Ways to apply values in the face of misfortune

As emergency relief gives way to long-term rebuilding in areas hit hard by hurricane Katrina, those who send money now could in certain cases get their money back and then some.

While the region aims to attract bullish investors, the situation raises ethical questions about how much profit is acceptable to reap from a disaster zone. What's more, those who invest there need to decide what sort of social vision for a rebuilt New Orleans and Gulf Coast they'd like to help finance.

Investment opportunities thus far have been most obvious in real estate. "For sale" signs peek out from the rubble in Mississippi and Louisiana amid reports that longtime residents with modest incomes can no longer afford to stay. Faced with pleas for cash, ethical investors on the ground should respond to the market while making sure that sellers are informed, says Mark Cohen, professor of American competitive enterprise at Vanderbilt University's Owen School of Management in Nashville, Tenn.

"What's wrong with coming in and offering a fair amount of cash to somebody who frankly doesn't want to rebuild and wants to get a job in another state and says, 'I can use the money. I'm going to move on with my life'?" Dr. Cohen asks. "I'm asking that genuinely. I think the problem is going to be, where's the exploitation? The exploitation is going to come in if the individual is not informed [or hasn't] had the opportunity to get the fair market value for it."

Cohen adds that a buyer dealing with a distressed seller has a moral duty to at least make sure the seller has consulted with a lawyer before signing an agreement.

For investors from afar, however, the most practical opportunities are emerging in the form of avenues to get capital into the hands of small businesses and homeowners aspiring to start afresh. Here potential returns pale when compared with real estate speculation, but the risks might be lower as well. And marketers of these investment products say they're guaranteed to help people in need. The question is by what means.

One approach puts priority on restoration of life as locals knew it. Example: Florida-based CRA Qualified Investment Fund, a no-load mutual fund with $640 million under management, has begun earmarking its next $50 million for fixed-income securities in areas hit by Katrina. Its top priorities: affordable housing, business development, and infrastructure repair. Normally the fund, which has averaged a 6.7 percent annualized return over the past five years, wouldn't finance casino gambling, says portfolio manager Barbara VanScoy. But now it will consider financing even that hard-hit industry - a staple on Mississippi's Gulf Coast - in the interest of restoring jobs.

"We will probably be a little more liberal [than in the past] in allowing financing for businesses in the Gulf Coast that are not necessarily strictly in low- or moderate-income communities, but [we'll be] looking at where they are and how they've been hit," Ms. VanScoy says. Crafting a new vision for the area isn't part of the plan: "We believe that communities need to respond locally, I guess. It's really not for us to say how New Orleans, Biloxi or Gulfport are to look," she says.

Others, however, have established a mission to improve the social fabric of the region. For instance, the Calvert Social Investment Foundation this month began issuing community development notes for the Katrina-hit region in response to requests from investors. Investors choose an interest rate between 0 and 2 percent for a period of one to 10 years. These notes aren't federally insured, but they're backed by $12 million in collateral. The idea: by accepting low interest rates, investors pass along savings to local community development financial institutions (CDFIs), which then finance such efforts as new home construction at minimal costs, according to Calvert Foundation executive director Shari Berenbach.

In the process, local channels for delivering low-cost capital to low- and moderate-income borrowers get stronger.

"The region is characterized by their having relatively weak local [nonprofit lending] organizations," Ms. Berenbach says. "I hope this becomes an opportunity to build a much stronger safety net.... We're hoping that what will be rebuilt is not just what was there before but a place that's more economically vibrant with greater economic opportunity."

While the Calvert Foundation sells its plan as a way to reach a variety of areas directly hit by Katrina, local CDFIs are also inviting investors to bypass middlemen and invest directly in local certificates of deposit. Example: The New Orleans branch of the Jackson, Miss.-based Hope Community Credit Union has attracted $300,000 from investors since Sept. 1. But officers say they'll need millions more to satisfy local needs after insurance claims get settled.

"We're anticipating our demand to really start ticking up in the next few months," says Reed Branson, director of investor relations for Hope and its sponsoring institution, the Enterprise Corporation of the Delta. By serving a customer base with a median household income of just $26,000 per year, Mr. Branson says, "A good chunk of the people we're dealing with would be facing rates three or four percentage points higher at least" if they were to seek loans from commercial lenders.

The need for hurricane-related capital stretches well beyond communities that suffered a direct hit. Because thousands fled north to Arkansas and central Mississippi, CDFIs in those areas now face the task of financing reconstruction of all those broken lives, says Phillip Baldwin, president and CEO of Southern Bancorp, a CDFI holding company in Arkadelphia, Ark. Unless capital flows into these types of channels, with local ties and accountability, Mr. Baldwin warns that the region's recovery could run a risk of failure.

"My big fear honestly is that this [recovery effort] is going to be huge monetary disaster," he says, noting the potential for abuse of federal contracts for reconstruction.

Expanded access to capital is essential to improve long-term security for the region's low-income residents, Baldwin adds.

To that end, Southern Bancorp is exploring the prospect of buying one or two commercial banks that may come up for sale and convert them to CDFIs, which can then lend at lower rates because they don't need to generate profits for shareholders.

But buying two banks would require about $5 million in new capital, Baldwin says. In the meantime, investors may earmark any certificate of deposit to be used for Katrina recovery, such as home construction or business loans for the displaced. Rates at the start of October ranged from 2 percent for six months to 4.25 percent for 60 months.

As investors imagine a new Louisiana and Mississippi, some local organizers say the time is right for new investment vehicles as well. Lorna Bourg, executive director of the Southern Mutual Help Association, a rural outreach organization in New Iberia, La., has been lobbying in Washington, D.C. for the creation of a National Disaster Recovery Bond. Like war bonds issued more than a half century ago, these would give investors a chance to fund particular federal efforts in times of need, especially the retirement of existing home and business loans for owners whose homes and businesses no longer exist.

Ms. Bourg also suggests tax credits to encourage homeownership in the four state disaster area. Thus far, neither has done more than generate discussion on Capitol Hill, but Bourg hopes extraordinary times will create fertile ground for some new ideas to take root.

"It seems so much pain should yield some benefit," Bourg says, "for new models of investing."