Zombie Banks Have Us Right Where They Want Us
By Jonathan Weil
Two years after the collapse of Lehman Brothers and what rightfully should have been the death of American International Group, U.S. capital markets face a crucial question.
How long will it take before we see some semblance of robust free-market capitalism return, where the value of an asset is based on what bona fide market participants will pay for it, the cost to borrow money is based on a company’s fundamental financial strength rather than its ability to access a government safety net, and corporations are free to fail no matter what their size?
No one can say. And the longer it remains this way, the more entrenched the status quo becomes.
Consider AIG. Is it a failed financial institution? Yes. Is AIG systemically important? Yes. Will U.S. government officials force it into receivership now that the Dodd-Frank Act gives them the tools they say they lacked two years ago? Of course not. Why? Because doing so could send the markets back into a tizzy, which the government has decided isn’t allowed. Heaven forbid any AIG bondholders should ever be forced to take a loss.
Here’s the kind of thing that passes for free enterprise now. Last month a fellow named Michael Carpenter, who is the chief executive officer of Ally Financial, got on a conference call with securities analysts and gushed with delight about the $3.5 billion price that General Motors had just agreed to pay for the subprime auto lender AmeriCredit. Based on that transaction, he proclaimed, Ally might be worth $30 billion.