The member-elected directors and executives may have a conflict of interest in recommending this conversion.
In most previous conversions, credit union directors and executives have profited personally by converting their members’ credit union to a bank, according to the Washington Post. The Post cites a study in which insider gains averaged at $742,000 for each director and more than $1.2 million for top executives.1
| Learn more about insider enrichment from the National Center for Member Trust. |
In Dallas last year, the CEO of the former Community Credit Union made over $3 million of windfall profits on stock by converting his members’ credit union-turned-mutual bank into a stock bank. By comparison, over 98% of Community’s members effectively lost their ownership without receiving any compensation in return.
Under Texas law, credit union directors, who are elected by the members, and executives, owe a legal duty to maximize benefit for members. We own the credit union.
How does it work?
Converting to a stock bank is generally a two step processes. In the first step, which First Basin has proposed, the credit union converts to a “mutual bank.” In the second step the mutual bank issues stock. To date over 75% of converted credit unions eligible to issue stock have taken that step. According to a study by the University of Wisconsin, “The credit union that converts to a mutual is simply creating the device through which it can issue an IPO (stock offering) and become a commercial bank.”
| What does this insider gain mean for us? See: Worse rates and fees, Loss of ownership, and Loss of voting rights. |
Here are the ways directors and executives are able to enrich themselves in the second conversion, from mutual to stock bank (According to Alan Theriault, a consultant whose business is to convince credit union directors and CEOs to convert)2:
- GIVE THEMSELVES 4% of the stock they issue as a so-called “recognition and retention reserve”
- GIVE THEMSELVES stock options to 10% of the stock they issue
- Profit from the stock they purchase in conversion.
Even before selling stock, insiders are able to profit:
- Bank CEOs are paid 20% to 57% more than Credit Union CEOs
- Directors, who had served as volunteers under most credit union rules, are generally paid between $2,500 and $50,000 annually as directors of a bank.
Notes:
1.“Credit Union Conversion Plan Draws Opposition From Members,” Washington Post. August 24th, 2006
2. Theriault, Alan D., “CEO & Directors: Salary Imbalance is Corrected by Converting to a Bank,” Converting From a Credit Union Fax Update, 9/16/02, http://www.cufinancial.com/pdfs/NL2002.pdf
