Category Archives: President’s Corner

President’s Corner – Nobel Prize in Economics

Every year at this time, the Nobel Prize winners are announced. These prestigious honors, which are worth about $1 million to the winners, are awarded in Physics, Chemistry, Medicine, Literature, Economic Sciences, and Peace. Alfred Nobel established a foundation upon his death to recognize outstanding achievements in these disciplines, sort of an Oscar for brainiacs.

Dr. Richard Thaler of the University of Chicago is this year’s recipient of the Nobel Prize in Economics. Usually, this particular Nobel Prize goes to someone who developed a complex economic theory. Recent winners tackled the rarefied subjects of contract theory, empirical analysis of asset prices, cause and effect in the macro economy, and markets with search friction. Dr. Thaler’s subject earned his Nobel Prize for his contributions to behavioral economics. His body of work is a little less Econ 101 and a little more Psych 10, which was the basic survey course at my alma mater. This is not to denigrate Dr. Thaler’s research, but rather distinguish it from past honorees.

Dr. Thaler’s hypothesis is known as limited rationality, which theorizes how people make financial decisions by focusing on the impact of the individual decision rather than its overall effect. In other words, people make bad financial decisions using only a limited amount of information which usually means thinking short-term instead of long-term. For example, an investor will sell a strong stock to feel they made money instead of a weak stock which they hold to hopefully make their money back. “Buy low and sell high” looks good on a billboard and sounds nice in theory but rarely is utilized in practice.

This theory is nothing new to anyone who works or has worked in a credit union, bank, securities brokerage, or financial planning company and is something we’ve known and I’ve mentioned in this column for many years. For whatever reason – family history, preconceived notions about investing, or trying to “time the market” – economic decisions are made on a human level and are not made strictly rationally. Human behavior is the reason why we buy a shirt at Nordstrom instead of the exact same but cheaper shirt at J.C. Penney, why people buy a Lexus instead of the lower-priced Toyota (it’s all the same under the hood), and why amateur investors think they will be millionaires by day trading.

But this doesn’t mean people can’t change their behavior. With apologies to Dr. Thaler, people’s mindsets can change from wants to needs. If a consumer focuses on their needs instead of wants, they will look for the best price for a product or not even buy that product and save the difference. For instance, Walmart, for better or for worse, has changed the way consumers shop for everyday goods. Online shopping has also changed consumer behavior but has turned out to be a convenience rather than cost saving.

The Nobel Prize for Economics is a relatively new award, starting nearly 70 years after the other disciplines started to be awarded. As a result, some doubt Nobel winners in Economics are the equal to the other winners. However, Dr. Thaler brought humanity to the forefront of an otherwise pretty dry and statistics-heavy subject. The good doctor himself brought some humor into his award when he replied to the question of how he will use his award winnings, “I will say that I will try to spend it as irrationally as possible.” He also expressed disappointment for not being considered for a real Oscar for playing himself in the 2015 film “The Big Short.” Yes, economists are humans, too.

David M. Green
(925) 335-3802

President’s Corner – Bitcoin

I jumped on Jamie Dimon pretty aggressively earlier this year when he proclaimed in JPMorgan Chase’s recent annual report that a failure of any of the “too big to fail” banks would not harm the U.S. economy. The top ten U.S. banks hold almost $12 trillion in assets. The top five banks (Chase, Bank of America, Wells Fargo, Citibank, and U.S. Bank) make up nearly half of the total assets in all financial institutions. Credit unions, by the way, represent 7% of all financial assets. His argument is tenuous at best.

According to Reuters, Mr. Dimon, Chase’s CEO, has spent much of his summer vacation in Washington, D.C. opining on everything from immigration to criminal justice reform. He even has occasional flashes of humor. One day, he spotted Democratic Senator Richard Durbin, no friend of the banks or credit unions, at a non-Chase ATM. He approached the senator from behind and wisecracked, “We welcome competition.”

