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Zombie Banks: How Broken Banks and Debtor Nations Are Crippling the Global Economy Hardcover – November 22, 2011
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Q&A with the Author of Zombie Banks
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.
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.
Top Customer Reviews
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.Read more ›
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.Read more ›
The concept of systemic risk and institutions which are "too big to fail" had led the government and financial regulatory apparatus to almost panic and throw literally hundreds of billions of dollars at these banks. I have started to read Sheila Bair's book and I am slowly starting to understand that there is a complete lack of a mechanism to shut down these institutions in an orderly way. This, I believe, is no accident. If there were a well established way to unwind these institutions, there would be much less pressure on the government and regualtors to prop them up.
The book provides a really excellent beginning backgroud to start more understanding of what is actually (still) happening.
Most Recent Customer Reviews
This is a pretty informative book. It gives a good synopsis of the banking crisis and the players involved and the problem.Published on February 15, 2014 by JR66
This is a must read for anybody interested in the financial sector. The book does a great job explaining the recent financial crisis, as well as previous crisis in the financial... Read morePublished on July 12, 2012 by Kurt Kautman
Well researched, well reasoned, and well written. This is as close to a crystal ball as you can find for divining how the European debt crisis and our domestic fiscal... Read morePublished on March 3, 2012 by Doggoneit
Zombie Banks is exactly what anyone interested in the global financial crisis should want: a comprehensive analysis of what is actually going on in the global recovery, and why... Read morePublished on February 7, 2012 by Christopher
The Zombie Banks is a great reference book about the recent financial crisis and banking crises in general. Read morePublished on January 19, 2012 by Burak Tekes
Before reading Zombie Banks, I only grasped the outlines of what happened in the financial sector; the book transformed my understanding so I can actually understand the latest... Read morePublished on January 15, 2012 by John McCrory
This book reads like a novel. Unfortunately it is not fiction. Yalman Onaran provides a compelling narrative on how countries and regulators are handling the fall out from the... Read morePublished on January 9, 2012 by Dr P