Zombie Banks and the Need for a Public Option in Finance

Frank Pasquale

[Banks have successfully lobbied] for free or low cost money: the euphemism is the need to “get a new balance sheet into the game.” . . . Along with bank creditors, which in the U.S. include giant bond funds like Pimco and BlackRock, bankers also form a phalanx against making bank creditors share any costs of bailouts by converting debt into equity – which, of course, is exactly what states concerned about their taxpayers should do.

Financiers also hate the idea – important for reasons of moral hazard – of losing their jobs, or limits on their salaries and bonuses[, or clawbacks]. Not surprisingly, wolves are artful specialists in crying wolf: Moves by states to make banks pay the costs of cleaning up are greeted by what we like to call the “immaculate deception”: that such steps amount to “socialism” and will choke off recovery and drive “talent” out of the banks.

Where bad banks or other schemes for warehousing assets are set up, the price at which those assets are eventually resold often generates another mare’s nest of problems. And finally, there is the issue, widely overlooked in the literature, of how impaired banks treat customers. In the current U.S. case and, we suspect, many others, “zombie” banks gouge clients by raising fees and other charges. More generally, in a financial equivalent of the Night of the Living Dead, they try to raise margins everywhere they can. All too often, they can almost everywhere, thanks to the waves of consolidation that financial crises bring in their wake.

In the recent crisis, for example, U.S. regulators repeatedly waived antitrust guidelines for mergers. By the middle of 2009, four large banks were responsible for almost half of all mortgages and two thirds of all credit cards. A peculiarly destructive twist is the way many banks take advantage of low rates of interest and regulatory forbearance to “play the yield curve” in bonds instead of making business loans. The swift revival of the dollar “carry trade” in 2009 is the international version of this. Fundamentally, it represents a gift from taxpayers (and their central banks) that has made even mediocre bankers look like financial geniuses again, while refilling depleted war chests for additional dizzying rounds of political contributions, lobbying, and bonuses.