It has not been a good week for bank stocks. The Keefe Bruyette Woods Bank Index (BKX) has fallen about 6% so far this week. The stocks tried to rally for a brief period early in the week but where hit by a wave of analyst downgrades and earning estimate reductions. Merrill Lynch and Goldman Sachs both cut estimates for Bank of America (BAC) citing concerns about further write downs of assets and growing loan losses. The same concerns led Merrill and Sandler O'Neil to cut estimates for Wachovia bank (WB). The reduced estimates caused a sharp drop n share prices with Wachovia off 8% and Bank O f America down 7%.

The big bomb this week was thrown by Oppenheimer analyst Meredith Whitney. Originally last year thought the bearish bank analysts was something of a Cassandra with her drastic forecast for banks. Time has of course, proven her to be correct about the dire straits at the big banks. In her reports this week she said that Citigroup ( C), Wells Fargo (WFC) JP Morgan Chase (JPM) and Bank of America would have to cut their dividends. Her report said "Banks under coverage are dangerously approaching earnings levels that will not support high relative payouts. Beginning with first quarter 08 results, which will be announced in two weeks banks will seriously address their ability to maintain the current dividend level."

She was not upbeat on the immediate future for the sector. Whitney told investors this week, "The best case scenario is that the financial firms take the pain quickly and purge assets form their balance sheets. That could bring stock valuations down as much as 50%, which would be enough that you could legitimately buy long term positions. If they do not purge, there is a slow bleed of capital and pressure on stock prices for an extended period of time. We will most likely see a combination of the two, with more of the latter scenario. It will not be pretty."

Banks continued to shy away for corporate buyout deals this week. Fear of the risks in the highly leveraged deal and concerns about the somewhat shaky shape of their own balance sheets led Citigroup, Deutsche Bank(DB) and Wachovia to back away for financing the buyout of Clear Channel Communications (CCU). Clear Channel, as well as the buyout firms of Bain Capital and Thomas Lee Partners have sued the banks to attempt to force them to put up the capital. For their part, the banks say the lawsuits have no merit. Hearings are being held on the case April 8 in Texas and April 3 in New York courts. As the price of leveraged loans has dropped in 2008, funding the deal could cause losses of up to $2.8 billion for the financing banks.

The outlook for the major banks remains murky at best. There will be more downgrades and losses in the months ahead and this is likely to continue weighing heavily on the shares of the money center banks. It is difficult to make a case for investing in them at these levels.