A Lesson from Katrina: The Disaster That Didn't Happen

Five years ago, I forecast that Katrina could cost the credit union system up to $2 billion. How wrong I was!

 
 

Five years ago, the entire world was focused on the devastation caused by Hurricane Katrina and the greater New Orleans area population.

Our September 2005 Callahan Report was devoted to the impact on credit unions in the hurricane’s path and how the cooperative system  might help save or reestablish local credit union service afterwards.

The Report used the latest June 30, 2005 call report data to indicate the potential losses if the worst of the projected outcomes were to prove out.  

My data analysis looked at the 69 credit unions with $285 million in assets that NCUA reported as non-operational or unable to contact two weeks after the storm. I also included a second group of 54 credit unions in the New Orleans Parish with approximately $980 million in assets and another group of 139 credit unions with more than $3.0 billion in assets listed by NCUA which included the two prior listings. (In each case there was some overlap, so the three groups are not additive.)

The Loss Projections in September 2005

Looking at the devastation and the total evacuation of New Orleans, my lead article projected potential NCUSIF insurance fund costs by estimating the losses on unsecured loans (no one had jobs), auto loans (either driven away or submerged) and real estate secured loans (all lost if no flood insurance) in the three segments.

My forecast was that the cost to the NCUSIF of Katrina-induced credit union failures would be no less than $100 million and up to $2.0 billion if the largest number of affected credit unions failed.  My words were:  It is reasonable to assume from these initial estimates that the NCUSIF could have a loss this year, or at a minimum, credit unions could be facing a significant premium expense.

The Disaster that Didn’t Happen

How wrong I was! Just four months later, the NCUSIF reported a positive net income for calendar 2005 of more than $74 million (up from $47 million in 2004), a loss provision expense of only $20 million, and all with no premium—just the earnings on investments.

What happened that could change what looked to be an easily forecastable local credit union disaster into a minor glitch, easily absorbed by the system’s cooperative insurer?

Two Lessons from Katrina for Credit Unions Today

  1. Never, ever underestimate the creative energy and efforts of ordinary folks working with members to support their credit union. This commitment was undergirded by multiple relief programs from credit unions which gave both immediate and longer term assistance. (Read "The Great Credit Union Cash Airlift" for one example.)

    In addition to negligible insurance losses, the outcome is even more dramatic five years later. The 54 credit unions directly in the Hurricane’s path in the greater New Orleans area in 2005 had $989 million in assets. Today, the 39 credit unions in the same geographic area have $1.12 billion in assets; savings have grown by more than $100 million and total capital increased from $116 million to $143 million.

    There were some mergers. Those have occurred everywhere. But the credit union system not only survived but also continues to grow.
     
  2. A second factor in my erroneous forecast, which I believe is especially relevant today, is self-confidence.  

    Almost everyone was caught off guard by The Great Recession. Richard Fuld, CEO of Lehman Brothers in April 2008, in the middle of the downturn, predicted the “worst is past.” Bankruptcy followed just five months later.

    Most of us were so comfortable, confident in our current understanding, that it was virtually impossible to even imagine the financial and economic scenario that followed.

    Today, our overconfidence is just the reverse. We are overconfident in our pessimism. We missed the downturn, so now we are sensitive to every uncertainty. Good news of the recovery is now headlined as “surprising” even though the recovery is now over a year old. The crisis is long gone. But confidence in our pessimism is still rampant—the opposite of our confidence before the crisis. 

    The effect is the same. We hold back commitments, thinking that I can’t be faulted if things turn out bad, and if that is not the case, well, we’re all better off anyway.

Macro Uncertainty and Micro Strength

Credit unions and their cooperative system are a premiere example of many sectors of our economy that have financial strength, stability and abundant opportunities. Members are the foundation of our safety and soundness. We can pass on to them the benefits of the lowest rates in 50-plus years and help them reset their financial condition as credit unions strengthen their balance sheets. Even with slow job growth, credit unions are sound, stable and responsive.

The credit unions on the Katrina frontline offer a vitally important example for the credit union movement today.

  • There is a tremendous regenerative power in the cooperative model—give the leaders and members the chance to show that capability.
  • Don’t repeat the mistake of overconfidence in one’s forecast.  Just because no one foresaw the downturn does not mean that the wisest course is to not anticipate the upturn today—it is already underway.   When it is no longer “surprising,” it may be too late to catch the recovery!
 

 

 

Aug. 30, 2010


Comments

 
 
 
  • Chip, Great review of a previous forecast which did not develeop as expected. In any emergency there is a tendency for forecasts to be both too pessimistic and too optimistic and then to learn from the results which we hope improves forecasting next time. The Exxon Valdez and Deepwater Horizon spills are an example of that as well.
    John Dolan-Heitlinger
     
     
     
  • Chip...your honesty and humility is refreshing. Thanks for the recap and allowing us all to learn from case studies!
    John Iglesias