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Answer:
I strongly empathize with your concerns. In the 10 years that I have written the “Ask Emily” column, I have referenced personal issues only on rare occasions, but perhaps this is the right time to do so. Like you, I’ve been pondering the relationship between American behavior, the protestors, bank transfer day, and risk assessment. Perhaps my focus on human behavior is derived from reflection on a new year, a new start, or perhaps from my mother’s death last September and the reality that my father, her husband of 62 years, has only a few months remaining. In any case, I offer these thoughts:
On the subject of the protesters, I think back to my upbringing and struggle to comprehend what truly is real, and what is reaction to the heat of the moment. On one hand, I am ecstatic that people are in an uproar about the greed of some bankers and Wall Street opportunists, and that it has created greater awareness of what credit unions are all about. However, the initial peaceful intent and compelling story seem to have been distorted by some protesters who just don’t get it. For example, I am appalled at the ignorance of some young people and wonder about the foundation of their value system when they demand that their student loans be absolved. They are advocating precisely the lack of integrity they decry in others. I know I’m “preaching to the choir,” but loans are made based on solemn promises to repay them, and no one is forced to borrow. Being a college student isn’t a state of victimization; it’s a privilege that millions of young people around the globe would die for – literally.
In the mid 1990s, when ALM First was merely a dream, I mentioned to my Cuban father that being 50 percent Hispanic and a female, I could prosper as a “minority” investment manager. My dad winced as he began a lecture on abusing the system, reminding me that I was well educated and I didn’t need such a crutch. Let’s face it, I don’t even look Hispanic. I listened to him (for perhaps the tenth time) relate his experiences of 30 years ago, which he wrote about in his published book, “Thanks, America, Thanks.” In a nutshell, his boss began explaining his rights as a minority, and my dad rose from the chair, announced he was an American, and left the room. He didn’t need the help but we all know that some do. Another time, Dad painted a huge American flag on the front fence only to be forced to dispose of it when the neighborhood home association threatened a lawsuit. He couldn’t bring himself to paint over it, so he dismantled the boards one by one and they still lay in a pile in his garage. Bottom line, he would never take advantage of the country he loves.
Of course, my father is my #1 role model, but I have a few others, as well. Warren Buffet, Herb Kelleher... and right behind them, so many credit union executives who have really made a difference in our society.
At ALM First, we conduct risk assessments for financial institutions, but I am torn about how to account for human behavior in our financial models. We are caught between Americans who truly need help and those who abuse the system. As I once again watched the heartwarming movie, “It’s a Wonderful Life” over the holidays, George Bailey’s Building & Loan reminded me of the true “people-helping-people” philosophy of credit unions. This is the backbone of America. Without believing in members, their ability to pay and their desire for self-improvement, America would indeed turn into a “Pottersville.” The reality is, we can’t forgive all loans, we can’t survive with loose bankruptcy laws, we can’t have minimal penalties for early share certificate redemption, and we can’t forego all service fees. And, just like in the movie, we also need member loyalty when rates rise fast and we lag in money market rates.
Eventually, rates will rise. As we model risk assessment, we always presume that credit union money market rates lag index rates by a certain amount, depending upon historical member loyalty, irrespective of how high and fast rates rise. Decay rates are reasonable and do not take into account lurking companies like ING that offer overly aggressive deposit rates, for members reward service oriented institutions, right? We also project that current fees are sustainable and in merger valuations, even worth a fair amount of premium. We assume that home equity LOCs perform extremely well when rates rise. The rates are set at a spread to an index and rarely assume that member defaults increase exponentially or that the loans are converted to a negotiated lower than market fixed rate. Lastly, we would never model any student loan to be just forgiven.
So, for our modeling assumptions, I choose to be optimistic and believe most people are responsible and understand that financial institutions – including credit unions – are still businesses. But if we change the assumptions only to the extent that members have little loyalty when rates rise quickly, the risk looks pretty bad.
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