Wednesday, December 5, 2012

Working Capital Finance and Identifying Dead Banks Walking

With virtually any conceivable commercial financing situation, it should be beneficial for commercial borrowers to understand what constitutes a "Dead Bank Walking" and what they should do about it if they are in fact working with a "Zombie Bank". Ultimately it is not likely to be in the best interest of a business owner to have extensive involvement with any of the banks which these terms describe accurately. Although recent discussions using these colorful terms have an element of entertainment and humor, there is a practical aspect as well. The impact for commercial loans can be far-reaching because the terms zombie banks and dead banks walking have been applied recently to quite a few commercial banks.

For any business owner currently needing a commercial loan or working capital financing, the concept of "Dead Banks Walking" is likely to be an essential part of their decision. This description has been used by several sources recently, all with a similar reference point of banks which have already gone broke. This critical but apparently accurate assessment is largely derived from a straightforward net worth approach. Such an analysis recognizes that many banks have substantial assets which are either worthless or at least worth well below the values reflected on their books, with the resulting real current value being less than the current debts of many banks.

Based on the evaluation of many observers who have realistically reviewed current asset values, most of the largest banks in the United States been shown to be worth even less than Lehman Brothers (which is already in bankruptcy). Many banks have compounded their public relations nightmare by demonstrating very little common sense in how they make commercial loans and spend money. If a bank is already worthless, it certainly calls into question how businesses and commercial borrowers will benefit by the government throwing money at these "zombie banks" in the first place. The failure of most banks to increase their commercial lending to business owners after receiving government bailout funds has fueled the controversy involving bank survival. Banks who have received bailout funds appear to be determined to hoard the money in order to preserve their own solvency rather than providing commercial finance funding to commercial borrowers.

This raises several questions. The emerging consensus is that giving otherwise bankrupt companies (the dead banks walking) more cash does little more than cover the internal operating expenses for the zombie banks.

First, should we really believe that a bank should be "saved" simply because it is so large? For those suggesting that there would be a crisis of confidence if the three or four largest banks in the United States were taken over because they are insolvent, there appears to be a growing majority of the public which would suggest that these banks have already lost too much good faith to ever recover.

Second, is there a better way to solve the problem than giving insolvent banks more money? George Soros and others have recently described in detail how other banking systems have successfully handled mortgage financing. Even though residential and commercial real estate loans are thought to be at the heart of the current crisis, there is no real effort underway to revise this approach.

Third, how long will it take the government to solve the problem and can business owners afford to wait? Although waiting a few weeks or even several months might be viable for a practical solution which results in needed commercial loans, the current logjam impacting business finance funding shows little evidence of subsiding that quickly. Prudent commercial borrowers should seek alternative sources for essential working capital financing such as business cash advances. In case it is not obvious from the discussion above, dead banks walking and zombie banks can be avoided when seeking new commercial financing.

1 comment:

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