Zombie Banks: How Broken Banks and Debtor Nations Are Crippling the Global Economy (Bloomberg) [Hardcover]

Yalman Onaran (Author), Sheila Bair (Foreword)

Book Description

Publication Date: November 22, 2011 | Series: Bloomberg (Book 160)

An in-depth look at the problems surrounding zombie banks and their dangerous effect on the global economy

“The title is worthy of a B movie, but it's also apt. Bloomberg News reporter Yalman Onaran, supported by former U.S. Federal Deposit Insurance Corp. chief Sheila Bair - who provides a foreword and numerous interviews - urge that insolvent banks both small and too big to fail be allowed to do precisely that.  Reading bank balance sheets is not everyone's idea of a good time. But Mr. Onaran, with support from Ms. Bair, does the chore and explains what it means.  Mr. Onaran shows that the process of rescuing dead and dying banks is increasing systemic risk in the global banking system. And that is really more frightening than scream flicks from Tinseltown.”  -- Financial Post

“Yalman Onaran knows of putrid financial institutions, having written about them in his native Turkey so successfully he brought down a few in Istanbul in the late '90's.” -- Huffington Post

“Do We Love Zombie Banks? The new book by Yalman Onaran of Bloomberg News, Zombie Banks: How Broken Banks and Debtor Nations Are Crippling the Global Economy, is a well-organized and clearly written discussion of the use of leverage to provide growth in many different economies. Onaran has carefully researched the zombie phenomenon and makes some important points in this concise volume about both public policy and the concerns of investors. One of the more interesting early threads in the book is the juxtaposition of the experience of the US in the S&L crisis and Japan in the 1980s and 1990s with the US today. Zombie Banks is a good review of the latest thinking about the ebb and flow of the political economy.” -- R. Christopher Whalen, author of Inflated

Zombie banking has become standard operating procedure for big debtor nations. They prop up failing institutions, print money, and avoid financial corrections. But in an attempt to prolong the inevitable, bigger problems are created. The approach used now has not, and will not, work. This timely book reveals why. Zombie Banks tells the story of how debtor nations and failing institutions are damaging the long-term prospects of the global economy.

Author Yalman Onaran, a veteran Bloomberg News reporter and financial banking sector expert, examines exactly what a zombie bank is and why they are kept alive. He also discusses how they hurt economic recovery and what needs to be done in order to restore stability. Along the way, Onaran takes an honest look at how we arrived at this point and details the harsh realities that must be faced, and the serious steps that must be taken, in order to get things headed in the right direction.

• Puts insolvent banks and debtor nations in the spotlight and examines how they are crippling the global economy
• On the record sources include Paul Volcker, Joseph Stiglitz, Sheila Bair, and many more bank executives, regulators, politicians, and policymakers in the United States and abroad
• Takes the complexity of the current situation and translates it in a way that makes it understandable

While the short-term measures taken to stave off depression and rejuvenate economic growth may offer hope, they are unsustainable over the long term. Get a better look at what really lies ahead, and what it will take to improve our economic situation, with this book.

Editorial Reviews

Amazon.com Review

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Q&A with the Author of Zombie Banks

Author Yalman Onaran

Everyone is afraid that the world economy is about to go into a second recession. Why are we heading in that direction?
That's because we haven't fixed the problems that had caused the one in 2008. Leaders in the U.S. and Europe patched up the troubled spots, printed lots of money and avoided the underlying issues. Especially the banking system, which blew up to bring the world economy down a few years ago, is still fragile, too wounded to support a recovery and filled with even more risk. That's why I call the banks zombies. They will make the next blowup more spectacular.

Why are the shares of European banks falling so much? What are investors worried about?
French and German banks are more exposed to the troubled economies of the region than others. During the boom times -- when Irish housing prices quadrupled, Greek civil servants were allowed to retire at the age 53 -- French and German banks fueled the boom in those countries. Now that the bubble has burst, those same banks face huge losses. There's too much debt in Greece, Ireland, Portugal, Italy and Spain. When the debt isn't paid -- and most of it can't be -- then lots of European banks will go bust.

