Scary Banks

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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By |2014-09-04T14:26:13+00:00October 31st, 2008|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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