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Management Strategies

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Katrina and the Titanic

When the lookout on the Titanic warned the officers on the bridge that the infamous iceberg was looming ahead, first officer William McMaster Murdoch had the engines stopped and reversed. He then ordered the quartermaster to turn the ship hard to port. Bad move. The iceberg sliced through the first five of 16 transverse compartments of the hull. If the ship had hit the iceberg head on, the ship likely would have limped home, and we would have been spared the sight of Leonardo DiCaprio on the bow

When the lookout on the Titanic warned the officers on the bridge that the infamous iceberg was looming ahead, first officer William McMaster Murdoch had the engines stopped and reversed. He then ordered the quartermaster to turn the ship hard to port. Bad move. The iceberg sliced through the first five of 16 transverse compartments of the hull. If the ship had hit the iceberg head on, the ship likely would have limped home, and we would have been spared the sight of Leonardo DiCaprio on the bow of the ship claiming to be the king of the world. Some king. The ship sank.

With Hurricane Katrina playing the role of the iceberg, the deck officers of the United States of America are relatively fortunate in that they have the time to figure out how best to distribute the damage.The industries that you might initially think would have suffered the most are instead poised to do rather well. In insurance, premiums will rise and more capacity will enter the market. The oil companies will simply pass on their costs to everyone else, even while raking in extranormal profits from the supply squeeze. Even hotels did fine, with insurance settlements bolstered by increased bookings from storm refugees.

But what about the banks? Depositors facing financial ruin are withdrawing their funds to pay for essentials. Meanwhile, many financial institutions are staring down serious impairments on the asset side of the balance sheet. With firms and families experiencing severe financial distress and possible bankruptcy, the financial institutions holding their loans are poised to absorb a significant share of the uninsured losses in real estate and business assets.

Thus, the banking lobby has requested a bailout, suggesting that the federal government set up a special fund to purchase impaired loans of borrowers affected by the disaster — purchased at above-market rates, I presume. That's hardly fair. Consider two businessowners who have been completely wiped out — one with no debt, and one with a bank loan. Why should the Federal government play favorites between the 100 percent owner of the first business and a creditor of the second business? Why should taxpayers make the banks whole, but not the businessowners?

If containing the financial damage means that some banks fail and their investors lose out, so be it. The FDIC guarantee will cover most depositors, and the financial markets can handle a head-on hit. Municipalities, hospitals and small businesses cannot. Scarce reconstruction funds have far better uses than to prop up banks with an undue concentration of geographic risk. Furthermore, there are plenty of other banks that can step in to finance the reconstruction, as well as hire all of the displaced bankers who know the area.

We live in a troubled age where disaster must be expected and planned for, not ignored or wished away. This does not bode well for the community-based financial institution, which from a financial perspective, can no better withstand a large local disaster than can a family-owned restaurant or laundromat. To be sure, the community banks were as capable as anyone of restoring service after the storms. But if banks in affected areas are going to need a federal bailout every time there's a hurricane, earthquake, plague, pestilence or dirty bomb, they're doing more harm than good.

Banking is a risky business — take the hit and keep moving.

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