Bailout not much help for small Georgia banks

The proposed bailout of the U.S. financial system may not do much to help small banks in Georgia and elsewhere saddled with bad real estate construction loans.

Local banking officials say the $700 billion plan being debated on Capitol Hill appears designed to rescue the market for toxic mortgages and mortgage-backed securities, whose values have sunk sharply in the last year.

While that may help big financial companies, it apparently would do little in the short term for community banks, which typically don’t hold mortgages or mortgage-backed securities.

“Our banks that are struggling are struggling because of real estate construction loans — either lots, raw land or partially completed homes that are not selling,” said Joe Brannen, president of the Georgia Bankers Association. “Those loans are not part of this plan at all.”

Brannen said most Georgia banks remain relatively healthy. But some have recorded heavy losses, particularly those that made big bets on home builders working in Atlanta’s suburbs. In June, nine Georgia banks made a list of 25 troubled banks across the country, including one — Integrity Bank — that later failed.

The proposed legislation provides for the federal government to buy “troubled assets” from financial institutions, including mortgages and mortgage-related securities. The language also says “other instruments based on or related to mortgages” are also fair game, but it’s not clear what might be included in that category.

Community bank executives said the plan should apply to them, too, because they’ve been hurt by the same economic woes that have brought Wall Street firms to their knees.

“Community banks did not make subprime loans, but we did back builders and developers who were trying to meet the demand, this unrealistic demand, that was created by the development of subprime mortgage products,” said Pete Malone, chairman and CEO of McIntosh State Bank in Jackson, Ga.

“If help is being given out, I think community banks would enjoy any help that they can get,” Malone said. “But it doesn’t appear that this will deal with the kind of assets that community banks have.”

Marvin Cosgray, president and CEO of Buckhead Community Bank, said he’d like to see the government take over foreclosed properties, similar to what happened during the savings and loan crisis two decades ago. But as he reads the proposed legislation, that’s not likely to happen.

Many community banks have been stuck holding empty lots and half-built homes in the suburbs that have sharply declining market value, Cosgray said. Current accounting rules require banks to price holdings at market value, forcing banks to either take big losses on paper or unload property at a heavy loss.

Cosgray said the government could help by suspending the accounting rules “so banks don’t have to write down their assets to the distressed levels where they currently are, because real estate will come back.”

Bob Davis, executive vice president of the American Bankers Association, said he is optimistic that the U.S. Treasury Department will extend the bailout.

“We think there is latitude here for the Treasury to exercise purchase authority for a wide range of real estate collateralized assets,” Davis said.

But he stressed that any government bailout would not rid banks of their losses but rather create a more stable market for them to dispose of their assets. Many properties would still be sold at a loss, just not as much of a loss, he said.