"I came here to drink milk and kick ass. And I've just finished my milk." - Moss, The IT Crowd

Thursday, March 10, 2011

Do Zombie Banks Eat Brains?

Naked Capitalism has an excellent article on the term sheet proposed by the states' attorneys general and federal regulators for settlement with the national mortgage lenders over allegations of loan servicing abuses, illegal foreclosures, etc. Naked Capitalism's contention is that the motivation for the push to get this deal finalized, without taking time for further in-depth investigation of fraudulent practices, is that a more thorough examination of the lenders' liabilities for fraudulent actions would demonstrate that their actual financial position is far more precarious than it has been portrayed by Timothy Geithner and company.

Basically, Naked Capitalism suggests that we're in a situation similar to that of Japan in the 1990s, where the government continued propping up so-called "zombie banks" for fear of an economic meltdown if they were allowed to fail. There's definitely an argument to make that the big problem was that Japan's zombie banks were busy making loans to money-losing zombie companies, which made it impossible for the banks to ultimately recover. Given how much U.S. banks have already tightened up on credit, they're probably not doing too much of that. However, it seems to me like the economy is busy funding a tech bubble right now (last I looked, Facebook's valuation was $75 billion, bigger than United Parcel Service, Kraft Foods, or Ford Motor Company), and there is a house-of-cards feel to the whole thing.

It's a long article, but definitely worth reading. I'm not sure what the real deal is with the solvency of the big banks, but whenever regulators push this hard to paper over systemic malfeasance and downright fraud, I tend to think something's up. The Wall Street Journal is also sounding a note of caution about toxic assets remaining on the books.

ETA: In Texas, legislators are looking into regulating mortgage servicers. However, the proposed bill would exempt banks and their subsidiaries (i.e., the biggest mortgage servicers).

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