Why Do Zombie Banks Hate Writing Off Bad Loans? Jonathan Weil Explains

Tyler Durden's picture

Wonder why all bank earnings over the past 3 years are fake? Wonder why few if any banks ever dare to take major write offs and represent the true nature of their financials? Wonder no longer: Bloomberg's Jonathan Weil explains.

Why Zombie Banks Hate to Write Off Bad Loans

There’s a simple explanation for why the world’s zombie banks remain so reluctant to write off worthless assets and tap the equity markets for fresh capital. They don’t want to end up like UniCredit SpA. (UCG)

This month has been a nightmare for the Italian bank’s shareholders. Since embarking last week on a 7.5 billion euro ($9.7 billion) stock sale at a steep discount to its Jan. 3 closing price, UniCredit shares have fallen 39 percent to 2.56 euros. It seems no good deed goes unpunished when it comes to lenders besieged by Europe’s debt crisis. A little bit of candor about the true state of a company’s finances can hurt a lot.

That undoubtedly is the message some other lenders facing large capital shortfalls will take from UniCredit’s troubles. The incentive now, just as most banks are undergoing their year- end audits, will be to stick with the pretense that all is well and there’s no need to raise additional capital.

Not that a lot of them have better options. There’s only so much private-sector capital available to go around. As sickening as the plunge in its share price may be, UniCredit secured an early-mover advantage by acting when it did. Even that might not be enough to ensure its survival without a taxpayer rescue.

This month’s offering was spurred in part by UniCredit’s decision in November to take large writedowns for the third quarter, resulting in a 10.6 billion euro loss, mostly for intangible assets such as goodwill leftover from ill-fated acquisitions. The loss was the largest disclosed for the period by a euro-area bank. The European Banking Authority also weighed in last month after its latest stress tests, saying UniCredit had almost an 8 billion euro capital shortfall.

Frightfully Low

The markets sense, with good reason, that the latest cash infusion won’t be enough. UniCredit’s stock market value stands at 14.8 billion euros, taking into account this month’s rights offering. That’s frightfully low, considering the company showed 52.3 billion euros of common shareholder equity and 950 billion euros of assets as of Sept. 30.

Investors still see a huge hole in the company’s books that UniCredit executives have yet to admit. Had UniCredit taken swift action sooner to mop up and replenish its balance sheet, it might not be in the precarious position it is today.

This is one of the lessons everyone should have learned from the collapses of Lehman Brothers Holdings Inc., Fannie Mae and Freddie Mac in 2008: Come clean about your losses to preserve the markets’ trust, and raise more capital than you think you will ever need to get through a crisis while you can, because you might not get another chance. UniCredit seems to be coming a tiny bit clean, and raising a smidgeon of the money it needs. At least it’s doing something, though.

Elsewhere in Europe this generally isn’t the case. On average the 31 companies in the Euro Stoxx Banks Index (SX7E) trade for 39 percent of common equity, or book value, according to data compiled by Bloomberg. France’s Credit Agricole SA (ACA) trades for 23 percent of book. Yet somehow the European Banking Authority last month concluded it had no capital shortfall.

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lolmao500's picture

Because it doesn't give them braiiiiiiiiiiiiinnnnnnnnnnsssssss or even graiiiiiiinnnnnnnnnnnnn?

nope-1004's picture

Wonder why all bank earnings over the past 3 years are fake?

Did Satan ever admit to being a sinner?  Monkey see, monkey do.


redpill's picture

I for one welcome our new zombie overlords.

hedgeless_horseman's picture



Why do zombie banks hate to write off bad loans?

Loans?  Does he mean assets?



I will post this again:


8 December 2011 - ECB announces measures to support bank lending and money market activity
The Governing Council of the European Central Bank (ECB) has today decided on additional enhanced credit support measures to support bank lending and liquidity in the euro area money market. In particular, the Governing Council has decided:

  • To conduct two longer-term refinancing operations (LTROs) with a maturity of 36 months and the option of early repayment after one year.
  • To discontinue for the time being, as of the maintenance period starting on 14 December 2011, the fine-tuning operations carried out on the last day of each maintenance period.
  • To reduce the reserve ratio, which is currently 2%, to 1% as of the reserve maintenance period starting on 18 January 2012. As a consequence of the full allotment policy applied in the ECB’s main refinancing operations and the way banks are using this option, the system of reserve requirements is not needed to the same extent as under normal circumstances to steer money market conditions.
  • To increase collateral availability by (i) reducing the rating threshold for certain asset-backed securities (ABS) and (ii) allowing national central banks (NCBs), as a temporary solution, to accept as collateral additional performing credit claims (i.e. bank loans) that satisfy specific eligibility criteria. These two measures will take effect as soon as the relevant legal acts have been published.

