Halloween is supposed to be the time or make-believe ghouls and goblins. But there are some real-life zombies out there that are really scary.
I’m referring to zombie banks. These are banks that, if you marked their balance sheets to market, have no equity. But because the FDIC guarantees their deposits they can sell CDs and keep operating.
GMAC bank, AIG bank, and IndyMac Federal all offer 1-year CDs online that pay over 4%. Notice anything similar? Yeah, they’re all bankrupt, or almost. In a rational world they’d be out of their misery. But the government guarantee means they compete with healthy banks on an equal footing, and they raise the cost of funds for everybody.
So prudent banks get punished by the imprudent. This is an example of the law of unintended consequences. Government intervention distorts the market, and the Feds need to intervene again to kill off the zombies.
Douglas R. Tengdin, CFA
Chief Investment Officer
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