Fear and trembling in the halls of banking

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About two and a half years after the worst financial crisis in recent memory, the world's major banks are once again staring at potential catastrophe.

Bank of America ( BAC ) has shed more than 55 percent of its value in the last six months, dropping to just $6.30 per share on Tuesday, August 23. Investors fear that the bank faces far larger obligations and writedowns than previously revealed, thanks to a stagnant housing market. If the bank is forced to recapitalize, it may end up issuing new shares which would badly dilute existing investors.

The bank's actions don't inspire confidence, either. Henry Blodget, a former analyst with Oppenheimer and Merrill Lynch during the tech bubble (later banned from the industry by New York state attorney general Eliot Spitzer), recently penned an article on his website the Business Insider , suggesting that "the market thinks Bank of America is worth much less than Bank of America's management says it is.

In fact, in what is fast becoming a formal law of bank-stock thermo-dynamics, the more the bank insists that everything's fine, the more investors take this as a signal to run for the hills."

In a bizarre retaliation, Bank of America responded directly  to Blodget's claims, contesting both his figures and his credentials as they cited his 2003 civil securities fraud settlement. Meanwhile, the Financial Times reported credit is getting tighter for the bank - the spread on five-year credit default swaps for the bank has hit a record, while the one-year spreads are wider still.

And Brian Moynihan's company isn't the only bank with a losing record this year. JPMorgan Chase ( JPM ) and Wells Fargo ( WFC ) are down 24 percent, while mighty Goldman Sachs has lost nearly 35 percent of its value.

Will there be more bailouts if the situation comes to a head? It's possible, given the leverage these banking behemoths have with the central banking system. However, such an action would bring populist rage to a head and virtually guarantee electoral defeat for any public official backing them. 

In 2008, we learned about Too Big To Fail. In 2011, we may yet discover what Too Big To Survive looks like.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: News Headlines , Banking and Loans , Stocks
Referenced Symbols: BAC , JPM , WFC

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