What about the stress tests? The Europeans have carried out three of those in the last three years? Why haven't those helped?
The first three tests failed miserably because their assumptions were too optimistic. For example, the banks' holdings of Greek government bonds were discounted by 20 percent. But Greek debt was already trading at 40 percent of their face value. Finally, in October 2011, the EU took a step toward a more realistic test, assuming proper losses on sovereign debt holdings and asking the region’s banks to raise some 100 billion Euro in the next nine months. Even this is less than half the capital hole that exists in the banking system, but it’s better than nothing. So it will probably help the EU stave off the end for now. But once again, the zombies are being propped up –- governments will inject capital if banks cannot raise it in markets –- instead of being wound down.

U.S. bank stocks have also taken a beating in the second half of 2011. Are they also exposed to Greece or other EU countries?
Our banks didn't lend to Greece, Ireland or Portugal that much but they have other exposures to them -- derivatives backing their debt, loan guarantees, etc. So U.S. banks could suffer substantial losses in case of a string of EU defaults. On top of that is the added concern that the U.S. economy is sliding back into recession. We have our share of zombie banks who've managed to stay alive with temporary patches. They're too weak to survive a second downturn.

Why are Bank of America shares dropping more than its peers?
BofA has the largest portfolio of mortgages which are souring and faces the biggest lawsuits due to home loans packaged into tricky securities that blew up in 2008. It needs more capital to cope with mounting losses, but its leadership has been refusing to raise any. Market forces push zombie banks into a corner that's very hard to come out of. The longer BofA waits, the lower its share prices get, making a capital increase more costly and less effective.

What's the solution? What do we need to do? How do we avert another crisis?
Both Europe and United States need serious debt restructuring. Here mortgages need to be written down to diminished house values, in Europe sovereign bonds to levels that will allow countries to resume growth. The write-offs will cause losses on banks' books in both sides of the Atlantic. Unlike 2008, we should let the weakest fall this time, shut them down, sell off their good assets and let the surviving healthy banks pick up their market share. That way the financial sector can resume supporting economy recovery and consumers, companies return to consumption and investment.

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From the Inside Flap

Zombie banks are running amok. With net values of less than zero, these institutions continue to operate thanks to the help of national governments that prop them up, print more money, and allow them to avoid financial punishment. Presenting an in-depth look at the issues surrounding this financial phenomenon, Zombie Banks tackles the terror head on, demonstrating how this practice has failed in the past, and why it's destined to do so again.

This revealing new book examines what zombie banking is, why it is practiced, and why it doesn't work. Looking at examples from around the world, it proves that the vast sums invested in keeping these banks afloat has failed to save the United States, the EU, or Japan from their current economic rut, leaving them in just as poor financial shape as before the market crash, only now with reduced resources for the future. Zombie banks are dangerous and positioned to prevent economic recovery. Only by closing the books on these freaks of finance can any country hope to start rebuilding. Author and Bloomberg News reporter Yalman Onaran presents an honest look at how we arrived in this position, bringing together commentary from bank executives, regulators, politicians, and policymakers from around the world, including Joseph Stiglitz and Sheila Bair.

Refusing to shy away from the harsh realities that need to be faced, this book outlines the essential steps that must be taken to get rid of these institutions once and for all. Transforming this highly complex financial issue into something that general business readers and financial professionals alike can understand, Zombie Banks is a must-read for anyone interested in grappling with one of the true monsters of the financial world.

