A quick look at bank stocks would indicate that Wall St. is not terribly impressed with the Paulson $700 billion bailout plan. Citigroup (C), the whipping boy of the group, may be at a multi-year low. But, so is Goldman Sachs (GS), the most sublime of all US financial institutions. Even Jamie Dimon’s JP Morgan (JPM), arguably the best run bank, has been pulled into the vortex of selling

The trouble is that investors think that the amount of money being put into the financial system is far too little. If it was adequate, this argument goes, bank stocks would be worth more than Confederate dollars.

Citi is supposed to lose as much as $2.72 a share in 2009, at least according to the more pessimistic numbers. Banks have underperformed analysts’ guesses most of this year. Why should next year be any different? The Wall St. consensus is that Goldman will make $10.73 EPS, which is actually up from where 2008 is being pegged. So, why has its stock dropped from $234 to $55 in less than a year?

According to the Oracle of Delphi, the reason these stocks are taking such a beating is that the estimates are too high and are based on unrealistic expectations of an economic recovery.

A number of indicators point to bank earnings getting worse. One of them is problems with consumer credit and the potentially toxic securities attached to this market. Another is that corporate debt default rates are likely to rise sharply, at least if credit default swaps are any indication.

An analyst at Friedman Billings Ramsey was good enough to work out the math. According to Reuters, these figures show that "The U.S. financial system still needs at least $1 trillion to $1.2 trillion of tangible common equity to restore confidence and improve liquidity in the credit markets."

By that estimate, the Paulson program fund would have to be increased almost two-fold.

While this expert or that expert may differ over what the exact sum may be, the markets are wise, and all the trading in major financials indicates that there is still great concern that another large bank could fail due to lack of capital. Based on trading over the last two weeks, the money is on Citgroup to be that firm.

If the financial world thought Lehman wrecked the credit markets, it knows that Citi would be much worse. Looking at what it cost to save AIG (AIG), the pot is still light.

Douglas A. McIntyre

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