Stephen Bush is a commercial banking and business consulting expert. He is the CEO and Founder of AEX Commercial Financing Group.
Spoiler Alert: Zombie Banks Ahead
Zombie Banks? If this term is unfamiliar to you, are you ready for your education to begin?
Please understand that I am not referring to a television show or movie but a real-life problem that is (and has been) impacting individuals and small businesses. The term first appeared more than 25 years ago when the savings and loan crisis in the United States resulted in hundreds of financial institutions with liabilities in excess of assets. This is never supposed to happen with an operational bank, but it happened over and over again with the savings and loans. The political response was a variation of “Too Many to Fail,” and Zombie Banks were born.
As we fast forward to 2018 and beyond, the precedent of Zombie Banks lives on. Many banking institutions are effectively bankrupt but are being kept in business through artificial government supports and guarantees. In some cases, these banks are being kept on a short leash, and in others, they are operating with more flexibility. But they are certainly not lending normally. The failure of these banks to operate like “real banks” is a major contributing factor to explain why the economy and real estate in particular, are still functioning as if they are on life support in many areas. These troubled banks also raise a number of ethical issues—I have devoted a portion of this discussion to the role of ethics in making effective business choices.
|Zombie Bank Summary Points|
150 to 800 Banks on the FDIC Problem Bank List 2008-2018
More Info: "The Best Way to Rob a Bank Is to Own One" by William Black
Concept Originated with S&L Crisis About 30 Years Ago
More Liabilities than Assets (Negative Net Worth)
"Banking establishments are more dangerous than standing armies." (Thomas Jefferson)
A Tiny Bit of Good News: Not All Banks Are Zombies
This is an appropriate point to note that not all banks are Zombies. However, the abundance of Zombie shows like The Walking Dead is a vivid illustration of how the presence of fictional Zombies affects how everyone acts in a society where Zombies are present. While not everyone is a Zombie in these fictional shows, nevertheless, nothing will ever be the same after being forced to deal with the Zombies. The behavior and choices of the real-life (but fictional) characters are restricted in one way after another.
Similarly, in 2018 there are still “good banks” in addition to the “bad banks” (that definitely include the Zombie Banks) and what I refer to as the “maybe banks.” But all of these banks act differently because of the Zombie Bank problems. To make matters worse, there are also other unresolved financial issues and problems that are causing many banks to limit their primary lending activities to payday loan programs offering the banks high rates of interest in return for making loans to high-risk customers. In the background is an important legal issue—banks no longer are legally required to avoid many financial and investment risks. For this reason alone, banks will never again be the same as they were 20 years ago and before—unless banking restrictions such as the Glass-Steagall Act are restored to limit risky bank behavior.
"The banks that existed then that were too big to fail are even bigger now. We need not only a reinstitution of Glass-Steagall, but even a more serious limitation on banks." (David Stockman)
Banks and Your Financial Health
If you do not use banks for anything more complicated than a checking account, you are in relatively good shape and deserve a gold star for not using banks in ways that can harm your financial health. But that's about it for those who do not need help with their bank. Our financial institutions have not been the same since the Glass-Steagall Act was repealed in 1999. Simply put, until and unless this kind of restrictive banking legislation is again put into place, the events of the last 10 years are likely to be repeated over and over again.
Banks with a negative net worth are one of the disastrous by-products of banking bailouts. These institutions should not be in business because they have flunked every conceivable test except the one given by banking lobbyists who never met a bank they thought was doing anything wrong. Zombie Banks are not capable of lending "normally," but that doesn't stop their bankers from saying that they are lending normally.
An Educational Book About Banksters and Zombie Banks
It is possible that the title of William K. Black’s masterpiece about the banking industry—The Best Way to Rob a Bank Is to Own One—is the most concise and accurate description of what is currently wrong with business, finance, commerce, and banks. The origins of Zombie Banks can be directly traced to the U.S. savings and loan crisis during the 1980s. In case you might have forgotten, this was also during the “Golden Era” of junk bonds and Michael Milken.
Risky investments by banks were a major contributing factor behind the banking crisis that started in 2007-2008. Despite what should have been a clear signal and lesson about reducing risk exposure, one of the largest banks lost billions of dollars several years later by excessive exposure to volatile investments. Financial derivatives are a major example of a risky investing practice that led to the recent banking crisis—yet many banks are actively making these investments.
