Early on in the financial crisis, economists warned that the biggest danger of the bailouts was that we would end up with zombie banks – institutions kept alive by government bailouts, but essentially doomed to rot away. Recent news about Bank of America raises the question as to whether B of A has turned into a classic zombie. On Monday, Bank of America announced that it was planning on eliminating 30,000 positions in the next two and a half years. It is also expected to close as many as 750 branches. Does this make Bank of America a Zombie Bank?
If you want to know if it matters that Bank of America may or may not be a Zombie Bank, you need to talk to Steve Cook in Vassar, Michigan. Or at least I did. Cook owns the only car dealership in Vassar – American of course; GM. Last year, Bank of America closed its only branch in Vassar, Michigan. In fact it was the only branch the bank had in all of Tuscola County. Cook says the bank closing hasn’t been a big immediate hit to the local economy. There’s still a Chase branch in town, which is where he goes for his borrowing. What’s more, a community bank has moved into the old Bank of America space, and Cook thinks most people are probably happier with a local bank. But community banks generally don’t make small business loans, or at least not a lot of them. And Cook says businessmen like to see two big lenders in their home market – you get better pricing that way. (There is a Citizen bank in the town as well, but Cook says he hears troubles at that bank are significantly curtailing the number of loans it makes.) And so Cook sees the exit of Bank of America as another potential step down for his home town. Cook says when he first came to Vassar there was 20 or 30 local business owners who would buy his most expensive cars. Now it’s down to a handful.
For a term as artful as Zombie Banks there is not an exact definition. Generally, it’s a shrinking bank – where both loans and profitability are expected to continue to drop until the bank is either all or mostly gone. But that’s not really what’s happening at Bank of America. By many measures, the bank looks healthier than ever. Capital ratios are way up from late 2008 (12.5% vs. 10.7%). Profits are down recently because it is recognizing losses it may have from lawsuits. But most analyst expect the bank to make money in the near future and more of it. In fact, Meredith Whitney, the bank analyst who called the financial crisis, of all people says Bank of America has perhaps the best opportunity of all the banks to greatly increase it’s profits. How can it do that? By cutting costs. In general Whitney thinks all of the banks have grown too big for their existing business. Revenues are down by as much as 35% from boom times and won’t be coming back anytime soon. The American consumer afterall, in Whitney’s opinion, is going through a great deleveraging. So they will demand fewer loans, not more.
But of all the banks, Whitney thinks Bank of America’s cost structure seems the most out of line. That’s why it needs to cut back. The flip side of that is that if Bank of America doesn’t cut costs significantly then profits are unlikely to rise, at least not until the economy gets much, much better. Then there are the recent government lawsuits against banks that sold mortgage bonds to Fannie Mae and Freddie Mac. Put Bank of America’s three suits together – strangely the government decided to sue Merrill Lynch and Countrywide separately, but the JPMorgan/Bear Stearns case was rolled into one – and it faces the biggest liability of any single bank. Overall, I have seen figures that put Bank of America’s liability from mortgage cases at anywhere from $40 billion to $60 billion. Lastly, there are the new Basel banking rules, which come into affect in 2013. Bank of America seemed in the clear to meet those requirements, but if it has to pay out a big mortgage settlement, maybe not. For all of those reasons, Bank of America needs more capital. It can do that by selling shares. But CEO Brian Moynihan says he won’t do that. Another way a bank can boost its capital ratios is to make fewer loans. And that probably is the future of Bank of America, more cost cutting and fewer loans.
I’m not sure if the banks have to turn around before the economy can turn around. But what seems clear is that the banks and Bank of America in particular are not adding any boost to the economy. In fact, they are probably sucking some of the life blood out of it. To me that makes Bank of America a zombie bank, or maybe a vampire bank. No wait that’s somebody else.
Stephen Gandel is a senior writer at TIME. Find him on Twitter at @stephengandel. You can also continue the discussion on TIME’s Facebook page and on Twitter at @TIME.