TEOTWAWKIAIFF

I sat down and managed to get some research done to follow up on a hunch of mine. My hunch is that all the major American banks are Zombie Banks. Truth be told, I bet most of the major foreign banks are zombie banks as well. A zombie bank is a financial institution that has more debts than assets and is kept alive through government intervention (via Wikipedia). I am going to expand that definition to include financial institutions that are kept alive by other banks.

So the Zombie Apocalypse has started, it is just not the way we all joked about.

Every major American financial system has benefited from capital injections from the Federal Reserve. Many are borrowing cash from the Fed at a stupidly low interest rate and re-investing them into government bonds. This provides two benefits. First, the bonds are an asset that can be used to offset debts on its books. Secondly, the bonds have a return higher than the interest payments due to the Fed, and the bank can pocket the difference. This has been a running QE2.5 for the last couple years, which benefits the government first, and the Federal Reserve by keeping the Ponzi scheme going.

This is a highly inflationary practice. In our fiat currency system, the banks create over 99% of the total money in the system. This excess liquidity is driving prices up, which further helps these Zombie Banks as consumers continue to borrow more money on their credit cards to make ends meet. I am willing to bet in more than a couple board rooms this is how they think they can bring themselves back into the black.

Another tactic that has been well documented, is the games these banks are playing with the real estate market. There are millions of foreclosed homes across America that are in their own undead, neither foreclosed, nor in good standing. I have personally seen how the banks are unwilling to foreclose, and are unwilling to work with the current mortgage holder and a prospective buyer to facilitate a short sale.

The banks are doing this because a mortgage is a bank’s asset, and a foreclosed home is a loss – especially in this real estate market.  The mortgage is for the purchase price of the home, and the foreclosed home is adjusted to the current price, which is a 20% haircut at the minimum. The banks are moving through this glut of undead mortgages, but only as fast as the real estate market and their balance sheets can handle. These banks are in such a precarious state that if there are too many foreclosed homes they show their cards to the point the FDIC is obligated to act.

I am sure the FDIC knows just how bad these banks are, but until these bluffs are called, the banks are willing to raise the bet. When the bank’s dirty laundry is showing then the FDIC has to close them down to save face and give us, the customers, the illusion that the FDIC is doing its job and protecting us.

To summarize:

1. Many of our largest banks are in the red, and are using showmanship and government intervention to remain solvent.
2. All of the large banks are tied together in a web of derivatives and CDS swaps.
3. The government regulatory agency is nearly out of funding, and could not cover a failure of one of the Mega-banks.
4. The consumer/customer is at the bottom of the pecking order when we want to get our funds.
5. If one bank begins to crumble, the whole system would collapse.

Look how the government handled the recent collapse of MF Global, ensuring the big banks like Lehman Brother’s got paid first, when bankruptcy law states investors should be paid first. I have to ask myself if Lehman Brothers would have collapsed if they did not recover their investment funds? Would they have been the first domino to fall?