Banking Crisis Dwarfs Depression

It's unlikely that bank failures can peak until we are close to a peak in mortgage foreclosures. Karen Weaver, global head of securities at Deutsche Bank Securities, projects that housing prices will continue to fall into early 2011. If that is the case, foreclosures could continue at a high rate until then. Many more banks may go under in such an eventuality.

So why then are bank stocks soaring? Two exchange-traded funds, SPDR KBW Regional Banking(KRE) and SPDR KBW Bank (KBE) are up 5.87% and 7.18%, respectively, in the past week. Over the last month they have gained 24.7% and 31.1%, respectively.

In my opinion, it is a case of a melt up in banking stocks. Investors are buying the robust "V" recovery story and will ride this market until we finally get a correction. The banks led the decline to March 9, and led the rebound. When a correction comes, banks should be one of the weakest sectors because investors will lock in huge profits and because significant questions will return about the strength of banking while falling house prices and mortgage default issues are still unresolved.

The worst situation for banks would be for the recovery to peter out. A "W" recovery, dipping back into recession, even if only for a couple of quarters, would push unemployment significantly higher and increase the mortgage foreclosure rates above the gloomiest projections made today. Such a scenario could take us beyond the thousand bank failures that many think unlikely. This also could put super banks, such as Bank of America (BAC), back on the list of banks at risk.

How does this bank crisis compare historically? There is no comparison.

-- Written by John Lounsbury in Clayton, N.C.

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