The Guardian reported Mr. Dimon said recently bitcoin is a fraud that will ultimately blow up because the digital currency was only fit for use by drug dealers, murderers, and people living in places such as North Korea. I thought this might be an example of Mr. Dimon’s sarcastic sense of humor, but he added that he would fire “in a second” anyone at his bank found to be trading bitcoin “…for two reasons: it’s against our rules, and they’re stupid. And both are dangerous…It’s worse than tulip bulbs. It won’t end well. Someone is going to get killed.” I’m quite certain he meant that figuratively (I think.)

Bitcoin is a virtual currency that emerged after the Great Recession. It transcends all national borders, but no country has adopted it. Bitcoin is traded like stocks but can be used to purchase goods and services from merchants which accept the currency. Several British apartment complexes accept rent payments in bitcoin, which has approximately $70 billion in total market capitalization as of last month.

The problem is that while the thought of a digital currency not controlled by a government entity sounds idyllic, it also means there are no rules. The lack of rules, especially when associated with money, attracts the worst our society has to offer, like drug dealers, murderers, denizens of the “dark web,” and rogue countries.

The other problem is that bitcoin is subject to the whims of the investment market. When a high profile investment gets a lot of airplay in the media, the amateur know-it-alls come out of the woodwork. After Mr. Dimon’s “tulip bulb” comments, bitcoin’s value dropped 9% in one day and 31% in a recent two-week period. In the movie “Wall Street,” Gordon Gekko (played by Michael Douglas) explains to Bud Fox (played by Charlie Sheen) the price of anything is not determined by its intrinsic value but rather by irrational beliefs and expectations of buyers and sellers. Gekko is showing Fox a painting and says, “I bought it ten years ago for $60,000. I could sell it today for $600,000. The illusion has become real, and the more real it becomes, the more desperate they want it. Capitalism at its finest.”

On this subject, I agree with Mr. Dimon and admire his directness and brutal honesty. The world’s central banks like the U.S. Federal Reserve Bank, aren’t perfect, but it’s the best we have now. If someone comes up with a better mousetrap, then I’m all for it. I’m not sure bitcoin is that mousetrap.

Mr. Dimon and I still don’t hang out together, but some of our views are a little more closely aligned than even I originally thought. But, I’ve still never had the shrimp cocktail at Nobu.

David M. Green
(925) 335-3802

President’s Corner – Personal Finances

Married members came into our office recently to consolidate their debts into a second mortgage loan. They wanted to amortize the loan over fifteen years, but we felt a second mortgage loan based on old debts should not have a term more than five years. We explained to the couple that in order to get rid of their debt as soon as possible at the smallest possible cost to them, they would have to accept the lower term. We showed them how much less interest they would pay with a five-year term versus a fifteen-year term, and they could afford the monthly payment on a five-year loan.

Our members hemmed and hawed but eventually accepted the loan. Before the ink on the documents had a chance to dry, however, they took out a cash advance on their Credit Union credit card for $6,000.00. To quote Captain Jack Ross (played brilliantly by Kevin Bacon) after giving his opening statement during the murder trial in the 1992 classic “A Few Good Men,” “These are the facts in the case, and they are undisputed.”

Why did our married members advance on their credit card? Was it to buy a new refrigerator? Could it have been a down payment on their child’s college tuition? Or, as I suspect, was it to show the Credit Union that they thought they knew best when it came to their finances?

This scenario happens much too often. I’ve thought about why some people are frugal with their money, while others can’t wait to spend it? I watched my parents manage money growing up and came to the conclusion they did it the right way. I certainly did not get everything I thought I wanted. Mom and Dad took a lot of nice vacations, both with and without my brother and me. I did not attend a private college but was fortunate an excellent university was close by. When Dad passed away, I helped Mom with her finances and was pleasantly surprised at how much Dad squirreled away. Mom is living a stress-free life because she doesn’t have to worry about money. According to her financial advisor, she can live well into the ripe old age of her early three figures.

However, many people struggle in their later years because they did not prepare earlier in life. They saw their parents struggle with money but did not make any adjustments to their own finances. I understand what parents say can influence one’s life. Mom once told me that croutons were bad because they were just fried bread. Croutons are actually sautéed or baked, but the fact that Mom said they were fried stuck in my head.

