Banks or it's the end of the world and I feel fine.

One thing that i've noticed over the past week or so of being in NYC is that the more time you spend with "Finance people" the more depressed you get about the economy and especially the banks. A bunch of my friends also just got fired from banking jobs last week (i hope you guys are ok) which definitely doesn't help to increase "perceived health" of the finance industry. But is it really that bad?

What I am asking myself is - ok, so this is going to be a bad recession, no doubt about it. Fine. But aren't we overdoing it in the market? Have we totally lost faith in banks (Citi below 4.. MS at 9 and change..) forecasting an almost Armageddon-like scenario? Now, funny thing is that from what i remember forecast disasters never happen. I mean, anyone remember the Y2K scare? SARS? Avian flu? Insurance bankruptcy in 03? Terrorism post 9/11? Isn't it in the sheer nature of a catastrophy that noone can see it coming for it to happen? Yeah, the economy is bad but if you look at what the market is telling you at the moment it seems that the expectations are for the world banking system to fail . And I'm sorry but if that happens then my last worry is whether or not my investments are doing well . If you think that's going to happen then you should be buying gold and some ammo, canned food and hope for the best ( doesn't that sound like Y2K all over again?). Loads of it. Coincidentally Gold prices have been declining from a peak of over 1000 USD per troy ounce to now 750ish USD - funny that. Can you still lose all your equity in a government bank bail out? Sure. Doesn't mean that an investment in Citi is safe at the moment. But it doesn't mean that the system will fail. And i am tempted to ask myself how many banks will 1) need to be bailed out 2) have all their equity wiped out 3)be worth 5 times as much once they make it through this crisis? I bet the majority will still be around in 5 years from now. The system is obviously under a lot of pressure. But i continue to believe that it works and the best will survive ( my money is on GS) . And if it doesn't then we are all screwed anyway . With Lehman the case was clear - "too much leverage, equity wiped out by writedowns", no biz from scared customers. Now we've moved on to "could have write downs", "customers might stop doing biz with them" - it's mostly sentiment or why else would banks like MS or GS be down as much when they are still profitable? Unless you think their managements are lying, which given the increased scrutiny on the bank is somewhat unlikely to have remained unnoticed 18 months into the crisis.

If i could find an easy way to do so I'd buy a bank index now (i'm actively searching for an investment vehicle). Yes, some of them will fail - hence the diversified risk of an index- but the rest are trading at bargain prices at the moment. Of course i wont do that with all of my money but possibly 10%. I'm also starting to buy S&P500 now. We're below 800 and i'm moving 50% of my assets into the market. Waiting for the DAX to break the 4000 level to put some of my money to work there as well. When 35 year old journalists start to question Warren Buffet's strategy (again) on 6months performance I think it's a sign that fear is high enough that I should start being greedy.