Banks Are Coming Clean, And Investors Love It

But there's little arguing with results, and they've been fairly clear so far. Banks that have shown the willingness to clear up their balance sheets as well as the ability to recapitalize themselves for the damage done are getting richly rewarded by investors.

"I believe they're getting their arms around the problems, as are the regulators," said Bill Isaac, managing director at LECG in Vienna, Va., and chairman of the Federal Deposit Insurance Corp. during the banking collapse of the 1980s. "I would be very surprised if we haven't at this point gone so far with the markdowns that there will almost certainly be recoveries as things start to pick up."

Some worry, though, that even though banks may want to be in full-disclosure mode regarding the troubles ahead, it's almost impossible at this point until the collateralized debt obligations used to back subprime loans unwind. Banks are required to mark-to-market many of the assets involved in the instruments, meaning that they must assign current value to assets which may have drastically different values in the future, especially in light of the way homeowners have been walking away from their subprime-financed houses.

"There are just so many moving parts here," said Michael Kresh, president of M.D. Kresh Financial Services in New York. "I'm concerned that we still have a scenario where even the people in charge at the banks don't know exactly what they have going on."

Because of that uncertainty, experts are cautious about entering the financials.

"You want to stick with things you understand, things that are financially strong," Mayer said. "The problem with a lot of these things is you could wake up one day and they could be virtually out of business because of some accident in their loan portfolio."

Kresh takes a similar position, wondering if total transparency has been achieved or if more writedowns loom.

"I'm not ready to get into the financials yet because I'm still not 100 percent convinced that everything that has been designed to be opaque is completely on the surface," he said. "I'm not even sure that many of the people in the financial institutions themselves, except for the people who designed these products, understand what they are."

Ashley, though, is one of those willing to take a bullish stand on financials, attracted by their low prices and solid capital positions. Still, even she advises being creative when investing in them, advising smart options plays as well as common stock buys and to have carefully planned exit strategies.

"I think it's a wonderful opportunity to get into what is essentially a number of quality names at a very low price," she said. "Pick them with some care, make sure they are general dividend-paying and relatively solid institutions, that they actually take measures when they've committed boo-boos."

The sector also isn't likely to be affected much by a controversy earlier this week when the Wall Street Journal reported concern that some banks might be fudging the rates banks charge to each other for overnight lending, also known as Libor. The article suggested that banks were reporting low London Interbank Offered Rate numbers to hide weakness in their institutions. High interest rates would be suggestive of financial trouble.

"Banks in general, because Libor is priced market to market, always have a little bit of room for what is known in the markets as a tick or two," Ashley said. "There's no absolute Libor rate. There's always a smidge of negotiation to it."

© 2008 CNBC.com

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