Modalities of the two longer-term refinancing operations with a maturity of 36 months and the option of early repayment after one year:

The operations will be conducted as fixed rate tender procedures with full allotment. The rate in these operations will be fixed at the average rate of the main refinancing operations over the life of the respective operation. Interest will be paid when the respective operation matures.

After one year counterparties will have the option to repay any part of the amounts they are allotted in the operations, on any day that coincides with the settlement day of a main refinancing operation. Counterparties must inform their respective NCB, giving one week’s notice, of the amount they wish to repay.

The operations will be conducted according to the schedule shown in the table. The first operation will be allotted on 21 December 2011 and will replace the 12-month LTRO announced on 6 October 2011.



hedgeless_horseman's picture



If bank assets were marked to market, both the US and Europe would have reserve ratios well south of 1%. 

This is why confidence is so important.  The banks have less than a penny for every dollar/euro on deposit.

Don't panic?  If there is a bank run with reserve ratios this low and you're in the 98th percentile of people withdrawing their money you are too late. 

LawsofPhysics's picture

While I agree entirely HH, if this were really a game of confidence why not hang Corzine in Time Square until dead?  That would send the appropriate message and the DOW north or 15,000 ASAP.

This is blatant, in-your-face, we own your government and are stealing everything, what-are-you-going-to-do-about-it, shit.

philipat's picture

 If Italian bond yields keep dropping Corzine might be laughing all the way to the Cayman Islands?

jaffa's picture

Issue of money, in the form of banknotes and current accounts subject to check or payment at the customer's order. These claims on banks can act as money because they are negotiable or repayable on demand, and hence valued at par. They are effectively transferable by mere delivery, in the case of banknotes, or by drawing a check that the payee may bank. Thanks.
criminal lawyer toronto

Gully Foyle's picture


"Did Satan ever admit to being a sinner?"

You understand that in early bible works Satan was the right hand of God. Satan was the tempter and God the redeemer.


Joshua Falken's picture

The Spanish mortgage banks do not foreclose because they do not want to drive down collateral values, so they count the unpaid portion of delinquent loans as new lending giving a polished image to an otherwise turdish balance sheet.


I imagine Unicredit have been the same.

Chief KnocAHoma's picture

Here in the US it is no better. I am a Realtor and recently attempted to help some friends of mine in a short sale. One of them lost a job and they were moving because of transfer. Their home is currently worth about $210k. Their mortgage in around $250k.

We had a bona fide offer for $220 and a certain mega bank rejected the offer. My clients asked me what they should do. I said "let them have the house. After they move it through their system and put it back on the market at a higher price the market will deteroate further. Based on my experience over the last few years, once it becomes a bank owned property, the offers will go south. The stupid bastards will be lucky to get $180k six months from now and they deserve the ass kicking for being so short sighted. Let them choke on it."

My clients said they did not want to ruin their credit, but had no other choice. Of course i think in a few years the bankrupcy stigma won't be as hard to overcome.


Irish66's picture

Does it really matter any more.

fonzannoon's picture

The manipulation of this market is just spectacular to watch. Bravo if you are out there reading this Mr. manipulator man. Bravo! We can bitch and moan all day long but at 3pm we can count on you.

vote_libertarian_party's picture

....aaaand US stocks float up with no volume on good news like this.

blu's picture

Shorter Jonathan Weil:

The only lesson the banks learned from 2008 etc was to keep your yap shut and lobby behind the scenes for a cushy bailout.

Any bank or BHC that deviates even slightly from that script will be shot in the head.

LawsofPhysics's picture

Of course, if you could "mark to unicorn" and get free money AND you controlled the puppets that made the laws that "regulated" it all, why would you let anything change?  Everything will be fine, until it isn't.  From my perspective, the only thing I worry about are supply chain disruptions.  Lots of our essential supplies are not getting cheaper and delivery is getting more inconsistent.  

HedgeAccordingly's picture

less chances for them (associates) to get that bonus to buy hookers and blow - http://hedge.ly/gFWVSm 

redpill's picture

In a world where mark-to-market valuation is considered uncouth and crass by the upperbanker class, no asset is worthless, hypothetically.

Math and reality.  They are so unhelpful.  Why put these chains on ourselves?  We'll just pretend things are worth something, and if we all do it together, they will be, and everything will be fine.

