Conference 7.286::dcu

    That some credit unions don't make annual reports available is
    not completely surprising. There are some very small credit unions
    around. If the membership is small, assets are small, and most of
    the members know each other and their board personally I can understand
    them not wanting to spend money to print up a lot of reports. Did
    the person at NCUA say if not making annual reports available was
    common for large credit unions or were they not specific?


    			Alfred

    
>He also said that some credit unions don't make annual reports available(!).
    
    Absolutely, positively incredible.  This statement says a LOT to me
    concerning the NCUA.  The fact that the federal oversight body 
    considers complete and accurate annual financial reports optional
    equipment is sheer incompetentcy in my eyes.  Why are these annual
    reports any less important for a $383 million federal credit union than
    for a $383 million bank or company?  Looks like the "blind trust"
    extends even to the federal government.
    
    But after hearing the sole reason for their getting involved with a credit
    union, how much value can we place on NCUA audits and "investigations"? 
    If what is stated in .0 is indeed the case with the NCUA (I have also
    been given the insolvency line), then it is more important than EVER
    that we as members know what OUR credit union is doing.  And that
    STARTS with complete, accurate financial statements that an auditor has
    put their name on.
    
    Why do I get the sinking feeling that everybody thinks somebody else is
    watching the barn door???

To reiterate 1,

	How many <$1,000,000 credit unions,where Evrybody knows everybody,
	might there be ??  In that case, anyone could see the real numbers
	at any time.

	In the case of a credit union as geographically diverse as ours,
	I would hope that Annual reports, with full auditor notes, would
	always be forthcomming. Whereas, if I was in a $100,000,000
	credit union where all members were in one town (city) a formal
	annual report COULD be optional.  All it would take is an OPEN
	operating environment.

    
    The default behavior should be one of REQUIRED, FULL DISCLOSURE.  To
    deviate from this behavior should require extensive justification and
    the proper controls, checks and balances.  IMO, having this as any type
    of standard behavior is inviting disaster.  As we have witnessed first
    hand, fraud and mismanagement seek a dark environment.  I have stated
    this before and I'll state it again.  Complete and accurate financial
    reports are NOT a luxury or the first item to cut for the sake of cost
    savings.  PLEASE "waste" $1 of mine!  If we, as owners of DCU, aren't
    willing to make this type of commitment then WE will be partly
    responsible the next time DCU sends money out the back door.  
    
    We have seen the NCUA only willing to get involved if a credit union
    is insolvent.  They ASSUME we are watching our own money and 
    interests.  This cannot happen without complete and accurate annual
    reports.  I find the NCUA's position a contradiction.
    

Re: .1

   I don't  know,  I didn't ask, but it's a good question.  Give him a call
   at 202-682-9600, I spoke to Alan Meltzer.

   He emphasized  very clearly that they have 15,000 credit unions, and not
   enough examiners to do everything.  They operate completely on the basis
   of financial solvency.  If it's solvent, they don't care what the credit
   union  does.   Everything  else  is  taken  as merely one faction agains
   another and they don't get involved.

    
   >They operate completely on the basis of financial solvency.  
    
    I guess expecting a federal agency to act to PREVENT insolvency would
    be asking too much.  But don't worry, all our money is protected by the
    government who will just ask us for more money to replace what is lost. 
    No wonder criminals are targeting financial institutions.  Why is a can
    in the back yard looking safer and safer?
    
    >If it's solvent, they don't care what the credit union  does.   
    >Everything  else  is  taken  as merely one faction agains
>   another and they don't get involved.
    
    Did they actually say this?  Even violations of Bylaws and NCUA regs
    and laws?  So anybody can do whatever they want as long as they don't
    steal that last dollar that will push them over the threshold of
    insolvency?  Anybody got any extra coffee cans I can have?
    
    They should state this on the stickers and signs that they give credit
    unions that imply something quite different.  So using their logic,
    what Mangone did was perfectly fine.  It was the down-turn in Cape real
    estate that was the REAL problem.  Had the market continued to grow,
    then the fraud would not have been found out, Barnstable would have
    plugged right along, DCU funneling millions to them unbeknownest to its
    members and we'd all be fat, dumb and happy...
    
