WARNING: Sinking bank stocks spell big trouble!

The last time U.S. bank stocks started sinking, it spelled a lot more trouble than anyone dreamed possible; and now, it’s beginning to happen again.

Starting in February 2007, the KBW Bank Stock Index, representing 24 of the largest banks in the country, tumbled 85% — from a peak of 120.14 to a low of 18.97 in March 2009.

If you had invested $10,000 in those big bank stocks, you would have been beaten down to a meager $1,579 within just 25 months.

And you’d be among the luckier ones! The same $10,000 invested in Citigroup shares was pulverized into $188. And shares in banks that were shut down by the Federal Deposit Insurance Corporation (FDIC) fell to zero.

Suppose you just held on to your banks stocks until today? Your original $10,000 in the KBW Bank Stock Index would still be down to $3,919 (a 61% loss) and your $10,000 of Citigroup shares would only be worth a meager $734 (a 93% loss).

This morning, I will name the 11 largest U.S. banks that are vulnerable today and give you explicit step-by-step instructions on how to protect yourself. But first, let’s address this all-important, burning question:

Could It Really Get That Bad Again
In the Next Phase of the Debt Crisis?

I know it may seem unbelievable. But it was equally unbelievable to the Wall Street pros who were gung-ho for bank stocks back in 2007.

They ignored us in 2007 when, in our Money and Markets of December 3, 2007, “Dangerously Close to a Money Panic,” I wrote …

“A money panic could threaten the solvency of major Wall Street firms like Bear Sterns, Goldman Sachs, Lehman Brothers, Merrill Lynch or Morgan Stanley; increase the risk of future failure among large banks like Bank of America, Citibank, HSBC, JPMorgan Chase or Wachovia; even force certain kinds of money market funds to break their solemn promise of preserving your capital.”

They ignored us again in August 2008, when we went before 100,000 viewers and 400,000 readers with our special live video and report titled “The Weiss X List,” clearly naming Citibank, Wachovia, Washington Mutual and other banks that subsequently failed or required a bailout.

And many are continuing to ignore us to this very day. But the banks’ official call reports filed with the FDIC for March 2011 don’t lie. They reveal that, in some major ways, the situation is actually worse today than it was in March ’09, at the height of the crisis.

Bank of America‘s main banking unit is saddled with $3.4 billion in repossessed real estate. Back in March 2009, even when its stock was in the gutter and it was getting an emergency capital transfusion from Washington, it had only half that much in repossessed properties — $1.7 billion.

Worse, the homes foreclosed on so far are just the tip of the iceberg. The bank also has a whopping $20 billion in home mortgages that are in the process of foreclosure. That’s up by a shocking 442% from March ’09.

JPMorgan Chase is in the same boat — $3.7 billion in repossessed real estate and $19.3 billion in home mortgages in the foreclosure pipeline, up 307% since March ’09.

U.S. Bankcorp, SunTrust Banks, Regions Bank and many others are also getting hit hard by the real estate double-dip.

Worse Than 2009?

I repeat: Although it may not appear that way on the surface, there’s solid evidence that the underlying risks in the U.S. banking system could actually be greater now than they were back in 2009!

First, back in 2009, the most salient threat was the wave of subprime mortgages that were going bad.

Now, the banks are in the midst of a far larger tsunami: Millions of homeowners with prime mortgages who stopped making their monthly payments a long time ago and are living in their homes rent free — sometimes for more than two years — while they wait for foreclosure notices from their bank.

Second, back in 2009, the economy was near a bottom and on the verge of a recovery.

Now, the latest data indicate that the economy is at or near a top and on the verge of a new decline. So banks are also vulnerable to the additional bad loans and lost business that inevitably come with any broad economic downturn.

Third and perhaps most important, in those days, Washington was willing — even desperate — to come to the rescue. That’s why Congress scurried to pass the $700 Troubled Asset Relief Program (TARP) to bail out the nation’s largest banks.