It's like building a Duplo princess castle, one pepto-pink brick at a time.  Viva Van Rompuy!

chdwlch1's picture

I wonder just how shitty the "collateral" that the Euro Banks put up for the last LTRO really was if it was still considered shitty with mark-to-market rules being suspended...

LookingWithAmazement's picture

How many of you, ZH'ers, do really expect a CDS trigger whenever Greece writes off 50 or more percent of its debt? I think "they" will not let "it" happen and replace the written off debt by fresh new bonds. Politicians do weird things, but openly committing economic suicide is a bridge too far, even for them.

Irish66's picture

nothing will ever go wrong ever again

LookingWithAmazement's picture

Exactly. No collapse. Boring world we live in.

T-roll's picture

No collapse because the game is rigged.  Those that create and play the game set the rules and can change them at will.  TPTB can pretend and extend longer than many people realise.

Odin's picture

Quick question there bud: A) Who would be dumb enough to buy these "fresh new bonds" of yours and B) How would creating these "fresh new bonds" not lead to a inflationary spiral?

LookingWithAmazement's picture

A) Very easy: "fresh new bonds" will be for free, otherwise banks lose lots of money on the old bonds. Now they get compensated.
B) "fresh new bonds" replace the other ones.

Mark my words: no CDS trigger, no collapse. Greece can default on anything, at any percentage.

LookingWithAmazement's picture

That's what I've been saying for months. No collapse.

SheepDog-One's picture

The world is boring for ALL fuking idiots!

fuu's picture

I always heard it as "only boring people get bored."

ZeroPower's picture

CDS are private contracts between 2 parties - so when one of them decides it is a credit event, its up to them to come up with their lawyer team at the other counterparties door and demand exchange (bonds vs payment as most are cash settled now after auction).


GeneMarchbanks's picture

Well then private institutions busting will trigger CDS payouts. Sears CDS will probably work out. Greece? I'm not so sure...

ZeroPower's picture

Yup. Corp triggers typically go off without a hitch, and involve a lot less 'central bank voodoo' than dealing with sovereign debt... last example of a sov default was Ecuador and the CDS went off just fine.

LookingWithAmazement's picture

Who will pay out all those CDS's? No one has the money for it. It simply will not happen. There will be no CDS dump either. Really, Greece is a storm in a teacup. I'm looking forward to the Spring, to make a nice trip somewhere to a Eurocountry. Just like Christmas was a nice time to laugh about all the doomprophets which became unmasked in 2011, so can Spring and Summer 2012 be. Happy Summer 2012.

LawsofPhysics's picture

Sure, until the supply lines for real products that are essential break, then it is war.  Same as it ever was.  We have some time.

blu's picture

We have some time.

We do indeed. Couple years, max. After which there will be no going back ever again for evar. I don't know what awaits us on the other side, but it has us in the grasp now and we are going there -- kicking and screaming for sure -- but go we must.

LongSoupLine's picture



Because the real value of the bad assets wouldn't be a haircut, but rather a scalping.


Welcome to the pending end of the "Mark to make believe" fairytale.

Hippocratic Oaf's picture

Exactly. Everyday our firm marks to market. EVERY. Fucking. Day

What's the value of the shit on the zombie books? 20cents? Less?


GeneMarchbanks's picture

'Come clean about your losses to preserve the markets’ trust, and raise more capital than you think you will ever need to get through a crisis while you can, because you might not get another chance.'

Dream on. MF Global was self regulated wasn't it? We're way past this. All of this rearview nonsense should be regarded for what it is: the end of the rope. Just before you die your mistakes come flooding in.

non_anon's picture

the bankster has no clothes

max2205's picture

Bloomberg ? MSM

AldoHux_IV's picture

Let's call it what it is: insolvency and the sooner the system gets reset and broken up to allow for new institutions to take the function of banking, the better.

The lesson that should be learned from Lehman is that no sacrificial lamb will scare the public into thinking the fraud needs to continue.

apu123's picture

I think unless a huge amount of coercion is used on the private holders of Greek debt the private holders will insist/litigate for triggering CDS.

Who knows what carrot/stick they will be offered to accept the voluntary haircut?  One way out for all these maxed out governments would be to bring back Roman style proscription.  That method worked well for funding many emperors pet wars/projects.

GeneMarchbanks's picture

Coercion is the name of the game. Laws will be re-written, palms greased and eventually [sovereign] CDS will be exposed for the absolute joke that it has revealed itself to be.

GMadScientist's picture

The NDAA is just another point on the line headed in that direction.

Shame they don't use it on white-collar thieves, but I'm a fan of pillory and the stocks first for them.

Cone of Uncertainty's picture

Speaking of Zombie banks, JPM should be reporting any day now.