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Fallout: The Financial Crisis

Bernanke: There are no ‘zombie banks’

John Dimsdale Mar 3, 2009
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Fallout: The Financial Crisis

Bernanke: There are no ‘zombie banks’

John Dimsdale Mar 3, 2009
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TEXT OF STORY

Kai Ryssdal: In his defense, the chairman of the Fed later fessed up that he’d blown it back in March of 2007 when he made that contained remark. Today found him back on Capitol Hill once again with a microphone in front of him. He told the Senate Banking Committee that the whole AIG mess makes him angry. That stabilizing the financial markets is the key to fixing this whole thing. And then he said this:

BEN BERNANKE: At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.

He was talking about banks, actually. That’d be banks like Citigroup saved from the undead by tens of billions in government aid. We asked our Washington bureau chief John Dimsdale whether Mr. Bernanke might someday be eating these “zombie bank” words, too.


JOHN DIMSDALE: Early 1990s Japan is exhibit A for zombie banks. For a decade, Tokyo propped up dead institutions that were thought too big to fail. The banks weren’t making new loans, weren’t restructuring.

Now, here in the U.S., firms like AIG and Citigroup — where the government already owns a controlling stake — are looking a lot like Japan’s zombie banks. For example, MF Global’s Nick Kalivas says check out AIG’s and Citigroup’s rock-bottom stock price.

NICK KALIVAS: Essentially the market is pricing them like they really don’t have a lot of earnings power.

But, Kalivas says, the government is worried that letting these huge financial institutions collapse would cause a cascade of defaults throughout the economy. And that’s why, he says, regulators are investing capital to keep them afloat.

KALIVAS: They are kind of rewarding the losers and making it more difficult for the winners to gain market share and become strong. And as a result, I think the system is kind of limping along.

So why would Ben Bernanke say there are no “zombie banks” in the U.S.?

DOUGLAS ELLIOTT: I guess I would say that too if I were chairman of the Fed.

The Brookings Institution’s Douglas Elliott says it’s a difficult line any Fed chairman has to walk in a crisis.

ELLIOTT: They need to push for appropriate action, but if they appear to say that any major bank out there is in deep trouble, it will automatically be in deep trouble.

Elliot concludes in a study out today that so far the government’s financial bailout is “right on virtually all counts.” He says the U.S. response to troubled banks is much more aggressive than Japan’s. This time, he figures regulators won’t let failing banks become zombies.

In Washington, I’m John Dimsdale for Marketplace.

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