    Pretty scary stuff if you stop to think about it.
    

Re: .6

The issued about NCUA not caring unless the credit union is insolvent is
of course not a direct quote, but it's a paraphrase to the best of my
ability. I didn't ask directly how an issue of a bylaw violation would be
handled. It would be an interesting question.

Oh and he said that under the FOIA, they only charge $.10/page of copying
rather than $.25/page at DCU.

I said that their outrageous fees and information refusal were to
discourage us from requesting documents. He pointed us at the court system
to resolve access to even the annual reports.

re: .6:

>    It was the down-turn in Cape real
>    estate that was the REAL problem.  Had the market continued to grow,
>    then the fraud would not have been found out

I think that this is exactly the BoD's position: they claim that they are guilty
only of trusting Mangone, and they saw no problem with such participation loans
since, over the years, they collected $7m interest (was that the figure?) from
such loans.

    RE: .8
    
>I think that this is exactly the BoD's position: they claim that they are guilty
>only of trusting Mangone, and they saw no problem with such participation loans
>since, over the years, they collected $7m interest (was that the figure?) from
>such loans.
    
    Yes, IMO they are "guilty" of the same thing as the people who send their 
    money to a stranger at the end of a phone line who promises 100% return 
    in a year.
    
    I guess everybody should be asking themselves, "Do we need people on the
    Board who are capable of more than 'trust'?  Do we need people on the
    Board who understand that "investing" in Cape Cod real estate does not
    serve the membership of DCU?"  $7 million or not.  I believe it was the easy
    rationalization of the second question which I, personally, have the
    biggest problem with.  That's why a credit union philosophy should be
    high on the list of desireable qualities of BoD candidates.  Otherwise
    DCU will continue to operate as a bank, and not a credit union.
    

.8>  re: .6:
.8>
.8>  >    It was the down-turn in Cape real
.8>  >    estate that was the REAL problem.  Had the market continued to grow,
.8>  >    then the fraud would not have been found out
.8>
.8>  I think that this is exactly the BoD's position: they claim that they are
.8>  guilty only of trusting Mangone, and they saw no problem with such
.8>  participation loans since, over the years, they collected $7m interest
.8>  (was that the figure?) from such loans.


True.  They'd like to overlook things like the Information Protection Policy,
the decision to pass off fee increases as "choices", and their view that
DCU is a bank which belongs to them instead of a credit union which belongs
to its shareholders.  So Mangone, who they ALLOWED to commit fraud, would
be very convenient if he could be made into a sole villain.  At the least,
concentrating attention on the participation loans has the merit of keeping
the conversation away from other subjects.

(Although at a price:  that line of argument from the Board makes them run the
risk of sounding like they would have been willing to put up with the fraud,
if only it had continued to make money.)

But just for fun, let's try to finish that sentence realistically...

          It was the down-turn in Cape real
          estate that was the REAL problem.  Had the market continued to grow,
          then the fraud would not have been found out

          UNTIL LATER.

During which time the eventual damage would have been continuing to grow.
We'd have been stuck for far more than $18M.  We were lucky.

The downturn was not the problem.  Lack of a functioning Supervisory
Committee was the problem.  Failure to adhere to DCU's Bylaws was the
problem.  Lack of commonly-accepted internal controls was the problem.
The downturn was only a trigger for events which caused the problem to
stop growing.

I guess I have a lot of trouble trusting my money to a BoD who says things 
which eventually boil down to "Well, if there wasn't a downturn in the market,
then there wouldn't have been a problem."  I've seen a lot of people with the
"real estate is a sure thing" philosophy, I don't think I've ever met one that 
I'd want to be in charge of my money.

ANY market, be it real estate, credit cards, stock, or doughnuts will see
strong times, and will also see downturns.  The difference is that real estate
likes to talk about loans of about 30 years in length, while the other markets
tend to be a lot more short term.

I don't care what the market is, I personally would be d*mned careful before I
stuck my money into ANYTHING (including a box full of gold burried in my back
yard) for 30 years.  That's just not something to be undertaken lightly.

