What ever happened to the National Cooperative Bank?

WHEN the National Cooperative Bank was created by Congress in 1978, it was the object of some modest hopes.

Supporters of the Coop Bank—including Ralph Nader, the AFL-CIO, and a network of farmer and consumer cooperatives—looked to it as a practical way to help people help themselves.  This was to be no welfare program, but a businesslike approach to bootstrap development.  Through loans and technical assistance to cooperatives, low- and moderate-income people would gain better access to food, health care, jobs and housing.

The Bank itself, like a large-scale credit union, was to be democratically owned by its borrowers.  With offices thoughout the country, it would be a source of capital for new and sometimes risky cooperatives that were shunned by conventional lenders.  Its own initial capital would come from the taxpayers, but except for a one-time subsidy of about $100 million, the public investment would be paid back over 40 years from retained earnings.

A decade later, the National Cooperative Bank is a go-go financial con­glomerate with a half dozen subsidiaries, all kept afloat by the interest on its original subsidy.  Unlike many of its financial brethren, it is in no imminent danger of going belly-up.  But in a similar though less dramatic way than the savings and loans, the Coop Bank is a public policy failure.

What went wrong?

SOMEWHERE along the line the Coop Bank lost its sense of public purpose.   Though it still makes a few loans that conventional banks would avoid, its main thrust these days is to win market share from its unsubsidized competitors.  It is a big lender to fancy New York City housing coops, large grocery wholesalers, a Massachusetts central bank and a host of other healthy businesses, few of whom need help getting credit.

As a director of the Coop Bank for the past four years, I watched this abandonment of public purpose with dismay and frustration.  It was a slow but seemingly inexorable process, accompanied always by rationalizations, lip service to the original goals, and slick public relations.  The letter of the law was never broken, but its spirit was belittled in constant deeds and private comments.  And as the commitment to public objectives waned, so—seemingly in tandem—did executive salaries rise.

My dismay at this drift was heightened by my strong attachment to the notion of “public interest capitalism.”  In theory, publicly chartered businesses can be a wonderfully non-bureaucratic way to meet many social needs.  But the lesson of the Coop Bank is pain­fully similar to that of the S&Ls (whose mission, let us not forget, was to make home ownership widely affordable): it is all too tempting—and all too easy—for private cor­porations to become self-serving, regardless of their public charters.

IS THERE A solution to this dilemma?  Is there a way to harness the efficiency of private enterprise for legislated public purposes?  Or must public interest capitalism inevitably degenerate into socialism for the privileged and clever?

I frequently pondered this question as I sat through tedious meetings.  What struck me over and over was absence of an ethic of public interest capitalism—a mindset that would guide managers and directors when priorities had to be set.  Thus, the concept of dual accountability—the idea that an institution can be accountable both to its private owners and to a legislated public purpose—eluded leaders of the Coop Bank.  “We have a fiduciary responsibility to our shareholders” was an oft-heard line.  Such thinking per­sisted despite the fact that the Bank’s “shareholders” were actually borrowers who had taken no risk—and the only real risk-taker was the U.S. Treasury.

The same lack of a public interest mentality was evident in the Bank’s attitude toward “soft” lending.  If ever there was a lender that had the capacity—because of its subsidy—to extend credit to worthwhile enterprises which otherwise wouldn’t get it, it was the Coop Bank.  Yet higher risk lending—especially to low-income cooperatives—was derided as “charity,” despite the experience of the Bank’s small development affiliate that nine out of ten such loans are fully repaid.  By contrast, disbursements to shareholders—which in the Bank’s situation are nothing more than non-repayable distributions of a government handout—were never thought of as charity.  They were “dividends” and thus the goal of the whole operation.

The absence of an internal public interest ethic was complemented by a dearth of external oversight.  Though the Bank was examined every year by the Farm Credit Administration, the FCA’s gaze was confined to gross indiscretions and minor techni­calities; it ignored the subtler issues of public policy.  Congress, after conceiving the Bank and resisting an early Reagan effort to abort it, soon lost interest in it.  And the three (out of 15) directors who are Presidentially appointed have been no better guardians of the public interest than the private directors elected (under a weighted voting system adopted several years ago) by the half-dozen or so largest borrowers.

There is also a growing recognition—even among wholly investor-owned businesses—that the claims of workers, customers, communities and the environment must be weighed alongside those of shareholders.  Whatever we call this still amorphous sense of “multiple stakeholders,” it may well evolve into a stronger public interest ethic, especially for mixed ownership enterprises and those with legislated charters.

I was elected to the board of the National Cooperative Bank in 1982 and resigned in 1986.