You've probably seen the Ally Bank commercials.  In one of them, a child is given a new bike, but then is not permitted to ride it anywhere.  In the others, the children are teased variously with a toy truck and a pony.  The commercial ends by touting one of the benefits of Ally Bank, such as its 'No Penalty CD' or high interest rates on savings accounts.  Then, "Ally Bank.  It's just the right thing to do." The implication, of course, is that other bank customers are suckers.

The commercials are funny and well produced.  They obviously spent a lot of money on them, as well as on a huge advertising budget.  This company must be doing quite well.  A high interest rate on CDs would imply they're healthy and making lucrative investments. Normally banks must charge a penalty for the early withdrawal of a CD in order to reduce risk: if everyone withdrew their CDs at the same time (such as if interest rates went up) the bank could have a serious liquidity crisis.  But no worries here.  This is one of the best capitalized banks in the country, according to their web site (www.ally.com).  It's good to see banks advertising again - and trying to do right by us.  Quite a change from the greedy and reckless old banks of the past.  It must be that we're finally emerging from the long financial crisis.

Or so you might think.

In fact, the company is the banking arm of GMAC, the recipient of $17 billion of bailout money from the federal government.  The US taxpayer is now the proud owner of 56% of GMAC.  The company is insolvent due to bad mortgages by its lending arm, Ditech, but it is kept afloat because of its 'systemic importance' to the auto industry.  And perhaps as well to keep the auto workers on the Democratic side ahead of midterm elections.

So at this point we can only watch as the company fritters away our tax money in lavish ad campaigns to attract FDIC-insured deposits of customers who would otherwise go to healthier banks.  One hopes that a bank such as this would have learned its lesson about investing in risky assets, but that would be wishful thinking.  Instead of buckling down and getting back-to-basics, the company is betting on a high-growth strategy to boomerang back into profits.  It is quite likely that they are simply making more risky bets, such as its 'No Penalty CD'.  And why not?  We'll continue to back them up because now they are even more 'Too Big to Fail.'

This risky and desperate behavior is typical of zombie banks, which feed off taxpayer funds and steal business from healthy banks.  History shows, however, that the longer we wait, the more expensive will be the final cleanup, as with the S&L crisis of the 80's and Japan in the 90's.  Zombies do not return from the dead, and forbearance, the policy of waiting and hoping, simply doesn't work.

The ultimate loss to the taxpayer is hardly limited to $17 billion.  The FDIC is responsible for bank deposits up to $250,000, and Ally is happy to show you how a family of 4 can insure up to $2.55 million (here).  And under the Temporary Liquidity Guarantee Program, which was part of the financial rescue package of 2008, the bank's bonds are FDIC insured as well.  Clearly we are throwing good money after bad.  A far better solution would have been to liquidate the company and sell its auto financing operations to another bank.

Zombie banks can be identified by their ultra-life-like appearance.  It will be interesting to see which other banks follow.