The whole banking sector is bleeding. Bank of America(BAC) has finally hit the single digits on news that the banking giant needs additional capital. Bank of America is dealing with huge write downs from the Merrill Lynch acquisition. Citigroup is trading at $4 and could easily be headed to zero. I wrote a post a while back that Citigroup’s only hope for survival was as a much smaller entity whose primary function is as a commercial bank. Citigroup finally realized this and is selling off assets including the majority of their Smith Barney stake to Morgan Stanley.

My guess is that these aren’t the only major banks that will need more government funds. Wells Fargo, JPMorgan Chase, PNC Bank and even US Bancorp may need additional TARP money. The more capital that these banks borrow, the more that it dilutes shareholders equity stakes. Who knows if Morgan Stanley has enough liquidity to survive and they just purchased Smith Barney? Can anyone say without a doubt that Goldman Sachs will not need more assistance from the government?

My positions page will always show that I hold shares in Bank of America, JPMorgan Chase and Wells Fargo because I have physical stock certificates of these companies. I sold the major portion of my bank stocks because I felt they still had significant room to drop. I have never liked Citigroup as an investment. I still believe that Wells Fargo, US Bancorp and JP Morgan will be profitable long term. Bank of America worries me because they are adopting a business model that is eerily similar to Citigroup. Bank of America has a lot riding on the Countrywide and Merrill Lynch acquisitions.

Economists estimate that the banking industry is only halfway through asset write downs. Banks may need to write off 1 trillion dollars more of losses. Banks are facing increasing home loan losses, rising credit card delinquencies and growing commercial loan defaults. As job losses continue to mount they only add to the pressure on bank earnings.

Bank stocks will continue to be under pressure in the near term. No one has a clue as to what bank earnings will look like for the next year. Citigroup is expected to report a 10 billion dollar loss for the 4th quarter alone. That is incredible. I have to admit that this financial crisis is far worse than I originally thought. I expect that dividends will be eliminated and stock prices will easily take out their 52 week lows set in November. Some banks will hold up better than others but the industry as a whole is not pretty.

Photo by woodleywonderworks