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