See all Editorial Reviews

Product Details

• Hardcover: 184 pages
• Publisher: Bloomberg Press; 1 edition (November 22, 2011)
• Language: English
• ISBN-10: 1118094522
• ISBN-13: 978-1118094525
• Product Dimensions: 6.3 x 0.8 x 9.2 inches
• Shipping Weight: 1 pounds (View shipping rates and policies)
• Average Customer Review: 4.5 out of 5 stars  See all reviews (11 customer reviews)
• Amazon Best Sellers Rank: #239,676 in Books (See Top 100 in Books)

More About the Author

Yalman Onaran (1969- ) was born in Istanbul to lawyer parents whose discussions at home of their court cases made him foreswear studying law himself even though he loved the art of debate, too. He came to the U.S. in 1987 to attend college in Ohio, moved to New York for graduate school at Columbia. He taught at junior high schools before becoming a full-time correspondent for Associated Press and moved back to the Middle East to cover wars and politics. He switched to financial journalism in 1998, joining Bloomberg News and has served in many capacities there. He was covering Lehman Brothers and Bear Stearns when they became the first to fall in the financial crisis of 2008-9. He now writes feature articles about banking issues worldwide, comparing the problems of European banks to their U.S. counterparts as well as identifying the effectiveness of new bank regulations.

Most Helpful Customer Reviews

21 of 21 people found the following review helpful

5.0 out of 5 stars Important topical work November 15, 2011

By Scott C. Locklin VINE™ VOICE

Format:Hardcover

Everyone agrees that the present economic problems are severe and frightening. Few people are interested in exploring how they could get worse. It seems to me that an honest exploration of the fault lines in our economic system are absolutely necessary, yet very few people seem inclined to take a stab at them. I don't understand why concerned people would not demand more such analysis, but most modern journalists seem to be more interested in regurgitating press statements, or engaging in pointless post-facto recrimination.

This book is an effort at serious analysis; it is actual investigative journalism aimed at what is happened and what is presently happening. It provides specific recommendations for heading off future problems before they happen. The author examines "zombie banks." These are banks which should have failed, and which still have the underlying problems which caused the problems in the first place, but which are kept on life support by central banks and governments as "too big to fail." Such banks have distorted the banking system: healthy banks are unable to compete with subsidized banks, and subsidized banks aren't encouraged to perform their primary social function of making loans to people and businesses. The book also outlines the complex interrelationships between failed banks and various other zombie banks, and makes clear the political motivations behind the various confusing EU actions. Despite the fact that this situation already happened in the 90s in Japan, our glorious leaders seem determined to make all the same mistakes the Japanese did. This is a fast-moving situation, and doubly worrisome, as the banking oligarchy who caused these problems in the first place seem to be consolidating their power in the Eurozone. This will almost certainly not end well.

This is a serious book for serious people; the issues under discussion are tremendously complicated. The author does a good job of explaining the issues to the interested educated laymen (I qualify), and doesn't waste any time wallowing in a high moral dudgeon over the monstrous problems which afflict the world economic system. It provides very specific recommendations as to solving some of these problems: ones which have been suggested by intelligent people, but which have been widely ignored thus far.

13 of 14 people found the following review helpful

5.0 out of 5 stars Excellent Analyses and Background - November 20, 2011

By Loyd E. Eskildson HALL OF FAME

Format:Hardcover

Zombie banks don't eat people as the term's historical usage might suggest - instead they eat money. Author Onaran contends that zombie banks, defined as those with net values below zero, are running amok - thanks to being propped up by governments that allow them to continue operating (waiving various requirements), and further aiding them through loans. Who specifically is he talking about in the U.S. - primarily Bank of America, and Citibank. (This isn't Citi's first near-death experience - 1992 real estate losses brought it to the verge of collapse - it was saved by a capital injection from Saudi Prince Alwaleed bin Talal and the Fed's massive interest-rate cuts.)

During the S&L crisis regulators allowed floundering S&Ls to book loan origination fees upfront and postpone the costs of servicing the loans; after the 1989 formation of the Resolution Trust, half the 3,234 S&Ls were closed.

