ZOMBIE BANKS: The Un-Dead among us...

One need not know the specific details of what is meant by the term "zombie banks" to get the feeling that it can't mean anything good.

Rolling back the calendar to the late 80's and early 90's, we find that the Japanese had banks that were becoming insolvent. These banks received government bail-outs in small doses over time along with various assurances from the government and, though they kept functioning they did not, in reality, have the money that they were represented as having.

And yet the small doses of government aid continued to keep the banks marginally propped up. This was done largely on the hope that the Japanese economy, an historic success story, would certainly rebound and that the zombie banks would become whole again at some point in the future. Confidence in the markets waned because the zombie banks could not support economic growth and Japan plunged into what is now called "the lost decade."

Today, confronted with a series of financial crisis events, the specter of zombie banks has returned, only now the setting is quite possibly world wide. Compounding the issue, securities rating systems have been badly injured as well. The dilemma here is that many banks may now be insolvent, continuing with daily operations, blissfully unaware of their own insolvency.

One cure for this delusional zombie effect lies in the valuation of toxic assets. Selling off or removing toxic assets from banks' balance sheets requires that those assets be given a price. In order for this to happen, independent financial analysts have to go to work fixing prices to assets. If a bank holds too much in the way of toxic assets based on these outside, independent valuations, it may then be able to determine whether it is solvent or not.

At that point, depending upon the severity of the insolvency, it may have to be allowed to die. Whereas, if it is relatively close to break-even, it may yet win through with some very modest private and/or public help. Essentially, nursed back to health so long as it appears to be reacting well to its "medication."

If, on the other hand, the bank, through its own sound financial policies, is found to be solvent, then it's not a zombie bank after all and could well be held up as a shining example; a ray of hope. Numerous insolvent zombie banks carrying loads of toxic assets, if kept "alive," will likely, as Japan's lost decade demonstrated, perpetuate the economic crisis well beyond its natural life.

The Financial Times Ltd.: How Washington can prevent 'zombie banks'

The Market Oracle: Shopping for Toxic Assets at the "Zombie Bank"

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