Bank Bloopers

Bank stocks have had another awful week. Several banks are at or near their 52-week lows.

The market doesn’t think we're through the worst of the crisis. Why should it? The housing slump is escalating, and banks are losing billions left and right. Here are some reasons why this week stank.

Bank of America (NYSE: BAC  ) CEO Ken Lewis said the dividend is safe. And if a CEO says something, it must be true. The dividend of $2.56 per share currently yields 8.9%. The consensus estimate is that B of A will earn $2.66 for 2008. If the consensus is correct, the dividend will cost the bank just about everything it earns.

Even if B of A maintains the current dividend, what will be the cost? If the bank has to cut back on business activity, strap itself with excess debt service for years, and issue stock that dilutes shareholdings, is the stock really worth it? Even if it doesn’t cut the dividend, shareholders may not be any better off for it.

KeyCorp (NYSE: KEY  ) announced it will raise $1.65 billion in capital through stock offerings, and it cut the dividend in half. The capital raise is intended to offset an unfavorable tax treatment ruling of $1.1 billion to $1.2 billion. And, guess what? The stock tanked.

Home foreclosures surged in May. The number of U.S. homeowners who faced foreclosure increased 48% from the same month last year and 7% just since April. The ugly numbers are fueled by the combination of slow home sales, falling prices, stricter lending standards, and a soft economy. Obviously, this is bad. But how bad? Is this merely the inevitable peak for a trend that has to happen before things get better? Or is the crisis just escalating? Nobody knows.

Citigroup (NYSE: C  ) is shutting down a hedge fund that it purchased just 11 months ago. The fund was co-founded by the bank’s current CEO, Vikram Pandit. The bank is just too cash-strapped to pony up the billions necessary to save the struggling hedge fund.

The startling thing about this story is that only 11 months ago, Citigroup was experiencing the good ol' days. It was gobbling up risky acquisitions in pursuit of more leverage and higher profits. Now, after having posted nearly $15 billion in losses and raising around $40 billion in new capital, the bank is forced to divest itself of such ventures. In less than a year.

In that short a time the subprime crisis descended on us and set in. UBS (NYSE: UBS  ) and Merrill Lynch (NYSE: MER  ) have also written off $37 billion and $18 billion, respectively. My how things have changed. Maybe they can sell the CEO, too.

Federal Reserve Chairman Ben Bernanke said Monday that the risk of a “substantial downturn” in the economy has lessened. Do you believe him? Me neither.

Lehman (NYSE: LEH  ) is in the news more often than senseless violence these days. This week, the chief financial officer and the chief operating officer were both fired. Fair enough. Why not shake up upper management? They got Lehman into this mess. It might be too late, though. The stock is down about 20% just this week.

I wonder what twists this crisis will take next week. This is getting fun. We’ll talk again next Friday.

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Bank of America is a Motley Fool Income Investor recommendation. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Tom Hutchinson holds no financial position in any companies mentioned. The Motley Fool has a disclosure policy.


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