The Return Of The Zombie Banks
Zombies have a prominent place in the world of fiction and movies. There’s the novel “World War Z” by Max Brooks (subtitled “An Oral History of the Zombie War”) and the well-known film by George Romero, “The Night of the Living Dead.”
From these sources, we become acquainted with certain well-established facts about zombies, namely, that it takes a pistol or rifle shot to the head to kill a zombie and that zombies can turn living persons into zombies. For example, in “Night of the Living Dead,” the dead come to life and eat the flesh of the living. This is apparently heart-healthy for the zombies, but not so much for the living, whose wounds become infected, causing them to die and then become zombies themselves.
In a case of life imitating fiction, we have the case of Signature Bank and New York Community Bank (“NYCB”). Signature Bank turned into a zombie bank by becoming seriously insolvent. Predictably, the FDIC and the Federal Reserve rode to the rescue on their white horses and protected the depositors (including those whose deposits exceeded the $250,000 FDIC limit) by arranging for Signature Bank to be acquired by NYCB.
Unfortunately for NYCB, the zombie virus that infected Signature Bank has proven to be contagious, with the result that NYCB may be on its way to becoming a zombie bank itself. The stock of its parent, New York Community Bancorp, Inc., dropped like a safe falling out of a seventeen-story building in the last couple of weeks from about $11 down to as far as $3.60. The drop in stock price was so abrupt that the New York Stock Exchange circuit-breakers for that issue were triggered. Bad loans and higher reserve requirements appear to be the major culprits.
The NYCB debacle is part and part of a much larger nationwide problem stemming from loans secured by commercial office buildings, multifamily housing, retail and factories. 44 percent of office building loans are estimated to be “underwater” at this time (meaning that the fair market value of the building is considerably less than the outstanding principal amount of the loan). Many, perhaps even most, of these loans are non-recourse, leaving the lender in a hole if the building has to be foreclosed upon and sold.
Similar to what occurred prior to 2008, the bank lenders are playing the “extend and pretend” game, in which the maturity of the loan is extended, foreclosure is temporarily avoided, and lenders and borrowers both pray that market values will rise and rescue them. The loan is reported on the bank’s books as “performing.” In reality, the bank is insolvent on a mark-to-market basis, with the actual fair market value of all its assets being less than the amount of bank deposits together with other bank liabilities. By one estimate, 300 of the nation’s 4800 banks are now zombie banks.
Should a large number of these banks fail in a short period, the resulting bad publicity could trigger nationwide bank runs by skittish depositors, especially those holding deposits exceeding the $250,000 FDIC limit. Recall that in this situation, there is little downside to pulling your money out of a troubled bank, but a lot of downside if your deposit is over $250,000.
The “progressive” Left’s penchant for letting hardened criminals out of jail and prosecuting and jailing people who pray outside abortion clinics is a factor in play here. Chicago, which has effectively turned into a Gotham City in a Batman movie, is especially bad in this regard. Dozens of people are being murdered each week. It wouldn’t be surprising if this affects businesses maintaining offices in Chicago. And so we find that beautiful Art Deco office buildings in that city are now reporting vacancy rates of 83 percent! In another left-wing hellhole, Los Angeles, many buildings are worth only half of their pre-2020 value. George Gascon, the district attorney of Los Angeles County, probably won’t be getting any Christmas cards next year from the owners of those buildings or the lenders holding the paper on them.
Over the next five years, $2.6 trillion of commercial real estate loans are expected to mature. Banks hold $1.4 trillion.
It should be an interesting five years.
In the aftermath of the 2007-2009 debacle, Robert Prechter of Elliott Wave International published a “Zombie Bank Index.” Keep an eye out for a replay.
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Mark Wallace is a retired attorney and Federal Bankruptcy Judge.
Image Credit: Pixabay
