Houghton and Atkeson

Fixing the Banks -- and Your Portfolio

by Houghton and Atkeson   03/09/09

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Success in the banking world during the past 20 years was measured by a bank's capacity to devour its competition through acquisition. Banks acquired each other in the name of customer service, even though it was evident that a "financial supermarket" was not a synergistic business model.

The real driver of acquisition activity was to accelerate reported profit growth and paycheck expansion.

Bank of America (BAC), which is the product of an acquisition by NationsBank in 1998, in turn engaged in a major acquisition almost every year for the past two decades.

Wells Fargo's (WFC) history isn't much different. Wells Fargo was originally acquired by Norwest Corp. After this acquisition, Norwest management changed the name of the overall company to Wells Fargo. Norwest was one of the most-acquisitive banks of the 1990s, and ended the decade spread across 16 states as the largest contiguous bank franchise in the nation.

Citigroup (C) was formed by one of the world's largest mergers in history with the combination of Citicorp and Travelers Group.

For dessert, these banks ladled out consumer loan programs in huge servings to ensure that they grew fatter than their neighbors. But now, the feast is over -- and what's most shocking is the size of the bill.

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Check, Please

Year-to-date, BAC is down roughly 75%, WFC's value is down around 65%, and C has dropped a gut-wrenching 85%, and is dangerously close to dipping below the $1 mark. And individual stocks only mimic the blows the major indices have taken.

Although we are still far from having a final tally on what this credit binge has cost us, it appears it will include the loss of our largest insurance, automobile and bank corporations, along with many of our retailers.

Millions of people have lost jobs, and the world is in a coordinated slump that rivals any financial crisis measured all the way back to 14th-century England, according to Harvard economist Kenneth Rogoff.

As option traders, what this all means is the sideways trend we've been seeing has broken to the downside. Yet the CBOE Volatility Index (VIX) reading suggests that the selling is not climatic -- and it seems that, no matter how low the financials go, they can always go lower.

How can we stop the hemorrhaging?