Is Your Bank A Zombie?

This week bank stocks moved even closer to their target price, i.e. zero. How can this be? Isn’t the government bailing them out? Not exactly. Like the Bush administration before it, the Obama plan involves slapping a lot of band-aids on a sucking chest wound. Both patient and medic are glad to be “doing something.” But the truth is that without major surgery, the prognosis is grim.

Investors are rapidly reaching the conclusion that some form of bank “nationalization” is inevitable. The insider debate in Washington has broken into the open with Senators Lindsey Graham and Kay Bailey Hutchison in favor of it. Even Alan Greenspan is now aboard. The ones who actually have the power to make something happen – Obama, Geithner, and Bernanke – still deny any such intent, but they can always change their minds. I think they will.

Of course no one is quite sure what this ugly word “nationalization” means, but people still dread it. In fact, bank nationalization has been going on for a long time. We even have an agency, the Federal Deposit Insurance Corporation, with long expertise in seizing financially unstable banks. The difference now is one of scale: the FDIC is adept at shutting down small banks and transferring the business to healthier institutions. A government takeover of Citigroup (C) or Bank of America (BAC) would be vastly more complicated.

Nonetheless, this appears to be the course we are on. Currently the major banks are zombies – walking dead who roam the streets, hungry for living flesh. As all good George Romero fans know, the only way to stop a zombie is to blow his head off. There are no other options. So it must be with the banks, unless we want them to continue consuming the resources the rest of us need to survive.

Much depends on how it is done. There will be winners and losers. Winners will almost certainly include depositors, while shareholders, some bondholders, top executives and directors will be on the losing end. Nationalized banks will most likely continue operating normally as far as customers can see. The key question is how long it will take to sort out the mess and return banks to private ownership and management. I don’t think anyone can answer that right now.

The sooner this awkward limbo ends, the sooner we can begin to recover. Let’s get on with it.