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Housing, credit crises slammed bank stocks in '08

Housing, credit crises slammed bank stocks in '08

While problems in banks' mortgage portfolios had surfaced some time before, 2008 was the year in which a landslide of deteriorating credit and concerns over capital took down industry stalwarts like Washington Mutual Inc. and Wachovia Corp., and sent stocks plunging to multiyear lows.
Before the end of 2008, Citigroup Inc., once the largest U.S. financial institution, would be brought nearly to its knees following a series of bad bets on complex mortgage and credit-related securities.
It was a year of unprecedented government intervention in the banking industry and one that left many Americans angry, disillusioned and seeking answers. The ensuing fallout cost several corporate executives their jobs. As the housing market tanked and defaults on mortgages spiked, nearly all banks were forced to set aside huge amounts of cash to cover loan losses just as credit markets were starting to dry up, leaving many financial institutions devoid of an outlet to raise capital.
In October, the government passed a $700 billion bailout package with the goal of unfreezing the credit markets and spurring more normal lending. As part of this program, the government earmarked $250 billion to invest directly into banks through preferred stock purchases. Among the beneficiaries was Citigroup, which perhaps as much as any other Wall Street bank symbolized what went wrong in an industry that is still racing to put out fires.
In November, the government propped up Citigroup, agreeing to shoulder hundreds of billions in possible losses and plowing $20 billion into the banking behemoth. Its shares, which were down 77 percent for the year, remain under considerable pressure following four straight quarterly losses.
The Dow Jones bank index declined 49 percent in 2008. Meanwhile, the KBW Bank Index, which tracks two dozen of the country's largest banks, also plunged. This compares with a 39 percent drop in the Standard & Poor's 500-stock index.
One of the biggest obstacles for bank stocks was a lack of transparency, said Jim Dunigan, chief investment officer for PNC Wealth Management in Philadelphia.
There was "a real question mark around earnings and the lack of clarity on the balance sheet," he said.
And these fears have not completely subsided, as weakening trends in both credit card and commercial real-estate portfolios remain a concern for investors.
Bank of America Corp. came to the rescue of Merrill Lynch & Co. _ which had spent decades building up a reputation as the bank of Main Street and Wall Street _ in an all-stock deal initially valued at $50 billion. The acquisition came just hours after Merrill competitor Lehman Brothers Holdings Inc. filed for bankruptcy protection and as investors were concerned the stand-alone investment banking model would no longer be viable amid continued weakness in the credit markets.
The deal kept Merrill from a Bear Stearns Cos.-style fire sale or a complete meltdown like Lehman. The combined Bank of America-Merrill creates one of the largest U.S. financial-services firms in a landscape that has thinned considerably from just a few years ago.
In addition to Merrill, Bank of America also bought mortgage lender Countrywide Financial Corp. Bank of America's shares were down 68 percent for 2008.
Analysts pointed to JPMorgan Chase & Co., Wells Fargo & Co. and PNC Financial Services Group Inc. as among the year's winners. All three capitalized on the market turmoil, scooping up valuable deposits on the cheap as some of their weaker competitors faltered.
Perhaps the biggest winner was Wells Fargo, whose shares were down only 5 percent for the year. The San Francisco bank emerged as the ultimate victor in a heated battle with Citigroup for the lucrative deposits of Wachovia.
"We entered the year knowing that things were going to be challenging, at least in mortgages," said Chris Shipley, equity analyst at Northern Trust Investments. "It was really this credit crisis that happened on top of the economic situation that people were not expecting."
Though Wachovia had been struggling, the emergency sale of the Charlotte, North Carolina, bank was sparked by a run on deposits following the failure of Washington Mutual.
Shares of Washington Mutual had plunged before regulators seized its assets in September and sold off its banking operations to JPMorgan for $1.9 billion. The Seattle thrift is by far the biggest bank to collapse in history, with nearly 10 times the amount of assets of Continental Illinois National Bank & Trust Co. _ the largest U.S. bank to fail up to that point.
WaMu was the second troubled financial institution that JPMorgan took over in the span of six months, following Bear Stearns in March. JPMorgan's shares finished the year down 29 percent.
Heading into 2009, several of the companies are under new chiefs and still struggling to gain a stable foothold and regain investors' confidence.
"Investors these days have little tolerance for banks with aggressive balance sheet strategies, especially strategies that include out-of-market lending and higher risk securities investments," said Jason O'Donnell, senior research analyst at Boenning & Scattergood. "Given the magnitude of the losses this year ... I expect conservatism to be a popular theme in 2009."


Updated : 2021-04-19 21:44 GMT+08:00