Banks' problems not yet solved

Before Friday, this had weighed heavily on the banking shares, with the broad Standard & Poor's Financials Index down more than 46 percent from its record high in May 2007.

The crisis grew more acute this month. with government takeovers of mortgage companies Fannie Mae and Freddie Mac, the bankruptcy of Lehman Brothers Holdings Inc LEHMQ.PK, Bank of America Corp's shotgun agreement to buy Merrill Lynch & Co, and a bailout of the insurer American International Group Inc. This came just six months after a government-backed rescue of Bear Stearns Cos.

Meanwhile, mortgage losses have battered Washington Mutual Inc, causing the largest U.S. savings and loan to put itself up for sale. And Wachovia Corp declared an entire $122 billion adjustable-rate mortgage portfolio "distressed."

Bad risk management has resulted in many lenders among the "walking wounded," Bank of America Chief Executive Kenneth Lewis said in a speech Friday. "More institutions will muddle through, attract new capital or merge to survive," he said. The economy may stay sluggish "well into next year," he said.

While the federal government plans to corral the detritus on bank balance sheets, not all will be eliminated.

VALUATIONS AT ISSUE

Wachovia, BB&T Corp, First Horizon National Corp, SunTrust Banks Inc, Synovus Financial Corp and TCF Financial Corp are among lenders with at least half their loans tied to residential real estate, Lehman Brothers Inc analyst Jason Goldberg wrote on Friday.

Even if the government should buy assets from solvent institutions at a discount, with the idea of unwinding them, "this isn't necessarily a fix for asset valuations," he wrote.

And Robert Patten, an analyst at Morgan Keegan & Co, recommended that investors "trim positions as valuations start appearing stretched given the still uncertain and challenging fundamental outlook."

Not all observers, of course, are as gloomy.