Banking. The list of banking stocks posting losses in excess of 50% grows with each selloff. Long-time shareholders have lost billions.

The Great Stock Market Crisis Of 2008

In a year seemingly flooded with bad news, this great crisis is still going strong as we hit the halfway point of 2008.

high-risk, volatile rollercoaster ride.

Banking.

The list of banking stocks posting losses in excess of 50% grows with each selloff. Long-time shareholders have lost billions. Take a look…

The Biggest Bank Stocks Run In YearsCitigroup (NYSE: C): Shares have slumped from $54 to $19.50 - down 64%.

Washington Mutual (NYSE: VM): Shares have plummeted from $44 to $6 - down 86%.

Wachovia (NYSE: WB): Shares have dropped from $54 to $17 - down 68%.

National City Corporation (NYSE: NCC): Shares have tanked from $34 to $5 - down 85%.

Investors who bought shares of these and other banks last winter bought a falling knife and have paid a dear price.

In fact, the only individuals who profited in the last year were short sellers and the fired CEOs that walked away with millions.

For example, Stanley O’Neal of Merrill Lynch took more than $161 million with him, on top of the $70 million he made during his four-year tenure. Charles Prince of Citigroup left the firm with a $68 million exit package, including $29.5 million in accumulated stock, a $1.7 million pension, an office and assistant, plus a car and a driver, according to The New York Times.

So with the tale of the tape so bad, why are some of the best investment minds in America talking about buying bank stocks?

Investors In Financial Stocks Have Panicked… And OversoldListen to what one prominent financial mind wrote about the current malaise in his recent Forbes column.

“The good news is that the worst of the liquidity crisis seems to be over. After a slow start, the Federal Reserve Board under Ben S. Bernanke has done an outstanding job containing the panic in the financial system and dispelling the fear of a total meltdown.”

That’s from David Dreman, Chairman of Dreman Value Management, who then recommended three banks.

Dreman is an expert on the psychology of investing and is a self-styled contrarian. He believes that bank shares, while in distress, are also oversold, and that by controlling your emotions and buying banks while others are selling, opportunity abounds.

To be sure, long-term investors who understand the intrinsic value in this sector will buy and profit handsomely.

Tom Brown of Bankstocks.com is even more bullish…

In This Case, Past Results Don’t Predict Future PerformanceAccording to Brown: “Our take on the arc of eventual subprime mortgage losses is simple: Most estimates, particularly of losses on loans originating in 2006 and 2007, are significantly too high. The reason why they’re too high is simple, too. They assume that last year’s credit performance will persist far into the future. Only it won’t.”

The news media has been full of reports that homeowners underwater on a valuation basis have been walking away from their homes. On his CNBC show, Jim Cramer repeatedly mimics homeowners that overpaid telling their bankers to, “Take the keys, I’m outta here.”

Might make for good viewing. But it’s not the reality, though…

For a dose of that, take note of Vikas Bajaj, writing in The New York Times: “Homeowners typically do not walk away from homes they live in unless they are unable to pay the mortgage. Usually [this happens] because of job loss, a death in the family, divorce or a big jump in their monthly payments. Real estate speculators, of course, do abandon properties when prices fall.”

As illiquid investors are washed out of the market, the rate of foreclosures will moderate. In turn, the non-cash charges to the balance sheets at many of these banking institutions will be reversed and show on the reports as profits. The year-over-year comparisons will be excellent and the shares should move substantially higher.

One year from now, a likely scenario is that investors will look back at the spring and summer of 2008 as the last opportunity to buy financial stocks at a generational low. Do not let fear keep you from participating in the buy of a decade.

Good investing,

Floyd Brown

Editor’s Note: If you liked this piece, be sure to check out Floyd’s other Investment U articles, plus those from Investment Director Alexander Green and other financial wizards like Louis Basenese and Horacio Marquez in the archives here.

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