As I look at the market's treatment of bank stocks in anticipation of a Federal Reserve hike in interest rates, I think of the story of the man standing on the Titanic who exclaims, "I ordered ice, but this is ridiculous!"
The drastic declines in the prices of equities of virtually all banks - large and small, community and money-center - make one wonder what has happened to investor sanity.
Tech and dot-com issues with no history, no earnings, and nothing to offer but heavy optimism as to what they will be doing in the years ahead soar in value the day they arrive on the market.
Yet stocks of banks with solid earnings histories plummet to record lows.
The reason most analysts and observers offer is that, if interest rates rise as expected, banks will have to pay more for money, their spreads will narrow, and their earnings will shrink.
The selloff is so intense that even banks that rely heavily on demand deposits and those whose income is largely earned from noncredit sources are being battered.
Bank shares are now being treated as a short-term investment, something they were never intended to be. The days are gone when investors looked at bank shares as "little old ladies" that slowly moved up and up with no excitement but little risk either.
There was excitement in store, however; it just was slow in coming. Some bank stocks I own have a cost basis to me of 1% or 2% of the value they had in 1999 before the market was battered. But even now the cost basis is still less than 5% of the market price. Sure it took years - but I slept well too.
Some bank managers have only themselves to blame for fickle stock prices. They wanted to attract the in-and-out professional investors in an effort to raise their share prices, boost options' values, and develop reputations as "modern stocks."
Bank executives often talk about generating "shareholder value." But does pursuing shareholder value necessarily mean focusing on boosting the stock price?
A bank by its nature can not be a company where earnings continuously expand at a much faster rate than the economy grows. Deposit growth and loan demand depend on the growth of the economy. Sure, you can work to make your bank more efficient, and you can provide new services - up to a point. But other than winning business away from other institutions, there is little you can do to boost earnings at a pace faster than the economy's.
This approach may be out of date in a world where dividends no longer are the incentive for many investors. Today we see that curbing or even eliminating dividends is no longer felt to be a sign of weakness but rather a sign that the money can be better used internally than in paying out taxable dividends to shareholders.
But banks should be different. They are the investment medium for people who expect a reasonable income and enough appreciation to offset inflation's erosion of purchasing power. They are not vehicles for those seeking extraordinary gain. Mr. Nadler, an American Banker contributing editor, is professor of finance at Rutgers University Graduate School of Management.