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Saturday, 21 February 2009

How the Mighty Banks Have Fallen

by David Gaffen

The destruction in the banking sector has been broad and deep and has taken the shares of the banking companies to lows not seen in 15, 20, or in some cases, 25 years. Bank of America Inc. shares today hit an intraday low of $3.19 a share — a level not seen since August 2, 1984, when the bank traded at $3.17 a share.

Now, the fear represents an expectation that the largest — and sickest — banks, one way or another, will be taken over by the government through some sort of temporary nationalization in order to avoid a Japan-style decade of malaise. This idea continues to gain currency, and it continues to hammer the valuation of the banks.

“The chatter is that people are really sort of pricing that in and anticipating that,” says Jared Woodard, trader at Condor Options. “With these bank stocks, the stock itself is an option. With Bank of America at $3 it’s really just an option — I don’t know anyone buying it now with an eye towards long-term value.”

At the end of October 2007, just after the market’s peak, the ten largest financial-services companies in the Standard & Poor’s 500-stock index had a combined market capitalization of $1.249 trillion, led by Bank of America Inc., which had a market value of $214.2 billion, making it the seventh-largest corporation in the S&P 500 at the end of that month. As of Thursday, the 10 largest financial-services companies in the S&P had a combined market cap of $298.6 billion — not much more than B of A’s market cap at the peak. None of the 10 largest in the S&P are members of the financial industry, according to S&P.

The unrelenting annihilation came after that, amid a series of revelations related to subprime mortgage exposure, off-balance sheet positions in complicated debt obligations, and later, write-downs on assets that had been marked to lower-than-anticipated levels. Wells Fargo’s intraday low represents its lowest level since September of 1996, and Citigroup touched levels it had not seen since January of 1991.

Mr. Woodard says that essentially, those playing in the stocks now are either expecting the equity to get wiped out completely, or they’re expecting the shares to double or triple based on some unforeseen positive outcome — one that few can foresee right now.

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