its anti-trust authority as well as its general welfare powers. No "taking" occurs here. Banks have five years to create a safer framework that maximizes shareholder value in any way they see fit. Most shareholders would end up owning shares in multiples companies and banks, not just one. There is no reason the value of their assets/shares must decrease--in fact, it may increase. As a result of the banks' complete discretion on how to spin off or create other entities and the long time period they have to do so, any "taking" is speculative and financial institutions cannot reasonably make such an argument under the 5th Amendment.

More specifically, the economic impact of the regulation is reasonable because a) the government is not violating or voiding any contracts, and to the extent it is doing so, such contracts may be re-negotiated in three to five years to produce a reasonable result; and b) the government is not taking anyone's property. It is simply ordering financial institutions to modify their own businesses to prevent massive systemic risk--it is not telling them how to do it. This is just like telling a restaurant it cannot have more than 1000 people dining in a certain square footage area. The government isn't taking the restaurant's customers--it's just telling them to modify their practices to prevent a fire hazard. The same principle applies with the proposed banking regulations.

The regulation's impact on investor-backed expectations is also negligible. No investor can reasonably argue he or she is entitled to create massive systemic risk when a) the government is not gaining any money whatsoever; and b) the investor does not necessarily lose any money if the banks handle the transition properly.

The more I think about it, the more I believe that "too big to fail" ought to be "too big to exist." Perhaps the government will come to this conclusion before the next financial crisis happens. I doubt it, though. The main people who would benefit from these new regulations would be average Americans. Unfortunately, Congress stopped listening to them a long time ago.

Bonus: another perspective, from Bob Wilmers:

At the shareholder meeting, Wilmers emphasized the performance of the "good" banks, the more conservative "community banks" that did not become players in the "virtual casino" of our financial markets. He also dissed the bank regulators, including the useless, dim-witted Office of Thrift Supervision. He calls OTS the "place to go ... if management of an institution wanted to be an aggressive player in the banking industry with a minimum of supervision."

Update: I can't believe I missed this Glenn Greenwald post:

Senator Richard Durbin (D-IL): "And the banks -- hard to believe in a time when we're facing a banking crisis that many of the banks created -- are still the most powerful lobby on Capitol Hill. And they frankly own the place."

Thomas Jefferson on Banks

From Thomas Jefferson, paraphrased:

If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered...I believe that banking institutions are more dangerous to our liberties than standing armies... The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.

President Jefferson's modern-day equivalent would have to be Mr. Ron Paul.

Note: the Jefferson quotation cited above has no credible source. It is apparently a paraphrasing of two separate Jefferson statements:

And I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale...Bank-paper must be suppressed, and the circulating medium must be restored to the nation to whom it belongs.

From Thomas Jefferson to John Taylor, Monticello, 28 May 1816. [Ford 11:533] and Thomas Jefferson to John Wayles Eppes, Monticello, 24 June 1813. [Ford 11:303]

Ford = Ford, Paul Leicester, ed. The Writings of Thomas Jefferson. New York: G.P. Putnam’s Sons, 1892-99. 10 vols.

Bank Market Caps

Barry Ritholtz almost always has great stuff on his blog, The Big Picture. Here's one particularly interesting post, showing how much banks have declined in value:

http://www.ritholtz.com/blog/2009/02/bank-market-caps-then-now/

Oh, the lack of prudence.