Sizing up the worst bank of the bunch

You don't need to be some financial doomsayer to conclude that the stocks of big banks have become an unnerving place to invest.

Real estate is still in a deep slumber, despite the wake-up call of cheap money, and banks are still dependent on property values. The European debt crisis could cause a ripple of defaults throughout the world. And regulators keep pressuring the banks not to lend, but to build capital reserves.

People who apply for loans report being put under intense scrutiny, as if banks are looking for a reason not to provide money. The headline-seeking banking analyst Meredith Whitney wasn't too far off last week when she said the nation's biggest lenders were turning into "zombie banks."

The industry's story has played like a horror movie on Wall Street. The KBW Bank Index has lost 26 percent of its value this year.

The "zombie" description is unfair to some companies. Citigroup (C) is a nascent turnaround story and has improved its capital ratios, as have several others.

JPMorgan Chase (JPM) has had problems managing foreclosures but otherwise has weathered the crisis well.

But the worst of the lot is Bank of America (BAC). Its shares are down 46 percent this year and, at last check, they were trading at 33 percent of book value. The stock closed Friday at $7.19, a level appropriate for some startup, not the biggest bank in the country.

Traders have pounded BAC because they see some­thing top management has said it doesn't see: a need to raise capital. It faces a $10 billion lawsuit from American International Group (AIG) over alleged securities fraud from the mortgage crisis, and that's just one of the allegations that have piled up from the bank's 2008 takeover of the disreputable Countrywide Financial.

It was a housing market deal from hell, executed under former BAC Chairman Ken Lewis, who had dreams of Manhattan grandeur from his headquarters in Charlotte, N.C.

To meet legal judgments and tighter standards for capital, traders think Lewis' successor, Brian Moynihan, will need to sell new shares. But that implies dilution, and that's holding down the stock price. The more the shares fall, the more have to be issued.

Closer to home, I apply a kind of Peter Lynch principle to Bank of America. I've never been impressed with its operation in Chicago. BAC frittered away much of the market share and goodwill it got from buying LaSalle Bank. And the deal itself included a lot of commercial real estate that went bad, from Block 37 in the Loop to the erstwhile Chicago Spire lot along the lakefront.

There are too many mistakes here for investors to forget, or forgive.

CROP CIRCLE: At the Chicago Board of Trade last week, the thinking was that the U.S. Department of Agriculture laid out a case for moderate bullishness in agricultural commodities, even though corn and soybeans are trading just off record levels set a few weeks ago.

The USDA reduced its estimates for the size of the corn and soybean crop, saying it has been damaged by record heat across the Midwest. "We needed a perfect growing season, and this was far from it," Jason Britt, president of the brokerage Central States Commodities, told Bloomberg News. "From spring flooding to late planting to a hot summer, a combination of things has been thrown at this crop."

Traders have said we could see grain shortages next year. A restraint on prices, however, will develop if world demand slows down.

MARKUP: FBR Capital Markets bumped up its rating on what it called a "heavyweight" of publicly traded apartment landlords, Chicago-based Equity Residential (EQR). The upgrade brings EQR to just a neutral "market weight" rating, but the analysts also raised their price target for the shares to $66 from $56.50. EQR closed Friday at $59.05.

The analysts applauded EQR's "capital recycling strategy," which it said goes something like this: "Equity Residential is doing the right thing: selling non-core and/or mature assets into a rich pricing environment." FBR said that with the upgrade, it is now overweighting the entire sector of multifamily real-estate investment trusts.

Meanwhile, FBR boosted its rating to "outperform" on shopping mall owner Regency Centers (REG), citing its "superior demographics portfolio" and recent declines in the share price. REG was a $46 stock a month ago but it closed Friday at $38.92.

The company owns mostly small- to mid-size plazas that are anchored by grocery stores, which are considered to be among the best risks for a retail landlord.

NEWS ITEM: From Reuters: "The octogenarian billionaire George Soros has been sued for $10 million by a former Brazilian soap star who said he reneged on promises to give her an expensive apartment on Manhattan's Upper East Side."

Rich old men need to invent an investment to hedge their girlfriend exposure.

CLOSING QUOTE: "If I thought this was a calamity, I would go back to New York." — Jamie Dimon, chairman, JPMorgan Chase (JPM), interviewed by CNBC while touring California bank branches Wednesday during one of the Dow's 500-point declines.

Bank of America is under heavy pressure from investors who think it needs to raise capital. | apChuck Burton

Fact Box: ROEDER REPORTDavid Roeder reports on real estate at 6:22 p.m. every Thursday on Newsradio 780 and 105.9 FM WBBM. The reports are repeated at 10:22 p.m. Thursday and 7:22 a.m. Sunday.