Now, Congress has exhausted its political and financial capital. It has neither the money nor the votes to embark on a whole new mega-bailout.

Which Large Banks Are
The Most Vulnerable?

I name them in the table below, based on our latest Weiss ratings, which take into consideration not only bad assets like repossessed real estate and nonperforming mortgages, but also each bank’s capital cushion, earnings history, liquidity and other factors.

As you can see, all of the banks in the table — including giants like JPMorgan Chase, Bank of America and US Bank — have a ratings ranging from D+ to D- (weak). That’s the simple fact based on the hard numbers — with no bias whatsoever, either positive or negative.

What do our D grades mean? In its landmark study of our ratings, the Government Accountability Office (GAO) defined them as “vulnerable,” and we agree.

Banks with a D+ or lower are vulnerable not only to a variety of adverse economic scenarios that we can envision — a second housing bust, a double-dip recession or rapidly rising interest rates — but also to scenarios that no one can predict.

Are You Less Pessimistic About the Future?
In This Context, It Doesn’t Matter.

The whole purpose of ratings is NOT to make predictions — not to blindly assume stability or instability.

Rather, their purpose is to submit the banks to true, realistic stress tests (unlike those performed by the authorities) and evaluate the chances of each bank’s survival based on their audited financial statements.

From that process, we provide an objective rating on each institution, plus lists of the strongest and weakest.

Then you have a simple choice: To do business with banks that have low ratings … or to do business with banks that have high ratings.

Not Convinced? Think the FDIC
Or the U.S. Treasury Will Cover
All the Possible Risk Scenarios?

Then consider these facts …

Our bank ratings have a stellar track record for accuracy. Since we began rating banks decades ago, we have identified and named, in advance, nearly every bank that subsequently failed.

Above, I gave you a link to our actual article forecasting the failures, specifically naming the institutions in 2007, long before they occurred. In case you missed it, here it is again:
http://legacy.weissinc.com/dangerously-close-to-a-money-panic-9299

I also gave you a link to the transcript of our X List video, in which we were even more specific and provided a list of 10 large banks, most of which went under later. Here’s that link again, too: http://legacy.weissinc.com/the-x-list-the-next-big-failures-transcript-part-i-25455

So when we name banks that we feel are at risk, I would advise against ignoring our warnings.

Unlike Moody’s, S&P and Fitch, we never accept any compensation, in any form, from the rated institutions for the ratings.

In addition, unlike the other rating agencies, we never factor in a blanket assumption that Washington is going to bail out failed megabanks.

Last week, even Moody’s announced it’s now doubting that assumption, putting major banks on credit watch for downgrades as it re-evaluates how much support the U.S. government is really willing or able to provide.

Moreover, the assumption of blanket government guarantees for megabanks proved dead wrong with Lehman Brothers.

It proved dead wrong with a number of fairly large banks that no longer exist today.

And it obviously gave stock investors a false sense of security, leading them to the devastating losses in bank stocks that I cited at the outset.

Here’s the key:

The FDIC may have the resources to shut down small- and medium-sized institutions without much damage to depositors. But it would be hard-pressed to cope with the losses and turmoil likely in the wake of megabank failures.

The proof: If Washington thought the FDIC could handle megabank failures on its own, it would not have rushed to pass the TARP legislation in 2008, giving the banks $700 billion in emergency aid.

Besides, whether megabanks ultimately go bankrupt or not, and whether Washington saves them or not, investors in their shares still face the risk of wipe-out losses, as we saw in the 2007-2009 bank stock debacle.

What Should You Do?

First, let’s focus on all the bank investments that are NOT covered by the FDIC — stocks, bonds, debentures and consumer deposits over $250,000.

Banks stocks are impacted by a bank’s balance sheets. But they respond more directly and immediately to earnings and earnings prospects.

