Zombie Banks Feed Off Bailout Money

In the continuing series on the lexicon of financial misfortune, Morning Edition introduces the term "zombie bank." A zombie bank keeps draining bailout capital from the government but doesn't respond with any meaningful lending that helps the economy recover. The prevalence of zombie banks made the long Japanese recession of the 1990s especially painful.

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ARI SHAPIRO, host:

It's MORNING EDITION from NPR News. I'm Ari Shapiro.

STEVE INSKEEP, host:

And I'm Steve Inskeep. Renee Montagne is away this week.

We're about to define some more of the jargon we use when we talk about the financial crisis. Our hope is to make one of the world's most confusing stories a little less so. Almost every new development throws new language into the mainstream. And today the term is zombie banks. Here's NPR's Chris Arnold.

CHRIS ARNOLD: More financial experts are getting worried that some of our major banks took such crazy risks and have now lost so much money that they're basically dead. Take a bank such as Citigroup or Bank of America. They say they're becoming zombies.

Mr. ANDY KESSLER (Former hedge fund manager): A zombie bank - it's not quite dead but it's certainly not alive and it's not doing any good for the economy.

ARNOLD: Andy Kessler is a former hedge fund manager turned author. He's worried that when the government props up a fatally wounded bank like this it's keeping it alive in an unnatural way.

Mr. KESSLER: It's not lending, but it won't die so that you can restructure it and have a healthy bank again.

ARNOLD: Wait, it's not just like almost dead. I mean, it's kind of clawed its way out of the grave and it's, you know, going around trying to eat people, something like… I mean, it's like they're doing damage.

Mr. KESSLER: Yeah. No. I always likened zombie banks to "Night of the Living Dead," where you've got these creatures, you know, walking around with their arms out, ripping at the flesh of humans and turning them into the living dead as well.

(Soundbite of movie, "Night of the Living Dead")

(Soundbite of scream)

Unidentified Man #1: And so this incredible story becomes more ghastly with each report. It is happening and it would appear that no one is safe from this wave of…

(Soundbite of scream)

Mr. KESSLER: Zombie banks eat the fabric of the economy. I mean, they're just awful. This is what happened to the Japanese. They had these banks that were overstuffed with nonperforming loans and so they had a decade plus of just an awful economy.

ARNOLD: Zombie banks are so bad in part because they keep sucking resources away from the government, needing more and more money. But the banks have such huge losses that they can't turn around and loan that money out again. That hurts the economy because there's less money for consumers and businesses to borrow and spend.

Last week, lawmakers in Congress were yelling at bank CEO's about this. Massachusetts Democrat Mike Capuano.

Representative MIKE CAPUANO (Democrat, Massachusetts): Start loaning the money that we gave you. Get it on the street.

ARNOLD: But Kessler worries that lawmakers might as well be talking to a bunch of mindless zombies. He thinks things have gotten so bad that the government's going to have to take much bolder action. Then the question becomes do you try to do heroic surgery and pour a much more massive amount of money into the zombie banks to try to save them or Kessler thinks…

Mr. KESSLER: I've watched every single one of those zombie movies and you can't cure zombism. Everyone knows that. You've got to shoot them. You've got to get rid of them, cut their heads off, put the silver bullet through their heart and get some healthy banks.

ARNOLD: There are more economists talking about that these days, but you don't want a messy collapse of banks. When Lehman Brothers failed last fall, that was like a nuclear bomb going off inside the financial markets. But a growing number of experts now think that it might be best to dismantle some of these huge zombie banks and wipeout the shareholders, and create some new banks out of the better pieces that are left over.

Mr. CHRIS WHALEN (Managing director, Institutional Risk Analytics): Well, we could fix this quickly if we move quickly.

ARNOLD: Chris Whalen is the managing director of Institutional Risk Analytics, a financial risk management firm.

Mr. WHALEN: If we muddle and screw around for another year, which is basically what we've been doing, then you know, we're going to lose time and we're going to be in a really bad place.

ARNOLD: Whalen would like to see the government calmly start to gradually dismantle the problem banks, strip out these toxic assets that are really worthless and throw them away, have the FDIC take over all those problem home loans, and ask smaller community banks to help restructure them to avoid foreclosures.

Mr. WHALEN: By doing that all of a sudden you've localized this problem.

ARNOLD: Andy Kessler has a different plan. He'd like the government to quickly nationalize and break up the big, problem banks then fire the management and spin off new banks. He'd make millions of taxpayers the new shareholders. But either way, Kessler says the government needs to do a lot more.

Mr. KESSLER: We have a situation where there are zombies roaming around, and the government programs so far are an aspirin, when instead you've got to chop its head off to get the economy growing again.

(Soundbite of movie, "Night of the Living Dead")

Unidentified Man #2: The body should be disposed of at once, preferably by cremation.

ARNOLD: Banking industry groups say things really are not quite this bad.

(Soundbite of movie, "Night of the Living Dead")

Unidentified Man #2: They're just dead flesh and dangerous.

ARNOLD: Chris Arnold, NPR News.

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