MOST READ: How to Play Crumbling Financials

While it's easy to understand that Bank of America's desire to protect the $2 billion preferred stock investment it made in Countrywide last year and to become the leading U.S. mortgage originator, you would be very hard pressed to find anyone outside the company who doesn't dread the acquisition, at least over the short term. Merrill predicts cumulative losses of $11.37 billion on loan portfolios acquired from Countrywide.

Another thing to consider over the very short term is headline risk, from the recent reports of the involvement of key members of the Senate Banking Committee in Countrywide's "friends of Angelo" lending program, set up by Countrywide CEO Angelo Mozilo to handle VIP loan requests.

A Senate investigation of these relationships could get messy, considering that some of the senators mentioned are also involved in drawing up mortgage bailout legislation.

Close to a Bottom?

Bargain hunters have been probing for a bottom in the financials for some time. It's possible we are approaching a bottom for the housing crisis, evidenced by good news in certain regions where large homebuilders have taken drastic action to reduce the inventory of newly-built homes.

But as we are seeing with regional banks, pain caused by construction loan delinquencies, which are trailing home mortgage delinquencies, has yet to fully manifest. Even if we are close to the bottom, total loan delinquency numbers are likely to continue increasing through the end of 2008.

Quarterly provisions for loan losses are the biggest factor driving banking industry earnings down. Banks and thrifts earned a combined $19.6 billion for the first quarter of 2008, compared to an aggregate net loss of $208 million in the fourth quarter of 2007 and net income of $36.2 billion in the first quarter of 2007. The fourth quarter 2007 number was revised downward, as several large institutions revised their earnings numbers to reflect the impairment of goodwill carried over from expensive acquisitions.