Repairing Financial Infrastructure in the Gulf Coast

In the wake of Hurricane Katrina, rescuers were trying to help victims by draining floodwaters, restoring electricity and water and reestablishing security. But people needed something else–money. Access to cash was vital to survivors and evacuees. Getting people greenbacks proved to be a difficult endeavor.

Kyle Waters, operator of commercial and personal banking for New Orleans’ Hibernia Bank, described helping evacuees in the Baton Rouge Centroplex in an interview on National Public Radio. Speaking to another banker on the phone, he said, “No, they have nothing. They have nothing. They don’t have their FEMA checks; that’s what they want–they want to try and get their FEMA checks but rather than us just bringing $3 million in cash to the Centroplex, in an unsecured situation, we are going to bring them to the banks and let them cash some checks and get checks and ATM cards if we can.”

Entire branches of his bank were under water and at least one ATM machine had been broken open during the looting. A number of the bank’s staff had not been located and people were facing problems never before seen.

Waters said banks in the area were breaking all the rules. He acknowledged that he had to smash open a drawer that held the keys to a vault and told tellers to give at least a few hundred dollars to anyone with a credible claim to an account.

Customers were testing the rules, too.

“The gentleman put the suitcase on the teleline, water just dripping all over the counter. And we took the cash, we brought it upstairs into a secured area and just peeled $20 bills off and just laid them on the floor, on the table, hung some, stapled them to the walls, anyplace we could find room to dry out this cash, this smelly cash–horrible smelling cash.”

Even as he prepared to offer credit to those moving back to New Orleans to rebuild, Waters warned banks to be cautious and not overreact. “There is a role for the federal government that makes assistance available as part of the relief effort. That’s not the role of the banks. I mean banks have to make loans they know can be repaid. That’s the way our system works,” adding that nobody benefits if local banks collapse.

On Sept. 14 at a hearing in Washington D.C., community banks and other financial institutions addressed the need for the federal government to become involved. They told of the effects of Katrina on their businesses, including the possibility of record numbers of loan and mortgage foreclosures where homeowners and businesses no longer existed. The banks called for some disaster relief for their customers and a plan to help them cope with foreclosures.

With businesses shut down for what could be as long as a year, bankers are worried about how borrowers are going to pay their notes. Lawmakers expressed concern, too.

“How does one go about booking a loan by an owner of a grocery store, for example, that is secured by the building and the store’s receivables when the building, business and owner are now gone?” asked Rep. Richard Baker (R-La.).

Paul Merski, chief economist for the Independent Community Bankers of America, said the job of assessing the loan portfolio situation is underway. “Everyone is in the process right now of determining the viability of all these loans,” he said.

Once the status of loans is determined, there are a number of different ways bad loans can be addressed. “Some businesses will get SBA (Small Business Administration) disaster loans. There is also talk of rolling these loans into a new one where they will get a fresh start either funded by the SBA or some type of government grant. So I think there are a lot of things in motion at this point; most importantly getting a handle on assessing what the true status of these loans will be,” Merski noted.

Bankers set aside portions of their capital for loan loss reserve, but not typically to the extent that would cover catastrophic damage to an entire lending area. They hope to obtain favorable tax treatment for what loan loss reserves they do have. According to Merski, the Federal Deposit Insurance Corporation may end up playing a role. “We have the [FDIC] that may in some capacity step in and work to package up a lot of these loans and sell them off or ‘securitize’ them in kind of a resolution trust corporation scenario by pulling these impaired loans together and selling them off for maybe pennies on the dollar.”