That the BoD doesn't get that point is in my mind staggering.  It almost sounds
to me like a kid whinning "Well, it isn't MY fault that the real estate market
crashed".  No, it wasn't.  It was their fault for not considering it as a
possibility.

BoD:  Can't run a credit union with them.  Can't run it without them...

.11> I guess I have a lot of trouble trusting my money to a BoD who says things 
.11> which eventually boil down to "Well, if there wasn't a downturn in the
.11> market, then there wouldn't have been a problem."

    At the first meeting w/ the board, I asked if they would acknowledge
    that the participation loans were a mistake. Mark Steinkrauss would
    only make statements like "Our mistake was to trust Mangone". Susan
    Shapiro gave the example that she had been a loan officer in Rochester
    that had issued many loans to Kodak employees (which is based there).
    When Kodak had large layoffs, many loans defaulted but Susan's bank
    supervisor told her she had not made a mistake in granting these loans
    since she couldn't have foreseen the layoffs.

    I agree that it isn't a mistake if the DCU gave loans to DEC employees
    who were laid-off and force to default. Member loans are the purpose
    behind a CU. Holding long-term house mortgages isn't wrong - of course
    it would help the CU to use variable rates and to have a balanced loan
    portfolio. It's interesting the DCU sells it's mortgages - probably
    because it sees them as being risky. However the DCU pushes credit
    cards since they are highly profitable even though they're more risky
    and it's bad for members to build unnecessary debt in this recession. I
    wonder if the % profit on the Mangone loans was much more than on
    mortgages.

    At the second meeting, I asked why it couldn't be foreseen that
    participation loans in vacation areas (rather than primary homes) was
    inherently risky and there were many past examples of speculative boom
    and bust cycles in Cape Cod & Florida vacation real estate. The answer
    was that the board felt the return justified the risk.

    I also asked how money was generated from land under development to
    make payments (thus implying that the loans were for more than the
    purchase of the land - since part was needed to make payments while
    waiting for a buyer). The response was that some land had money
    generating structures - but no figures were given.

    The board stated that DCU needed to reserve earnings since it expected
    defaulting member loans due to layoffs. When I asked for figures on the
    cost of member defaults vs participation loan defaults, I got a
    confusing long answer implying the member defaults were a large factor.
    However it's turns out that in the past, member defaults were 0.4% -
    which lead the NCUA to use the DCU as a training example of a well run CU.

    I wonder what changed in '85 when the participation loans began?
    Perhaps one factor is that Mark Steinkrauss became chairman and shifted
    the philosophy of the DCU more into the high-flying Wall Street
    investment world in which he is proficient. (That's why we need a board
    of experienced financiers to deal w/ DCU's farflung finances instead of
    ordinary members who only know about the conservative & mundane world
    of mortgages, car loans & checking accounts.  :-} )

    RE: -.1
    
>    I wonder what changed in '85 when the participation loans began?
>    Perhaps one factor is that Mark Steinkrauss became chairman and shifted
>    the philosophy of the DCU more into the high-flying Wall Street
>    investment world in which he is proficient. (That's why we need a board
>    of experienced financiers to deal w/ DCU's farflung finances instead of
>    ordinary members who only know about the conservative & mundane world
>    of mortgages, car loans & checking accounts.  :-} )
    
    It's enlightening to read DCU's annual reports from 1980 until 1990. 
    The earlier years of the credit union were true to the credit union
    philosophy.  You see it in the writings (best rates, etc.), you see it 
    in the behavior (dividends).  Then in 1985, you see a very interesting
    change of words (competitive) and behavior (participation loans).  You
    see a budding credit union turned into a bank.  1985 was a turning
    point for DCU in many ways.  Personally, I believe Mark Steinkrauss'
    role as chairman of the board in 1985 had something to do with this. 
    His banking experience along with Susan Shapiro's (DCU Treasurer) 
    banking background have had a lot to do with where we are today IMO. 
    That's why I believe that banking experience on the Board is not
    necessarily a good thing for the credit union.