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Advocacy Alert- 01/21/2002

Key Statistics on Credit Unions

• Based on trends identified from DFI data, state-chartered credit unions will have more combined assets than state-chartered banks by 2008.
  

• Golden 1 Credit Union, a state-chartered credit union, had $285 million in assets in 1985, when it served primarily California state employees. Today, the credit union is the nation’s sixth largest, with nearly $3.4 billion in assets, serving 21 counties (as far south as Santa Barbara) and 437,000 members. Golden 1 is larger than 93% of CBA Members.
  

• California banks, savings associations and other financial institutions paid $700 million in state income tax in 1998 (about 14% of the total bank and corporation tax paid). Credit unions, of course, paid zero.
  

• For the first 10 months of 2001, CUNA out-raised the ABA’s Federal PAC for the first time, $1 million to just over $800,000. In 2000, CCUL out raised CBA’s State PAC by a two-to-one margin.
  

• Total Field of Membership (FOM) among all credit unions skyrocketed to 386.9 million Americans at year-end 2000 — that is roughly one-and-a-quarter times the entire U.S. population.
   

Enron front and center

The Enron issue threatens to eclipse other priority items
on the crowded Congressional agenda this year. Congressional committees, including those with banking jurisdiction, will dual to investigate the highly publicized collapse of the energy trading company. There are many SEC issues ranging from the accounting irregularities to the duties owed by investment advisors to their customers. There could even be pressure to revisit the fundamental premise of Gramm-Leach-Bliley which repealed all vestiges of Glass Steagall, the depression era Act which prohibited the combining of investment with commercial banking.

A great deal of attention will be devoted to a myriad of ERISA issues in light of the fact that hundreds of Enron employees were locked into a company administered 401 (k) program that gave Enron employees no option to sell their Enron stock. The accounting profession generally, and Arthur Andersen specifically, will be grilled by Congressional investigators about conflicts of interest and the reliability of audits. Legislation that grows out of the Enron investigation could affect banks in a variety of ways. The issue is now competing with the war against terrorism for television and newspaper coverage, and as long as it is, Congress will make much of the news.

FDIC-commissioned study recommends reinsurance

A study commissioned by the FDIC as part of its internal analysis of the deposit insurance reform issue has, not surprisingly, recommended that the corporation develop a pilot program to explore purchasing reinsurance from private companies to cover very large losses. The study was made by a unit of Marsh & McLennan Co. and suggests that the best course might be for FDIC to seek reinsurance on losses over some very large specified amount. It also suggests it would be much more expensive for FDIC to obtain private coverage against the failure of specific banks or even large banks taken as a whole. The study concludes that private reinsurers are generally not interested in sharing some percentage of FDIC losses as a whole and that they would want to share in FDI C premiums on the same percentage if they did.

There has been scant industry reaction thus far. Some groups oppose the concept of using information gained through the reinsurance process as a basis for establishing premiums for individual institutions. But FDIC, on the other hand, believes this would be the principal advantage of using reinsurance — to provide an independent and private judgment of the risk posed by a particular bank thus helping to justify risk weightings in assessing premiums. Another consideration is that well capitalized banks posing extremely low risk might improve their case for rebates if private reinsurance did cover some level of losses, because the coverage itself could free up some reserves. FDIC could proceed without further Congressional approval because existing law already permits the corporation to backstop up to 10 percent of its risk.

OTS pulls controversial holding company proposal

The announcement by Charter One Bank, one of the largest thrift institutions in the nation, that it would give up its thrift charter to become a commercial bank could have been a factor. In any event, the OTS summarily withdrew a proposal that would have required multiple S&L holding companies wishing to exercise powers provided under Gramm-Leach-Bliley to engage in activities authorized for a financial holding company to comply fully with Federal Reserve Board regulations applicable to financial holding companies. The industry, including the CBA, opposed the OTS proposal and was pleased with the OTS announcement. Industry argued that it was not necessary to add a level of regulatory burden on these so-called non-exempt (non-unitary) holding companies because GLB itself granted these powers. Still, one factor in the OTS move could have been its concern over the lost examination fees occasioned by the Charter One charter shift. Both Comptroller Jerry Hawke, and former OTS director, Ellen Seidman advocate that the FDIC should assess the cost of federal examinations of all insured institutions to remove examination cost as a factor in charter choice. Ironically, one possible consequence of the revenue shortfall of both federal chartering agencies is that it adds financial pressure for a regulatory consolidation which would eliminate an important element of the very choice the industry seeks to protect.

