Five years ago this week, a collapsing housing bubble plunged America into its worst financial crisis since the Depression. Wall Street's near meltdown midwifed both the tea party and the Occupy movement, and triggered a bitter debate about the big banks that continues to this day.
The ongoing controversy over whether we have solved or compounded the "too big to fail" problem may have cost Larry Summers his shot at the Federal Reserve's big chair. But amid all the focus on the handful of U.S. mega-banks, policymakers have paid scant attention to their little cousins – America's credit unions.
Now, however, credit unions are drawing fire from the banking industry for their not-for-profit tax status. The banks claim this exemption should be revoked because it gives credit unions an unfair competitive advantage over for-profit banks. "Credit unions were never intended to be untaxed banks, yet that is what many have become," according to Frank Keating, president and CEO of the American Bankers Association.
Keating's sentiment is representative of many in the banking industry, but ultimately his words ring hollow. His association boasts a diverse membership of large and small banks. Last time I checked, there aren't any credit unions that maintain a profitable global derivatives business and an essential investment-banking unit that underwrites multi-billion dollar corporate mergers and acquisitions like some of his members.
Eliminating the tax exemption is a terrible idea that would deal a fatal blow to 6,815 credit unions that provide low-cost financial services to 93.8 million members nationwide. It would also eliminate one of the safest and soundest segments of the financial services industry that stewards more than $1 trillion.
Credit unions are member-owned financial service cooperatives rooted in a specific community. These communities range from schoolteachers in San Antonio to members of the United States Navy and their families worldwide.
Unlike traditional banks, the credit unions' mission is to serve their members rather than maximizing profits. That's why they don't pay federal or state taxes. Any profit, known as a surplus, is returned to the members in the form of lower interest rates, lower fees and higher returns on members' deposits.
How did credit unions fare throughout the financial crisis and Great Recession, and what, if any lessons should we draw from their experience?
While hardly immune to the stresses of the financial crisis, the credit unions as a whole proved quite resilient. From 2008 through 2012, 481 FDIC insured banks were either liquidated or merged with healthier institutions. Credit unions, on the other hand, saw 136 involuntary liquidations or assisted mergers at the hands of the National Credit Union Share Insurance Fund (their version of the FDIC). Currently, there are 6,940 FDIC institutions compared to the aforementioned 6,815 U.S. credit unions.
In popular lore, the misuse of exotic instruments like collateralized debt obligations and mortgage backed securities were to blame for the financial crisis. Not so: the fuse that lit the bomb was the concentration and perversion of a single underlying asset: the single-family mortgage. Gone was the reliable and steady fixed rate loan, soundly underwritten and conservatively priced. In its place were loans that had outlandish terms and were poorly underwritten, if at all.
So how did the mortgages that the credit unions originated perform?
In 2009, credit unions saw their delinquency for mortgage loans peak at 1.61 percent compared to 8.86 percent at the banks. Since 2009, credit unions' share of first mortgages has actually increased as a percentage of total loans by 3.3 percent. Those are some pretty eye-popping statistics considering the severity of the crisis.
And credit unions achieved all this with an average compensation of $256,339 for their CEOs. While that may seem like a princely sum to you and me, it's a mere holiday weekend for Goldman Sachs chief Lloyd Blankfein, who took home $26 million last year. (For perspective and fairness, Goldman is the fifth largest financial institution by assets and Blankfein rewarded shareholders with a 43.4 percent stock return last year.)
The point here is not to exalt credit unions over banks. The world's largest economy needs financial institutions of all types and sizes to provide an array of different services. Big banks play a crucial and indispensible role in an increasingly complex global economy. (Do we really expect a credit union to be able to adequately "bank" Microsoft or General Electric?)
Nonetheless, credit unions have an established model that tens of millions of Americans find reliable and infinitely more accessible than the supranational banking behemoths. And credit unions don't have a mandate to lend and invest far out on the risk curve. That's for the banks, and a certain amount of risk-taking is not only appropriate, but also necessary.
As tax reform heats up and there are calls to do away with this tax break or that, let's stop and reconsider what's on the table. To critics, the credit union tax exemption represents $2 billion a year in lost revenue to the taxpayers. But if looked at in the right way – as a modest public investment in a safer and sounder financial system – they are a bargain.
Jason R. Gold is director of the Progressive Policy Institute's "Rebuilding Middle Class Wealth Project" and senior fellow for financial services policy. Keep up with his work at PPI here and follow him on Twitter at @PPI_JGold.