Attack of the Zombies !

While the word nationalization seems to be terrifying many observers, another technical financial term is gaining acceptability: Zombie Banks.NYT columnist Paul Krugman used the term in a recent column; Fed Chair Ben Bernanke said in Congressional testimony that there was “no such thing as a US zombie bank.” The term even has its own wikipedia entry.Why are even discussing what sounds like a b-grade horror flick? What is a Zombie bank?

A Zombie Bank is a financial institution whose liabilities outweighs it assets, making its net worth “less than zero.” ZBs continue to operate because of the implicit or explicit government guarantee — along with truckloadsof taxpayer monies.

Consider the two biggest Zombie banks — Citigroup, and Bank of America.They have each recieved $45 billion in capital from the US government — far more than either bank is worth. Additionally, the US had guaranteed up to 90% of the bad assets each zombie is holding — $250 billion and $306 billion respetively.

The term comes from Japan’s lost decade following their real estate bubble. The Japanese kept their zombie banks alive, delaying the eventuasl recovery by a decade.

The reason I favor nationalization is that I hope we here in the US avoid a lost Japan-like decade from September 08 forward. Keeping these banks propped up with more and more taxpayer monies — the Obama Administration has proposed another $750 billion more in bank-rescue aid — is not the way out of this mess.

Curse of the Zombies bank-zombies.png

via WSJ Marketbeat

Previously: The New N Word: Nationalization (February 25th, 2009) http://www.ritholtz.com/blog/2009/02/nationalization-the-new-n-word/

Sources: Curse of the Zombie Banks Haunts Fed Justin Scheck WSJ, FEBRUARY 26, 2009 http://online.wsj.com/article/SB123560389732776681.html

There are no zombie banks, Bernanke says Greg Robb MarketWatchLast update: 4:05 p.m. EST Feb. 24, 2009 http://tinyurl.com/zombiefed

Obama’s Budget Proposes Up to $750 Billion More Bank-Rescue Aid Roger Runningen and Brian Faler Bloomberg, Feb. 26 2009 http://www.bloomberg.com/apps/news?pid=20601087&sid=aY8vuevw1NKs&

Zombie Banks Feed Off Bailout Money Chris Arnold NPR, February 17, 2009 http://www.npr.org/templates/story/story.php?storyId=100762999


Originally published at The Big Picture blog and reproduced here with the author’s permission.