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Bank stocks rally despite projections of fresh losses

November 26, 2008 |  3:26 pm

Financial stocks have rallied the last four days, but not because their earnings are getting any better.

Losses stemming from the financial crisis are expected to be huge once again in the fourth quarter, with six of the country’s largest financial institutions projected to incur $44 billion in write-offs and additional loan-loss provisions, analyst Meredith Whitney at Oppenheimer & Co. said in a report issued today.

The six companies -- Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and Wells Fargo & Co. -- will probably write off $25 billion more next year because of changes in accounting rules, according to Whitney.

The companies have received more than $110 billion in capital injections from the federal government’s Troubled Asset Relief Program.

But in a report that she entitled “Gobble, Gobble,” Whitney contended that much of that money is going to “plug holes” in the companies’ balance sheets rather than spur much new lending. Suspicion that that's the case with TARP recipients in general has had members of Congress and others up in arms.

Losses are piling up as the three major credit-rating firms downgrade mortgage-related securities at a rapid clip -- forcing the banks to lower the carrying values of the mortgage assets clogging their books.

The credit raters downgraded a record $745 billion of mortgage securities in October and more than $456 billion this month, according to Whitney.

As a result, Whitney chopped her 2008 and 2009 earnings estimates for the six companies by an average of 17%.

“Overall, we do not believe these capital raises will spur meaningful growth for the industry,” Whitney wrote. “We remain cautious on the financial institutions as they continue to face asset price declines and a prolonged weak economic environment.”

Financial stocks have rallied in the aftermath of the government bailout this week of Citigroup. In the last four days, financial companies in the Standard & Poor's 500 index are up 32% as a group, leading the overall S&P 500 to an 18% four-day gain.

Still, the financial sector is nearing a dreary milestone: $1 trillion in total losses stemming from the financial crisis. Write-downs and credit losses at financial companies worldwide are just shy of $970 billion, according to data compiled by Bloomberg.

Many analysts once would have scoffed at the notion that the crisis that began with the subprime mortgage meltdown would cost banks $1 trillion. Now they’ll be delighted if $1 trillion is all that the industry loses.

-- Walter Hamilton