Croutons haven’t changed much over the years, but personal finances have changed substantially. I receive an annual “checkup” from the same financial advisors. Second opinions are always encouraged with medical issues and would seem to be fitting with finances as well. Mom and Dad may be great resources but may not always be right, especially about croutons.

David M. Green
(925) 335-3802

President’s Corner – Mr. Musk

“You have to spend money to make money.” We’ve all heard that well-worn phrase. To a business owner, that means investing funds for supplies, product, advertising, staff salaries, and other operating expenses. For entrepreneurs trying to get a business idea off the ground, spending money with no revenue is difficult without borrowing from friends, family, their financial institution, or if really lucky, a venture capitalist willing to take a risk.

Imagine the difficulty Elon Musk has trying to create an automobile company with new technology. Mr. Musk started off slowly by building a few cars at a time and selling them at a very high price which built up some cash reserves. Later on, the company went public, and more cash from stock issuances came in.

Then came the hard part. Stockholders are patient with new companies for a short time but then expect a reasonable return on their investment, either by a higher stock price or high dividend rate. Mr. Musk’s response was to transform Tesla from a niche product to a mass-market vehicle in less than two years. That requires a whole lot of new capital.

There are several ways for Tesla to bring in new money. They can offer more stock, float bonds, ask Mr. Musk to chip in some of his own funds, raise the price of their cars, or a combination of all of them. Each scenario carries its own level of financial risk. While the stock price continues to climb, it makes additional issuance more expensive and dilutes Mr. Musk’s stake in the company. Former Federal Reserve head Alan Greenspan feels we’re in a bond bubble ready to burst. Mr. Musk reducing his personal net worth is something the average consumer deals with daily. Finally, raising the price of the cars can put a damper on sales.

Tesla’s biggest problem at the moment may be Mr. Musk himself. Entrepreneurs by nature are always looking toward the next big thing. He still has an interest in creating commercially-viable space vehicles and colonizing Mars. Company founders are typically not good at managing people and systems. It may be time for Mr. Musk to clear the way for a professional manager to lead the transition of Tesla to a full-scale auto manufacturer.

The latest count is that approximately 450,000 individuals have paid a $1,000 deposit to purchase the mass-market Model 3. The company expects to reach a production rate of 5,000 cars per week by the end of this year and 10,000 per week by the end of 2018. Will consumers at the end of the line wait that long for their car? Given many consumers’ needs of wanting things immediately, this will no doubt be an interesting experiment in 21st century economics.

By the way, Plautus, the Roman playwright during the third century BC, was credited with the quote, “You have to spend money to make money.” He’s also known for creating the joke pattern used for “knock knock” jokes. From personal experience, anyone managing a business, especially one that markets to the public, needs a sense of humor.

David M. Green
(925) 335-3802

President’s Corner – Clean Energy Loans

Last month, I talked about the changes we are making in order to remain independent and competitive. Not only do we have to compete against the “Big Five” largest banks, regional banks, community banks, other credit unions, and nonbanks such as Walmart and Quicken Loans, but now our federal regulators are currently reviewing an application from a clean energy company to charter a new credit union to fund clean energy loans for its customers.

“Clean Energy” has become an umbrella term for all the different types of energy that do not pollute the atmosphere when used. In other words, clean energy is any type of energy not originating from coal or oil. Renewable energy includes wind, solar, hydro, geothermal, and to some, nuclear. While this is not a debate on climate change, I think we can all agree less air pollution is good.

The problem is the NCUA, the federal regulator overseeing all federally-insured credit unions in the nation, is considering a charter to an entity for the sole purpose of funding clean energy loans that most credit unions can do today. Many California taxpayers who have financed solar panels on their residences are already experiencing a form of this on their property tax statements. These solar companies hoodwinked the California Legislature into believing they were the only one capable of making these loans. We have seen examples of 90-year olds financing solar panels with 20-year terms that have to be paid off when the borrower/taxpayer dies or their first mortgage loan pays off or is refinanced. Is this responsible financing? I think not.

