FDIC says bank losses were worse than thought in 2008

Bank stocks led the market higher over the past couple of weeks -- the KBW Bank Index of 24 big financial institutions surged 62 percent from March 6 to last Wednesday, compared to a 16 percent gain for the S&P 500. So perhaps it's only fitting that sobering news from a bank regulator killed the market's buzz.

Speaking at the same conference of community bankers as Fed Chairman Ben Bernanke addressed Friday, Federal Deposit Insurance Corp. Chairwoman Sheila Bair predicted that bank failures would cost her agency $65 billion over the next five years. A little later, her office released a revised tally of banks' losses in the final three months of 2008. The new figures showed the industry actually lost $32.1 billion last quarter, up from $26.4 billion.

Taken together, the announcements apparently reminded investors that, yes, banks are still struggling with losses on bad loans, toxic mortgage-linked investments they can't afford to sell at market prices, and an economy that seems to keep getting worse.

The KBW Bank Index -- or BKX, as its known -- fell five percent, compared with a two percent drop for the S&P 500.

Last week, in the midst of the rally, Keefe Bruyette & Woods, the investment bank that puts together the index, warned that "we believe it may be challenging for the BKX, or large-cap banks as a group, to sustain a rally given the potential capital needs of the group."

Up to 60 percent of the companies in the index -- which includes behemoths like JP Morgan Chase (JPM) and Citigroup (C) as well as regional banks like Synovus Financial Corp. (SNV) and Huntington Bancshares (HBAN) -- may have to raise as much as one-tenth of their market capitalizations in fresh capital to offset losses, KBW analysts wrote.
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