“Zombie” banks – dead but still walking among the living – are, in Ed Kane’s immortal words, “gambling on resurrection.” Repeating the Savings & Loan debacle of the 1980’s, the banks are using bad accounting (they were allowed, for example, to keep impaired assets on their books without writing them down, on the fiction that they might be held to maturity and somehow turn healthy). Worse still, they are being allowed to borrow cheaply from the United States Federal Reserve, on the basis of poor collateral, and simultaneously to take risky positions.
Saturday, May 9, 2009
The banking system has just been tested to see if it is adequately capitalized – a “stress” test that involved no stress – and some couldn’t pass muster. But, rather than welcoming the opportunity to recapitalize, perhaps with government help, the banks seem to prefer a Japanese-style response: we will muddle through.
Posted by Jotman on Saturday, May 09, 2009