The solar companies have convinced our state representatives that credit unions are against clean energy. This is a fallacy. Credit unions are very much in favor of clean energy and can do a much better job of financing loans for solar panels, air conditioning systems, wall and attic insulation, LED lighting, and window and door sealing. After all, our business is to lend money to regular people with the personal service they cannot get at larger banks.

There are some other significant areas of disagreement with the NCUA should they approve this charter application. First of all, the proposed credit union will be located in Colorado but will serve a nationwide audience. While virtually every other credit union serves a well-defined community or membership group, the applicants want all 320 million of us as potential members. This smacks right in the face of local operation and ownership and keeping dollars in the community which is the bedrock of the credit union industry. Secondly, there is no defined membership. Being a customer of a clean energy company is not a valid common bond by any measure.

We’ll see what happens. If NCUA approves the clean energy company’s application, the entire credit union landscape will change. Who will apply next to operate a credit union? Walmart? Amazon? Google? If that happens, there will be some changes that none of us want.

David M. Green
(925) 335-3802

President’s Corner – Changes

As a lifelong UCLA fan and later alumnus, I studied their long-time basketball coach John Wooden. Basketball coaches generally don’t see beyond the 94 by 50 chunk of wood in front of them. But Coach Wooden was different. He saw basketball as an analogy for life. One of my favorite quotes from Coach was, “Failure is not fatal, but failure to change might be.”

I hear conflicting wants and needs from members. Some members want us to expand our branch network and add or expand services they want. Other members want us to do nothing and stay the same. Unless I’m missing something, both cannot happen.

A marketing technology firm survey revealed that one in five credit union members feel their credit union is failing to provide needed services and adequate information to help them reach their personal financial goals. The survey suggested there is still a wide gap between what people want and what credit unions and banks actually deliver.

In order to provide those services that our members want, we need to change and not because of our name change, as some members have suggested. We recently upgraded our credit cards so that they now show on a consolidated account statement, which makes it easier to make payments. By the end of the year, we will have introduced digital wallets such as Apple Pay, Android Pay, and Samsung Pay; moved our data center to a more secure location which has state of the art security; and painted and carpeted two of our branches.

After hearing member input on our East Contra Costa branches, we are planning on consolidating the Pittsburg and Antioch branches next year. Then, we will be looking for a branch location in Brentwood. While these changes may sound overwhelming, be assured we analyze all changes with the best interest of all of our members in mind.

Changes can be painful. You may have been unable to activate your credit card or were inadvertently charged a fee at one of our surcharge-free ATMs. We are getting those items corrected as quickly as possible. Our entire staff has been working hard to ensure a minimum of disruption while these changes are being implemented.

Apple founder Steve Jobs said years ago, “For the past 33 years, I have looked in the mirror every morning and asked myself: ‘If today were the last day of my life, would I want to do what I am about to do today?’ And whenever the answer has been ‘No’ for too many days in a row, I know I need to change something.” Agreed.

David M. Green
(925) 335-3802

President’s Corner – It’s Not a Race

ESPN’s “The Sports Reporters” ended its 30-year run this month. For those who never saw this quiet Sunday morning program, the show featured four primarily northeast sportswriters discussing the sports issues of the day in an erudite manner. The show stayed true to its roots of professional debate for its entire run.

What ESPN probably didn’t know at the time was that “The Sports Reporters” would be the beginning of an endless series of increasingly obnoxious talk shows which include yelling, interrupting, and in a few cases, fist fights. These shows were not exclusive to sports, oozing into the news and entertainment arenas. It’s hard to flip the dial without seeing Jerry Springer, the Real Housewives, cable news, or even SportsCenter with “expert” panels whose decibel levels exceed the call of the blue whale.

There is, however, a quiet little corner giving sane personal financial advice. On weekend afternoons when most of us are enjoying our time off from work, radio stations across the country syndicate financial shows discussing such topics as saving for retirement, reducing debt, and how to start a small business. The most popular programs are The Clark Howard Show, The Dave Ramsey Show, and Motley Fool Money, which also has articles in many weekend newspapers nationwide. Dubbed America’s dean of personal finance, Jane Bryant Quinn’s columns have appeared over the years in newspapers and magazines such as AARP Magazine.

