Co-ops fall down

There has been a bit of bad news in the co-op world this week, which has subdued my usual bubbly enthusiasm for all things cooperative. I generally am very upbeat about how co-ops can help solve our economic problems, but there are times when it is appropriate to be a bit more circumspect, and this is one of those times. My basic premise doesn’t change, but it might better be summarized as “Cooperate and not as many people get hurt quite as badly.” It doesn’t have the same ring to it, but it is important to be idealistic in a realistic way. So before I explore whether co-ops could conceivably take over for capitalist businesses (which was my original plan for today’s entry), I have to address these new developments.

The first setback was relatively small-scale (and remained local news for a month before I noticed it): The former-CEO of Humboldt Creamery, a dairy co-op located in Ferndale, California – remote area hours north of San Francisco –  made an abrupt departure after apparently embezzling a substantial amount of money. He notified the co-op by means of a call from a lawyer who specializes in white-collar crime, who helpfully suggested that the co-op hold off on its efforts to broaden community ownership by offering non-voting “preferred” stock. Nice touch, somewhat analogous to dumping his spouse with a letter from his lawyer. And since he was previously an upstanding member of the community, the betrayal must be immense.

It wasn’t much cash in the global scheme of things (not even a measly million!), but it was enough to do a lot of damage to the cooperative’s business plan, and has resulted in the suspension of payments that many members were counting on to keep their own operations moving. Even more damaging was the impact of this alleged theft on the local economy, where the damage is concentrated. Nothing about this sad story undermines the case for cooperatives – individuals can steal from any form of organization. It may be better to spread ownership around to cushion these sorts of blows, but there are ways of doing this while keeping the cooperative structure. And if co-ops are occasionally a bit lax with systems of accountability that might prevent theft, one does not have to look far for examples of how the same is true with other types of organizations.

Indeed, cooperation provides a silver lining in this dark cloud. One of the reasons why this has been so damaging is that five years ago Humboldt expanded its operations to another plant in Los Angeles, roughly doubling its production. This increased the debt load and made the 80 year old co-op more vulnerable to economic turmoil. As a result of this sudden loss of cash flow, they have put that second plant on the market. If this had been a typical corporation, it is more likely that they would have expanded  to LA after being absorbed by an outside interest based in LA.

Faced with the current situation of an unexpected crisis of capitalization, outside investors with no ties to Humboldt would have been more likely to close down the more remote and (presumably) older Ferndale plant. The home plant could be seen as a liability, operating at a financial disadvantage to its counterpart in the largest city in the western U.S. and in the middle of an urban market larger than most states. But because the co-op is owned by dairy farmers in Humboldt County, there is no chance that they will take the course of action that might make the most sense from a strictly profit-minded point of view. Their interest is intimately tied up in their original plant, which is closest to their herds and employs members of their community, their friends and family.

This illustrates how co-ops keep power closer to home. In this case, it is a fairly small portion of the community that actually has a say through voting stock (i.e. the farmers). But had the dairy been owned by investors in Los Angeles and worldwide – whose only interest in the plant was its return on their investment – it is very likely that this story would have ended in the all-too-familiar way of plant closings. The LA plant might close, but there is a much better chance that someone else will reopen it, or that its workers will find other employment.

It remains to be seen whether the co-op can recover from this blow, but the farmers and their community can at least take solace in knowing that their needs are being taken seriously, and that they are facing the crisis as a community.

The second setback was enormous, and it has me deeply alarmed that the rot in our economy is worse than we think: On Friday, two corporate credit unions were seized by the government. I’ve previously been pretty smug about the lack of credit union failures, so breaking that happy streak was bad enough to wreck my mood even without really undermining my ideology. I could have taken comfort from the fact that three banks also failed on the same day, bringing the FDIC $200 million closer to insolvency (approximately $17 billion to go) and the total number of bank failures this year to 20 (about one every five days). In contrast, credit unions are doing fine even after this blow.

However, the real problem is that these are no ordinary credit unions; they are some pretty central institutions to the credit union movement. I should step back and give some background: While capitalist businesses tend to achieve economies of scale through mergers, cooperatives federate into what are called secondary and tertiary cooperatives. That is, they join together to create institutions that provide specific services to their member institutions without undermining members’ basic autonomy. To make matters more complex, private businesses also form and join cooperatives, while co-ops sometimes merge into larger co-ops (quite common among credit unions). Unified Grocers is a wholesale company that provides an example of both such dynamics.

Anyhow, corporate credit unions are essentially a credit union for credit unions. Each “natural person” credit union has an equal say in the corporate (secondary) credit union. Twenty six such secondary credit unions have similarly joined forces into a central (tertiary) credit union that functions on a national scale, called U.S. Central Federal Credit Union.

This central credit union provides check clearing and other high-level services that individual corporate credit unions could not effectively do on their own, and allows a decentralized movement to function much like a megabank without surrendering its member control and independence. So when the National Credit Union Administration (which is analogous to the FDIC) declared that U.S. Central and Western Corporate Federal Credit Union (WesCorp – the largest of the secondary credit unions) had failed their “stress tests” and been placed into receivership, it was a very big deal.

NCUA will be running these two institutions in ways that will provide continuity of service, so it seems that there will be minimal disruption to credit unions’ efforts to provide better rates and more business lending at a time when the capitalist banking sector is not delivering. However, this is a pretty discouraging development even if not totally unexpected. Credit unions have been generally conservative in their lending and investment practices, and mostly steered clear of the catastrophically dangerous practices that threaten the global economy’s very integrity. But they still operate within the larger financial markets, which have been badly damaged by the capitalist adventure.

While U.S. Central and WesCorp credit unions are not too big to fail in the sense that their collapse would devastate the larger economy, their loss will have a deep impact on the cooperative banking sector, and will limit its ability to model a better way to run the financial system. In the long run, the loss of the central credit unions (as independent entities controlled by their members) may indirectly do more damage than just letting an already-failed institution like AIG collapse under its own weight. Ironically credit unions’ democratic and decentralized nature has prevented them from being seen as worthy of bailouts in the eyes of a deeply warped system. Because they have not grown to be so unhealthily and unsustainably large, they are provided with less protection than the out-of-control megabanks.

Once again, the system that is run in the interest of those who control great concentrations of wealth is operating in a way that undermines the common good. We are all literally poorer because of it.

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