Saturday, April 18, 2009

Zombie Banks

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By Isaac Cohen

The term "zombie banks" describes privately owned banks whose assets do not cover their liabilities, but who continue existing, based on the hope that the government, or somebody, will come to their rescue. No private investors are willing to pour money into these banks, because nobody really knows what their assets are worth. For instance, based on market capitalization, in June 2007, Citigroup (NYSE: C) and Bank of America (NYSE: BAC) together, the largest U.S. banks, were worth $270 billion. Today, market capitalization of both banks amounts to less than $30 billion.

Furthermore, since October, the government invested $125 billion in the biggest U.S. banks, with $25 billion going to Citigroup. By the end of November, the government increased its investment in Citigroup by $20 billion and guaranteed $300 billion of the bank's assets. In all, the U.S. government holds $45 billion in Citigroup preferred stocks. If this participation is converted into common stocks, as it is being discussed, the government would become the largest stockholder of Citigroup, with 7.8 percent. This would give the U.S. government control of the largest bank, equivalent to the control it now has of the biggest insurance company.

Similar interventions are taking place throughout the world. In the United Kingdom, the government now has control of 43 percent of Lloyds Banking Group and 70 percent the Royal Bank of Scotland.

Whatever these interventions are called, nationalizations or preprivatizations, the governments are sending the clear message that they will not let the big banks fail.

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