It’s too bad these financial radio hosts and columnists have been shoved to the equivalent of the Action/Adventure section of the local bookstore. They give consistent and valuable advice, but it’s not exciting and at times painful. Dedication and commitment are required to listen to a Saturday afternoon radio show or to read a newspaper article on personal finance. It may be because it feels like school, and who wants to be in school on a weekend?

The biggest mistake people make about finance is that they try to do everything at once. It becomes overwhelming which leads to just giving up. Start with something small, for instance a small outstanding bill, and pay it off. Or, start putting $10 a week into savings and gradually increase that amount over a period of years. It’s amazing how good one feels when even the smallest item on a to-do list gets accomplished.

With more and more technology, our society feels like it’s moving faster than ever. People feel pressured to move at that speed to keep up. Slow and steady saving and paying down debt will eventually achieve financial independence. It’s not a race; go at your own speed. That’s what “The Sports Reporters” did. Slow and steady for them lasted thirty years.

David M. Green
(925) 335-3802

President’s Corner – US Economy

Jamie Dimon and I don’t hang out together. Dimon is the CEO of JPMorgan Chase, the parent company of Chase Bank. Chase’s assets are roughly 3,500 times larger than your Credit Union’s. He hangs out at exclusive country clubs and expensive restaurants. I hang out in bowling alleys and at home eating dinner while watching our local teams’ games. Along with his great lifestyle, Mr. Dimon does not lack for self-confidence.

Recently, he announced in the bank’s annual report that the “too big to fail” issue has been solved. In other words, taxpayers will not pay if one of the major “too big” banks,” such as Chase, Bank of America, Wells Fargo, CitiBank, U.S. Bank, and a few others, fails. In his view, any failure would not harm the U.S. economy.

The “too big to fail” doctrine originated from the 2008 Great Recession and refers to the federal regulators’ assessment that the largest financial institutions could not be allowed to fail. Such failure would subsequently affect the entire financial system. These banks all accepted billions of dollars in taxpayer bailout money.

Not so fast, Jamie. Minneapolis Federal Reserve Bank President Neel Kashkari responded in a less than agreeable fashion. Mr. Kashkari disputed Mr. Dimon’s assertions that the largest banks are well-capitalized and well-regulated enough to sustain the financial shocks felt during the Great Recession. Kashkari said bank equity in general is about half of what it needs to get through another worldwide crisis and believes regulators are still being too easy on banks.

This last part is really surprising given that the Fed is the primary regulator of the largest banks. Kashkari has essentially thrown his own examiners under the proverbial bus. He is the newest of the Fed presidents and has a unique perspective of past and present financial waves. Kashkari was an aide to Secretary of the Treasury Henry Paulson in 2006, oversaw the Troubled Asset Relief Program, or TARP, in 2007-08, managed equity mutual funds at a large investment firm, and even ran for Governor of California in 2014.

Kashkari has estimated the odds of another bailout in the next century are nearly 70%. The Fed has analytics on every national bank, so his estimation is somewhat sobering. Dr. Alan Beaulieu of ITR Economics, who has been remarkably accurate forecasting economic downturns, predicts a doozy in 2030. They believe the convergence of global inflation, healthcare costs, entitlement spending, and the growing national debt will lead to a worldwide 1930s-style Depression.

That might give Jamie Dimon some pause while he’s munching on his shrimp cocktail at Nobu.

David M. Green
(925) 335-3802

President’s Corner – Entrepreneurs

In the 1941 classic “Citizen Kane,” Charles Foster Kane (played brilliantly by Orson Welles) describes business and entrepreneurship in his own way by remarking, “You’re right, I did lose a million dollars last year. I expect to lose a million dollars this year. I expect to lose a million dollars next year. You know, Mr. Thatcher, at a rate of a million dollars a year, I’ll have to close this place in…60 years.”

Most small businesses, and even some large businesses, can’t afford to lose a million dollars a year. I’ve been fortunate enough to meet some of the brightest entrepreneurs in the Bay Area. A few of them are tech whizzes at Silicon Valley startups, but most of them run companies we may take for granted, like office furniture installers, real estate development, and sporting goods.