If the stocks are cheap enough and the outlook is good enough, there can be times to buy bank stocks even when they’re still struggling financially. Conversely, if the stocks are too expensive or the future outlook is poor, there are times to sell bank stocks even if they’re in good financial health.

But right now, we have BOTH sick balance sheets AND a negative outlook for earnings.

And right now, most bank shares ARE already going down.

Indeed, the KBW Bank Stock Index has just fallen to a new low for the year and appears to be making a beeline for the lows it hit last September.

Your action: If you own any bank stocks, sell them, regardless of their ratings.

Bank bonds and debentures have sometimes been sold under the aura of FDIC-guaranteed investments, but they’re anything but. If bond prices fall, you will lose money when you sell. And if the bank goes under — whether rescued by the government or not — you’ll have to wait in line for your money with other creditors. Don’t expect more than a fraction of it back.

Uninsured deposits are rarer nowadays because the FDIC now covers up to $250,000 in consumer deposits and 100% of commercial checking accounts. But still, for the sake of somewhat higher yields, many investors are taking their chances and going for jumbo deposits. We don’t favor this approach. But if you do, make doubly sure it’s with an institution that merits a B+ Weiss rating, or better.

Second, let’s talk about your accounts that ARE covered by the FDIC.

Even if you are covered, you do NOT want to get caught in a bank failure. Here’s why …

If you bank fails, the FDIC does not guarantee it will continue paying the same interest your bank has promised you.

It does not guarantee the new bank you wind up with won’t charge you higher fees.

If doesn’t guarantee revolving credit agreements or other business contracts.

It doesn’t guarantee you’ll get your money back within a specified period of time. If it’s swamped with bank failures and closures, you may have to wait longer for your money than you want to.

And the FDIC won’t cover any funds in your account if they happen to exceed the $250,000 limit. You know that, of course. But are you carefully tracking how much accrued interest is being adding to your balance? In your checking account, suppose a few people are late in cashing your checks and you have a bigger bank balance than you thought. Or suppose you get a wire transfer into your account sooner than expected.

All of these factors could throw you over the $250,000 limit and expose you to losses.

Your action: Make sure your bank balance — the balance you get from the bank — is always comfortably under $250,000. Plus, for double protection, keep most of your cash in a safe institution.

Here’s How to Check — and Have Us Track —
The Financial Strength or Weakness of Your Bank

Follow these simple steps …

1. Go to our new website, www.weisswatchdog.com.

2. Sign in or sign up. It’s quick and there’s no cost. But you DO have to go through this process even if you’re already signed up for Money and Markets.

3. In the upper right-hand corner of the screen, click on banks and thrifts. (You can also choose credit unions or insurance companies.)

4. Then, also in the upper right-hand corner, type in the name of institution and press “search.”

Important hint: Don’t try to type in the full name of your institution. Just enter the FIRST word of the name and our search engine will do the rest.

5. When you’ve identified your institution, click on the green “plus” sign to the right of your institution’s name where it says “ADD TO WATCHLIST.” We give you the company’s current rating. Better yet, we will alert you via email whenever the rating changes.

6. Above the list, click on the tab “WATCHLIST.” That’s where you should see our Weiss rating, ranging from the top rating of A+ to the lowest rating, E-.

• If it’s B+ or better, we feel the risk of failure is comfortably low.
• If it’s a D+ or lower, we consider it weak and NOT recommended. Seriously consider moving the bulk of your cash to a safer institution.

7. While you’re at www.weisswatchdog.com, you can also check — and have us track for you — the latest rating on your U.S. stocks, ETFs and mutual funds. (Just remember that these equity ratings are a different animal from Financial Strength Ratings. They’re an evaluation of the investments per se — not the institution that issues them.)

Overall, it’s a rich resource and handy tool to help you make more prudent decisions about nearly all of your savings and investments. So do take full advantage of it.

I feel it’s the least I can do for our loyal readers — especially in these treacherous times.

Good luck and God bless!

Martin