You may have read about our nation’s largest bank losing more than $2 billion on something called a “hedge” investment. As my kids and their friends would say, “what’s up with that?”
Actually, it raises an interesting set of questions, the most important of which may be this: “Could the same kind of thing happen at Wright-Patt Credit Union?”
Based on what I’ve read so far, here’s what happened: JP Morgan Chase made some complicated investments in order to earn a return and boost profits. Then, in order to offset the risk of these initial investments (“hedging” their bets, so to say), they made a series of subsequent investments that ultimately went bad. To the tune of more than $2 billion…so far!
Now, there is likely a lot more to know, and to learn, about this story than has been reported so far. Still, it gives me a good opportunity to contrast the business models of mega-banks with those of Wright-Patt Credit Union and, frankly, other community-based financial institutions.
To look at the differences, it’s good to start with this: What exactly happens to the money you deposit with us? Here’s how it works:
First, we set aside money so that we always have plenty available to fund the clearing of your checks, debit transactions, ATM transactions, cash withdrawals, etc. In general, these reserves are part of our “liquidity” position, and we invest them at the end of each business day in ultra-safe overnight funds, so that money becomes available for transactions each new business day.
Then, we loan your money to other members. Indeed, this is WPCU’s basic business. We lend your money for things like buying a new car, taking out a mortgage or home equity loan, buying things with your credit card, sending family members to college, or lending to local businesses.
While these loans are subject to some risk of not being repaid, the fact is we only lend to individual consumers and local companies that demonstrate the character and ability to repay as agreed. Indeed, historically our loan losses amount to just .05% of total loans made!
Finally, once we’ve funded liquidity reserves and met member demand for new loans, we invest the rest of your money in safe securities representing even lower risk of loss than our loan portfolio (but which also earn much lower yields). We keep our investments short term to avoid undue interest rate risk, going out just 3 years or so. We also make sure we have money coming due regularly so we have plenty available to handle changing business conditions.
Our investments are among the safest available. These include things like U.S. Treasuries and agency bonds. In fact, this is where the biggest difference is between WPCU and the big banks: We invest excess funds to keep them safe instead of for making a profit. Our investments are not of the type that requires “hedging!”
Credit unions are, in fact, highly regulated in the types of investments we may make. Though I am not well versed in banking regulations, I can tell you that credit union regulations wouldn’t even permit the types of investments that Chase is trying to unwind.
Beyond that, however, is the fact that even if we could, I just can’t see us ever making complex investments. Our philosophy is that this money belongs to you…and you want us to keep it safe for you. And that’s exactly what we do. After all, you didn’t deposit your money hoping we would make complex market bets with your hard-earned savings.
So, as you read the ongoing stories about the adventures of JP Morgan Chase and its $2 billion investment loss, please remember that things are far different at Wright-Patt Credit Union. Because we are a not-for-profit organization, we don’t need to squeeze every last penny of revenue wherever we can find it. We don’t have stockholders demanding a return on their investment. We just have members who want to know their money is safe and sound at their credit union. And it is.
I learn a lot by watching the banking industry. Banks provide a good service to their customers, albeit on a for-profit basis. But we must remember and study the differences between banks and credit unions. Wright-Patt Credit Union simply won’t take undue risks with money that doesn’t belong to us. It’s that simple.
As always, thanks for being a member.
Douglas A. Fecher
President & CEO
Wright-Patt Credit Union, Inc.