Entrepreneurs are risk takers, don’t always follow the status quo, and are willing to fail and start over again. In fact, most successful business owners have failed earlier in their careers. The lessons they learned in failure forced them to create something better than before.

As we have learned, entrepreneurs solve everyday problems. Alexander Graham Bell is credited with inventing the first practical telephone which revolutionized communication. Steve Jobs took the telephone to a whole new level by combining it with computer technology to create the hand-held marvels almost all of us walk around with these days.

The one thing that stops entrepreneurs in their tracks is government intervention. This is something that credit unions have to deal with on a daily basis and that stifles management from making the banking experience more relevant and easier for average consumers. In the last five years, over a thousand credit unions have either been acquired or have failed. Some of these institutions have disappeared due to excessive credit risk; in other words, making bad loans. But many of the smaller credit unions have faded away under the tremendous weight of rules and regulations.

The Great Recession earlier in the decade exposed the largest banks as taking excessive risk to appease their stockholders. Congress passed a series of laws to regulate these banks’ activities, but those restrictions trickled down to credit unions that did not cause any of the problems the laws were intending to fix. This led to many credit unions becoming unprofitable, leading to either extinction or taking extreme steps to stay profitable, such as increasing fees or making riskier loans.

1st Nor Cal’s management has always had an entrepreneurial bent so that our members can be better served. Government regulations inhibit those kinds of creative solutions to members with financial issues. I pledge we will continue to do our best to give 1st Nor Cal members products and services they want and need.

The fictional Charles Foster Kane, whom many believe was based on publishing tycoon William Randolph Hearst, was brought to life by Senator Everett Dirksen who famously said, “A billion here, a billion there, pretty soon you’re talking about real money.” At the Credit Union, it will always be a dollar here and a dollar there.

David M. Green
(925) 335-3802

President’s Corner – Don’t Buy Gold Based On TV Ads

I try to live my life based on two fundamental tenets: 1) When a pitcher is struggling, always take the first strike, and 2) Don’t buy gold based on TV ads. The basic premise of marketing is to persuade consumers to buy a product without the use of common sense or intuition. Marketing may take the form of humor, inducement, preconceived notions, misapplied facts, and distorted data. How consumers select an institution to handle their finances is highly influenced by marketing.

The notion of a bank or credit union charging fees for their services has caused a lot of angst among consumers and the various state and federal financial regulators. After all, lawyers, accountants, doctors, phone and cable TV companies, and colleges charge fees; why not us? 1st Nor Cal charges fewer fees than just about anyone in our industry, yet, even with constant marketing, it is barely noticeable.

Humans hear what they want to hear and block out the rest of the noise. Most of the noise does get blocked, but so does some of the pertinent data necessary to make rational decisions which can end up saving a consumer a lot of money. When a baseball pitcher has trouble throwing a strike, the manager believes there is a strong possibility the next pitch will be a ball until the umpire calls a strike. Thus, the batter, especially at the lower levels, is told to not swing at a pitch until the pitcher throws a strike. In the interest of speed due to the fear of finances, humans will make decisions that may not be in their best interest such as staying with their high fee bank than move to a low-fee credit union like 1st Nor Cal.

TV ads for gold are cyclical similar to the economy. The market value of gold has been linked to the money supply controlled by the Federal Reserve, inflation, and the Gross Domestic Product which measures the value of economic activity. All the advertising I have seen for gold is for the viewers to buy gold. That simply means someone is selling the gold. Logic would dictate if the buyers of the ads were selling, they are betting the price of gold will go down, not up. In a perfect world, one would run to the closest 1st Nor Cal branch and open an account to save on oppressive fees.

But, this is not a perfect world, and people by nature are irrational. We would love everyone eligible to join 1st Nor Cal appreciate our low fees as a significant benefit to their lives. Some will hear us through the noise, and hopefully others will eventually listen and make the move. In the meantime, we’ll keep trying, and I’ll keep taking the first strike.

David M. Green
(925) 335-3802