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Do Zombie Banks Really Exist?
Spoiler Alert: Zombie Banks Ahead
Please understand that I am not referring to a television show or movie but a real-life problem that is (and has been) impacting individuals and small businesses. The term first appeared more than 25 years ago when the savings and loan crisis in the United States resulted in hundreds of financial institutions with liabilities in excess of assets. This is never supposed to happen with an operational bank, but it happened over and over again with the savings and loans. The political response was a variation of “Too Many to Fail,” and Zombie Banks were born.
As we fast forward to 2016 and beyond, the precedent of Zombie Banks lives on. There are many banking institutions that are effectively bankrupt but are being kept in business through artificial government supports and guarantees. In some cases these banks are being kept on a short leash and in others they are operating with more flexibility. But they are certainly not lending normally. The failure of these Zombie Banks to operate like “real banks” is a major contributing factor to explain why the economy and real estate in particular are still functioning as if they are on life support.
The banks should have been let go.— Sheila Bair, former head of the Federal Deposit Insurance Corporation (FDIC)
A Tiny Bit of Good News: Not All Banks Are Zombies
This is an appropriate point to note that not all banks are Zombies. However, the abundance of Zombie shows like “The Walking Dead” is a vivid illustration of how the presence of fictional Zombies effects how everyone acts in a society where Zombies are present. While not everyone is a Zombie in these fictional shows, nevertheless nothing will ever be the same after being forced to deal with the Zombies. The behavior and choices of the real-life (but fictional) characters are restricted in one way after another.
Similarly, in 2016 there are still “good banks” in addition to the “bad banks” (that definitely include the Zombie Banks) and what I refer to as the “maybe banks.” But all of these banks act differently because of the Zombie Bank problems. To make matters worse, there are also other unresolved financial issues and problems that are causing many banks to limit their primary lending activities to payday loan programs offering the banks high rates of interest in return for making loans to high-risk customers. In the background is an important legal issue — banks no longer are legally required to avoid many financial and investment risks. For this reason alone, banks will never again be the same as they were 15 years ago and before — unless banking restrictions such as the Glass-Steagall Act are restored to limit risky bank behavior.
"The banks that existed then that were too big to fail are even bigger now. We need not only a reinstitution of Glass-Steagall, but even a more serious limitation on banks." (David Stockman)
A Music Video About Zombie Banks
"Zombies are stalking Europe: Zombie banks that are solvent in name only." (Bloomberg View, October 2014)
The best way to rob a bank is to own one.— William K. Black
An Important Book About Banksters and Zombie Banks
It is possible that the title of William K. Black’s masterpiece about the banking industry — “The Best Way to Rob a Bank Is to Own One” — is the most concise and accurate description of what is currently wrong with business, finance, commerce and banks. The origins of Zombie Banks can be directly traced to the U.S. savings and loan crisis during the 1980s. In case you might have forgotten, this was also during the “Golden Era” of junk bonds and Michael Milken.
Risky Business by Banks
Risky investments by banks are the major contributing factor behind the banking crisis that started in 2007-2008. Despite what should have been a clear signal and lesson about reducing risk exposure, one of the largest banks lost billions of dollars several years later by an excessive exposure to volatile investments. Financial derivatives are a major example of a risky investing practice that led to the recent bank crisis, and yet these investments are still being actively made by many banks.
When I refer to Zombie Bank questions and problems, I am referring to the entire scope of banking problems that include dealing with Zombie Banks. But as you probably concluded from the discussion above, the current banking difficulties extend well beyond Zombie Banks. For example, it is still difficult for most small businesses to get “normal” commercial loans.
Finding “Zombie Bank Answers” involves knowing which banks to avoid. Some of these banks are Zombies, but many more are not. The long list of banking institutions to avoid includes many banks in the “maybe bank” category, and these are not Zombie Banks at all. However, their lending practices are very similar to Zombie Banks.
There is a long list of lessons to be remembered and learned as a result of the banking excesses both then and now. Bill Black provides a detailed explanation of the how and why about both yesterday’s and today’s “banksters” operating legally and in plain sight.
Zombie Banks: A Video Overview
"Banking establishments are more dangerous than standing armies." (Thomas Jefferson)
Zombie Bank Questions
Do you know how to negotiate with a Zombie Bank? Here are five additional questions about Zombie Banks for individuals and small businesses to ask:
- Is my bank a Zombie or is it lending like one?
- What should I do when my bank keeps saying no?
- Should I fire my bank and banker?
- What is my Plan B?
- Can you negotiate with a Zombie Bank?
A final note and Zombie disclaimer: No fictional Zombies were harmed in the publication of this report.
I have always been afraid of banks.— Andrew Jackson
© 2015 Stephen Bush