Bank Stocks Obliterated

Yesterday's big news was that the Dow Jones closed at its lowest levels since 2002. That's undoubtedly painful and frustrating news. Even if you're a long-term investor, who knows full well that buying stocks at these levels will set you up for long-term success, lopping off seven years of returns still hurts.

Then I took a look at bank stocks this morning, and everything suddenly became relative: Some of our largest banks, you see, now trade at their lowest levels since the early 1980s.

For the year to date -- all of about seven weeks -- here's how the biggest banks have performed:

Bank

Year-to-Date Performance

Bank of America (NYSE: BAC  )

(77%)

Citigroup (NYSE: C  )

(72%)

Wells Fargo (NYSE: WFC  )

(69%)

JPMorgan Chase (NYSE: JPM  )

(39%)

US Bancorp (NYSE: USB  )

(61%)

*Using intraday prices as of Feb. 20.

As I write, Bank of America is at its lowest level since around 1984. Citigroup is at its lowest level since the banking crisis of 1991. The only relative bright spots of the banking world are Goldman Sachs (NYSE: GS  ) and Morgan Stanley (NYSE: MS  ) , the latter of which is actually up year to date.

But does it really matter?
Yes. For almost any other investment, at any other time, pointing out short-term share fluctuations would be immaterial for long-term investors focused on the quality of the business. In banks' case, share prices will in fact dictate their future, simply because the common denominator these days is a bank's capacity to raise capital.

Without a significant common-stock base, some banks -- particularly Bank of America and Citigroup -- will be forced to turn to the government to shore up their books. With paper-thin capital cushions beyond what Uncle Sam has already pumped in, the theory du jour is that some form of nationalization -- either fully, or partially like Fannie and Freddie -- is the only way to prevent all-out failures.

Are the fears justified? No one really knows, but it certainly seems feasible. Earlier this month, Bank of America CEO Ken Lewis told CNBC that the prospect of nationalization was "just absurd" and fueled by "a bunch of malicious rumors."

That may be true, but Ken Lewis also forecast back in September that the Merrill Lynch acquisition was "a great opportunity for our shareholders." It's safe to say that his ability to predict the outcome of important events has been thoroughly discredited.

Where to now?
Anyone who tells you they know exactly what'll happen with banks isn't being honest with themselves. Time will tell, yet I wouldn't hold on to a ray of hope. The low single-digit share prices where these stocks now trade represent more of a call option on hope than actual shareholder value.

For related Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. US Bancorp and JPMorgan Chase are Motley Fool Income Investor recommendations. The Motley Fool is investors writing for investors.


Read/Post Comments (3) | Recommend This Article (17)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 21, 2009, at 10:32 AM, maniehols wrote:

    The best hope for the banks is for Chris Dodd to keep his mouth shut ! He has never held a job and is just another politican living off the tax payers.

  • Report this Comment On February 21, 2009, at 8:55 PM, goldenpiggy wrote:

    People make it sound like every penny of BAC, C, WFC, USB, BBT and other banks' assets are totally worthless. Are they? Has everyone stopped paying their mortgages and credit cards? Is everyone going into foreclosure or short sale? Have all the real estate in this country all of a sudden become worthless? Is the sun no longer coming out?

    World is not coming to an end (as long as the printing press keeps going.)

  • Report this Comment On February 21, 2009, at 9:10 PM, elboxeo wrote:

    lol... yeah they havent stopped paying their mortgages... what people dont realize is that those subprime garbage type borrowers for the most part are already out of their home and forclosed on. The people they should be worried about is that Alt A "i can pay" but whats the point if i stop paying ill get a better deal type people..

    all these problems for these banks and yet they havent written down too much now cause their isnt stuff to be written down but because theyve put moratoriums on forclosures... and credit cards are the next shoe to drop.... ever wonder why they are closing stores and cutting mall hours??? mabye cause people are stopping the use of their cards or even worse are not going to pay anymore..

    these banks are dealing (in a horrible way) with problems from last year... they havent even seen the stuff comming up. and thanks to the government and thier assistance (capping salaries, lack of enforcement on where the money is going) its only going to get worse...

    these problems would probally be okay if it wasnt the the consumer has yet to take big dump on all those banks... you honestly think people are going to be shopping when unemployment is at 10%...??

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