The current banking difficulties extend well beyond the problematic banks. For example, it is still difficult for most small businesses to get “normal” commercial loans. One practical problem involves knowing which banks to avoid. Some banks are Zombies, but many more are not. The long list of banking institutions to avoid includes numerous banks in the “maybe bank” category — while these are not genuine Zombie Banks, their lending practices are very similar to ones that are.
There is a long list of lessons to be remembered and learned as a result of the banking excesses both then and now. Bill Black provides a detailed explanation of the how and why of both yesterday’s and today’s “banksters” operating legally and in plain sight.
Do you remember the old saying about criminals returning to the scene of the crime? This book was written three years before the most recent banking crisis and bailout. The book's focus is on the savings and loan crisis that led to about 30 percent of S&Ls failing during the 1980s.
What did we learn from that?
Perhaps the more important question is the following:
What did the bankers learn?
Banking is a very treacherous business because you don’t realize it is risky until it is too late. It is like calm waters that deliver huge storms.
— Nassim Nicholas Taleb
The Role of Ethics in Making Effective Choices: Doing the Right Thing
Making "better" choices apparently means different things to different people. Our early surroundings clearly influence how easily each of us is able to confront later challenges involving ethical choices and decisions.
An ongoing business communication problem (and it's a big one) is that we are constantly dealing and working with individuals and companies that have discovered that there are profits to be made by "going to the dark side" and generally not doing the right thing. After some events in recent years, how many of us regularly trust that politicians and bankers will do the right thing? It's a real-life drama with the good guys against the bad guys.
The world of Internet information is a rapidly evolving piece of the puzzle regarding ethical lapses and doing the wrong thing. Stealing content, plagiarizing, and publishing "fake news" have all become profitable business strategies on the Internet. Realistically there should be a zero-tolerance policy when these transgressions are discovered, but this practical standard is proving to be an elusive target. Where are the ethics and smart decisions? Are we all going to let the bad guys win?
Am I being too optimistic to think that the good guys will win even if it takes more than one attempt to do so? A Margaret Thatcher quote might say it as well as anything else I could write about this dilemma:
You may have to fight a battle more than once to win it.
— Margaret Thatcher
Would Butch and Sundance Avoid Zombie Banks?
Butch Cassidy and the Sundance Kid loved robbing banks. Willie Sutton was another famous bank robber. What did they have in common? In both cases, nobody died during their bank robberies.
Butch and Sundance and Willie would probably feel right at home in today’s banking environment. Banks can now be looted without anyone going to jail. Too Big to Fail and Too Big to Jail—billions of dollars can now be hijacked without the need to flee to Bolivia.
As William K. Black has described so well in his book, today’s bankers have discovered a very important lesson:
The best way to rob a bank is to own one.
— William K. Black
What Do Bankers Have to Say?
Bankers will rarely pass up a public opportunity to talk about the banking industry's strength. However, there is plenty of conflicting data to suggest otherwise. More than one observer has referred to "Zombie Banks" after looking realistically at the assets and liabilities of some of our biggest financial institutions. Real estate finance consulting experts have been telling us for years that consumer and business debt was accumulating at a rate that was not sustainable. The Federal Deposit Insurance Corporation (typically referred to as the FDIC) has a monitoring list that keeps track of troubled banks, and the number has varied from around 150 to 800 for the 10-year period from 2008 to 2018 (compared to 50 prior to 2007).
The banks should have been let go.
— Sheila Bair, former head of the Federal Deposit Insurance Corporation (FDIC)
A Note About Sheila Bair
Sheila Bair was head of the Federal Deposit Insurance Corporation (FDIC) in the period leading up to the banking bailout of 2008. During 2008 and 2009, she was ranked as the second most powerful woman in the world. Like Bill Black, she tried to warn everyone about impending disaster if the banks were allowed to continue in their reckless ways. After her early warnings were ignored, Bull by the Horns was published in 2012. As she observed, “How many times can you go into a wall at 90 miles per hour?”
I have always been afraid of banks.
— Andrew Jackson
© 2015 Stephen Bush
Howard Schneider from Parsippany, New Jersey on September 29, 2015:
Excellent Hub and information, Stephen. These bankers are truly disgusting hucksters.
prasetio30 from malang-indonesia on September 18, 2015:
Nice information. I had never heard about zombie banks. Thanks for sharing with us. Good job!