Fed Bailout Spawns More 'Zombie' Banks

Fed lifelines preserve banks that, frankly, are better off dead

By Clay Dillow, Newser Staff

Posted Feb 26, 2009 9:40 AM CST

(Newser) – The Federal Reserve’s aggressive lending to banks has helped avert financial collapse, but it may have created some monsters as well, the Wall Street Journal reports. A research paper from the University of Chicago suggests that while federal aid has succeeded some in thawing frozen credit markets, it has also sustained weak banks laden with toxic assets. These “zombie' banks otherwise would have died, allowing stronger institutions to absorb their bad assets.

By allowing banks to borrow against their mortgage-backed securities, the Fed's Term Securities Lending Facility is helping clear the credit logjam but causing another. "The weak are afraid to sell such assets because doing so would wipe them out, while strong institutions don't want to buy because they are holding out for a fire sale," writes Mark Gongloff. Bernanke’s recently-announced Term Asset-Backed Securities Loan Facility may raise similar problems.

[Images (2)]

[Quotes (1)]

A Bank of America branch office is shown Sunday, Jan. 25, 2009 in New York. (AP Photo/Mark Lennihan)

Federal Reserve Board Chairman Ben Bernanke testifies on Capitol Hill in Washington, Tuesday, Feb. 24, 2009, before the Senate Banking Committee. (AP Photo/Evan Vucci)

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Central bank intervention to lend against all manner of collateral may not be an unmitigated blessing.
- Douglas Diamond and Raghuram Rajan
of the University of Chicago

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Fed Bailout Spawns More 'Zombie' Banks