House staff unveils 40-item regulatory relief package

The staff of the House Financial Services Committee has unveiled a package of some 40 items it wishes to package into a regulatory relief bill for consideration this year. The staff says it is a payback to the industry for being so cooperative on the money laundering bill last year, a measure which does add considerably to the regulatory burdens on the industry. Included in the package is a provision that would substantially eliminate state barriers to out-of-state banks and holding companies acquiring a bank in that state or establishing branches de novo. Another would provide thrifts parity with commercial banks under the Investment Advisors Act of 1940, thus eliminating regulatory barriers the SEC imposes on thrifts to act as investment advisors. But credit unions may, once again, be the biggest winners. One provision would allow uninsured credit unions to join Regional Home Loan Banks. Another would provide substantial latitude to the credit union administrator to authorize new investment authority for credit unions. One provision that is not contained in the package is the so-called SunTrust provision that would authorize a rebate out of SAIF to SunTrust and other Okar banks that contend they were improperly assessed in 1996 when the SAIF was recapitalized.

Political Analysis: Can a moderate be the “Survivor” in California?

With three separate versions, all finishing among the Top 10 television shows when aired, the reality show “Survivor” has proven to be a sure hit for CBS. Ethan Zohn took home the $1 million in the most recent show this month, beating out 15 others after enduring 39 days in Africa last summer. The show’s structure requires that contestants compete in challenges and then cast votes against their teammates until only one is left. As the show’s motto puts it: Players strive to “outwit, outlast and outplay” each other. Although who represents in the California Legislature or Governor’s office is vastly more important than a game show, the battle for who will “survive” to set the policy agenda has traits similar to those millions have watched on TV.

Unlike past years, the final “tribal council” for who runs the Assembly and Senate will be largely decided on March 5, during California’s statewide primary election. This is chiefly due to last fall’s reapportionment of legislative and congressional districts which cemented Democratic majorities for the next decade. Currently, there are 50 Democrats (out of 80) in the Assembly and 26 Democrats (out of 40) in the Senate. Most political observers don’t expect those margins to change much after the general election in November. As a result, the battles are being waged between members of the Republican and Democratic parties, with the respective nominees almost assured of being sworn in as legislators in December. Much like “Survivor,” California’s voters must choose from among their own to determine who will represent them.

In this new environment, traditional battles between the parties will be muted or non-existent. Instead, candidates must separate themselves from their fellow party members, often on ideological grounds. For Democrats, Senator Sheila Kuehl (D-Los Angeles) announced the formation of a “progressive coalition” to support progressive candidates. She argues that “if Jackie Speier’s privacy protection bill had just one or two more votes; we’d now be protected from banks who’ve been selling our personal information.”

Although the ideology is different, on the Republican side the battle is much the same. GOP gubernatorial candidates Bill Jones and Bill Simon are attacking frontrunner Richard Riordan for not, in effect, “being Republican enough.” As evidence of his lack of GOP party allegiance, Mr. Riordan’s contributions to Democratic candidates, including Gray Davis, are cited.

With the U.S. Supreme Court’s overturning of the state’s Open Primary, crossover voting will no longer be allowed. Republicans can only vote for Republicans, Democrats for Democrats. Conventional wisdom is that in primaries where turnout and interest are low, party activists—who tend to be more liberal if Democrats, more conservative if Republican—are more likely to go to the polls. In this environment, how will moderate candidates fare?

In “Survivor,” winning player Ethan was perceived as an introvert, a nice guy and one who generally had the interests of his fellow tribe members at heart. He was not flamboyant or provocative in the way that other players were, whether by making outrageous comments, gloating in victory or sulking in defeat. In short, he appeared to be “moderate,” in the best sense of the word.

For Democrats, a moderate in 2002 often means the candidate is pro-business, at least to the extent that he or she is willing to listen to the views expressed by organizations like CBA. It was, after all, the moderates who stalled Ms. Speier’s privacy bill on the Assembly floor last year. Although incumbent moderates are assured of victory in Democratic primaries in March, the same cannot be said for open seat contests, particularly in light of Ms. Kuehl’s progressive call to action. Can moderate candidates win those contests? What messages can they use to appeal to Democrats so that they can “survive” and win elections. More importantly, can CBA and like-minded organizations marshal the resources necessary to help such candidates not get “voted off the island.”

For Republicans, the dynamic is a bit different. For CBA, a Republican legislative candidate, whether conservative or moderate, is likely to support our business-oriented agenda. In that sense, March 5 won’t change things that much. However, in the larger arena of gubernatorial politics, the difference between a GOP moderate and conservative is significant.

Jones and Simon may be thinking that appealing to party loyalists by denigrating the bipartisanship represented by Mayor Riordan will serve their respective candidacies. In the short term, perhaps, assuming that one of them can prevail in the Republican primary. But how well positioned will these conservatives be in facing the incumbent Democrat in November?

In light of the failure of Dan Lungren’s conservative candidacy in 1998, the fact that only one statewide officeholder is a member of the GOP and both U.S. Senators are Democrats, it seems clear: Moderate candidates win elections in California. Portraying Riordan’s bipartisanship and pro-choice, pro-gun control positions as outside the GOP mainstream could prove to be a Pyrrhic victory for Jones or Simon—winning the primary, but losing the general election.

Can moderates “outwit, outlast and outplay” their more progressive or conservative counterparts? Stay tuned on the night of March 5th to find out who are likely to emerge as the ultimate “survivors.”