Such a bank is one which has too little capitalization (assets) to operate normally such as making commercial loans, etc, but still exists in the market place.
The term came widespread when, in the 1990s, the Japanese suffered a severe financial crisis and had to pump billions into their banking system, but the banks remained still too weak to stimulate the economy. Resultingly, the Japanese economy was in decay for a decade.
By all measures, Citicorp is a zombie bank. The Federal government has poured $40 billion into Citigroup, but the stock market values Citigroup at less than that. Citigroup is still acting as a retail bank, handing customer deposits, checking accounts, etc, but the bank is not a functional commercial bank. Citigroup has approached the Obama administration for help, suggesting the government pour money in and take in exchange a 40% common stock share with voting rights in the bank.
However, in my humble opinion, a 40% stake in a zombie bank does not give the Federal government the clout it needs to bring liquidity back into the nation's commercial banking system.
Right now, besides Citigroup, Bank of America and several other giant banks are zombie banks, lacking the assets and/or willingness to make the commercial loans get the commercial markets moving again.
So, let's start by dropping this N word, "nationalization."
In pure terms, nationalization means taking over and maintaining ownership of what was a non governmental asset.
Currently being discussed regarding the "zombie banks" is a take over of the banks, a sale or restructuring of the bad assets, a restructuring of the management, and a sale of the good assets into the market.
The same thing happens when a private investment company buys a failing company, pares off the failing units, and runs or sells off the viable parts.
Every Friday, the Government, in the form of the FDIC takes over failed banks, restructures the banks and sells the banks to healthy banks. This is hardly nationalization. It only makes the news when the banks being considered are the Bank of America and Citicorp.
In the 1990s, the Swedish government faced a financial crisis similar to the one we face today: deregulation had led to a real estate buying frenzy fueled by lending by banks with no real oversight of the loans. In 1991 the real estate balloon burst, the banks went into crisis, unemployment tripled.
The two Swedish political parties joined together, underwrote all bank deposits to prevent a run on the banks, told the banks to write down their assets to market value (mark to market), restructured management, and recapitalized the banks.
This cost the Swedish government approximately 4% of GDP which was reduced to 2% when it took its shareholder profit.
It is time we stop using this N word as if it were a swear or dirty word. The FDIC is taking over institutions every Friday to save what are typically small or regional banks.
This crisis and this nation will not start moving again until the banks start loaning.
And the crisis is very real.
On February 24, the Federal Open Market Committee (FOMC) of the Federal Reserve discussed new projections of the period of high unemployment levels and also of how many years it may take to return to sustainable growth.
Specifically, the FOMC stated: (I added the emphasis):
Given the strength of the forces currently weighing on the economy, participants generally expected that the recovery would be unusually gradual and prolonged: All participants anticipated that unemployment would remain substantially above its longer-run sustainable rate at the end of 2011, even absent further economic shocks; a few indicated that more than five to six years would be needed for the economy to converge to a longer-run path characterized by sustainable rates of output growth and unemployment and by an appropriate rate of inflation.
In my opinion, a worry about a movement to socialism is misleading and is meaningless.
The economy needs to have its banking system restored to "normal" as soon as possible, and if that means doing exactly the same as what private investment firms do: buying failing businesses, writing down the bad assets, spinning off the good assets into a new company and selling it off, then that is what the Federal Government must do with the "zombie banks."
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Certainly the banks need to start lending again and it is obvious that institutions such as Citigroup and Bank of America are incapable of running a profitable business and, worse still, are arguably a drain on the U.S. economy.
What makes me uncomfortable is the idea of turning their operation over to the U.S. government, whose economic meddling for political gain bears some responsibility for our current economic problems.
Members of Congress and the current Administration and their appointees have done little to win my confidence during the past couple of months, with their irresponsible and reckless spending and pork-laden legislation that has resulted in a nearly $2 trillion deficit for the current budgetary period.
Would it indeed be a disaster to let these unprofitable banks go under?
Mr. Hayward makes a good argument for gradual, responsible restructuring - the key word being "responsible".
Can we really trust our current crop of politicians to live up to the challenge and the accompanying ethical burden?
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