Page 38 - Accelerating out of the Great Recession

THE DAMAGED ECONOMY

debt-for-equity swaps that would have wiped out existing equity
holders, forced bondholders to bear part of the costs, and stabi-
lized the system without unnecessary levels of panic.
A Lex column entitled “U.S. Banks” in the June 10, 2009
issue of the Financial Times described how a U.S. bank had paid
back the so-called Term Asset-Backed Securities Loan Facility
(TALF) funds it received from the government at the height of
the crisis, and the writer concluded that the major U.S. banks
were far from stabilized. According to the writer, in all key indi-
cators—leverage, risk capital, and asset quality—the leading
banks are in worse shape than they should be (as recommended
by the IMF and other institutions) for the long-term stability of
the financial sector. Some observers, such as George Soros, have
4
declared the U.S. banks to be “basically bankrupt,” and some
have continued to maintain this point of view even after the
strong recovery in the financial markets.
Indeed, the banks, rather than realizing their losses, have
chosen to hold onto their assets in the hope that the economy
and the housing market will improve. In so doing, they have
attained a “zombie” status: they appear to be solvent, but only
because they have not acknowledged the deterioration in the
true value of their assets.
And for the global economy, there is a problem with zombie
banks: they don’t make loans.
If the situation is bad in the United States, it may be worse
in Europe.
Not only do European banks have a higher share of the non-
performing assets, but they also have written down significantly
less than their U.S. counterparts (although accounting conven-
tions for assets and trading books are different across some

■ 17 ■