The S&P 500 financials sector, which includes banks, brokerages and insurance firms, fell 18% in February on top of January's 26.3% decline, for a total decline of 39.6% in the first 9 weeks of 2009. This sector is down 80.2% from its all-time high in February 2007 and is at the level last seen in December 1994. Within the sector, Citibank is down 97%, Bank of America is down 93% and AIG is down 99.5% from recent highs. However Morgan Stanley and Goldman Sachs, while well off 2007 highs, are up YTD, so at least some banks are doing better.
Last month, we asked the question, "Can the banks be saved?" The answer so far seems to be yes, but selectively. So far in 2009, about 19 smaller banks have been declared insolvent and taken over by the FDIC. Shareholders are wiped out, but for the most part the day-to-day operations of these banks are unaffected while the FDIC merges the remaining assets of the bank with another firm. Depositors and checking account customers are unaffected, borrowers still owe their mortgage payments, checks and credit card continue to work. 2800 banks disappeared in the 1982-1992 banking crisis, and most Americans don't even remember that period. 10,000 banks went out of business between 1929 and 1932. In that period, deposit insurance did not exist, so every bank failure entailed the wipe-out of all its depositors.
"Bank nationalization" was hotly debated over the last month. The Obama administration has made clear that it will only take ownership of banks as a last resort as we saw with Citigroup on Friday. Paying a 10% dividend on the US Government's purchase of preferred stock in Citigroup was not sustainable given its constrained capital situation. The preferred shares are converted to non-dividend paying , and Citigroup is required to find private investors willing to match the government's investment dollar for dollar, leaving the US owning 36%, new owners 36%, and current shareholders 28%. Still, 28% of something might be more valuable that 100% of nothing. Bank of America could be the next candidate for similar treatment. PNC Financial, US Bancorp and Wells Fargo are also potential candidates. As investors are afraid to own stocks that might be diluted by government ownership, they're frantically selling all banks. Given that quite a few smaller, regional banks avoided investing in toxic mortgages, that selling is overdone.