Onaran contends that the protests in Greece, U.S. unemployment, Ireland's bank problem, and Japan's 'Lost Decade' are all products of zombie banks, and the governments have failed to correct the underlying causes - big banks with lots of leverage taking crazy risks.

Politicians prefer to kick the can down the road instead of preventing recurrences - avoiding the financial and political pain associated with doing so. The fact that over the past two decades the financial sector has outspent all others in campaign contributions and lobbying, more than the next four combined (health care, defense, transportation, and energy), also helps restrain action; on the other hand, the sector's size explains its relatively large contributions. Further, many officials (Paulson, Geithner, Rubin) were former sector executives - unconsciously helping their former colleagues or at least repeated older action patterns.

Sheer size is part of the problem - if the same proportionate resources were used to scrutinize the books of a small community bank were applied to Citibank, about 70,000 examiners would be needed vs. the 90 or so there now. (This is somewhat misleading - appropriate use of sampling allows a much greater reduction in regulatory workload for large banks than it does for small ones.)

Per Naomi Prins, as of 10/10/, some $7.8 trillion of U.S. lending/funding to zombie financial institutions was still outstanding, as well as another $6.8 trillion of Freddie and Fannie assets taken responsibility for by the government (another indirect subsidy - U.S. banks hold $2 trillion of F&F bonds). (Problem - Naomi never makes clear how she came up with such large numbers vs. others', and neither does Onaran.) There are also $280 billion in government bonds backing zombie debt. Explicit government debt guarantees are fading away, but large implicit guarantees still exist. Moody's estimates that Bank of America's rating would drop 5 notches without this backing.

The biggest subsidy to zombie financial institutions are the near-zero interest rates they are charged to obtain loans from the Federal Reserve, which they utilize to loan money to the government at 4%+ rates. This subsidy amounts to a wealth transfer from pensioners and savers to banks in the amount of about $500 billion/year.

Ireland joined Greece in seeking EU help in 2010, not because of high government spending, but because it decided to bail out its banks that had collapsed during the property bubble - this almost doubled its national debt. Iceland, by contrast, let its failed banks go down, seizing its 3 zombie banks (the largest) and guaranteeing only domestic deposits. (An ongoing dispute involves the rest.) New banks were created in their place, and the currency underwent a 58% devaluation, unemployment rose to 8% (vs. 15% in Ireland), but it is predicted to have 2.3% GDP growth this year vs. stagnation in Ireland.

Banks resist modifying mortgages that are underwater because this would threaten the performance of their home equity (2nd) loans. Loan servicers get higher fees from foreclosure than modifications. Another problem - borrowers often can't identify who owns their mortgages, thanks to securitization.

Freddie and Fannie (F&F) have gotten $21 billion back from banks that didn't underwrite loans properly, though Onaran believes they should have gotten far more and this is another government subsidy. Private investors are also pursuing this issue - another $400 billion from the four biggest banks is at risk for this reason, including $222 billion at Bank of America. Mortgage security insurers are also making such demands after the loans are liquidated. Overall, Onaran believes non-performing bank loans are under-reported by about half. Current weak balance sheets discourage bank lending.

Bond holders with CDS protection against default have little interest in debt restructuring to save a firm near bankruptcy - this would likely cut their insurance coverage.

Author Onaran recommends turning zombie bank bondholders into shareholders to boost bank balance sheets. If this had been done in 2008 with Citigroup's $350 billion in bonds it would not have needed government support. Politicians resist doing this - it would raise bank borrowing costs. Onaran counters that better regulation and increased capital requirements would minimize this issue. He also tells us that academic studies have found that banking scale economies max out at about $100 billion in assets.

7 of 8 people found the following review helpful

5.0 out of 5 stars frighteningly relevant November 23, 2011

By evanlucky13

Format:Hardcover

this book takes an in depth look at the trouble we are getting ourselves into as the accumulation of the national debt continues to increase. It allows the reader to contemplate deeply on the problems that are arising and perhaps that are to come. One this is certain after reading this title; something has got to give.