So understand that you, as an investor, will have a hard time determining how many bad loans are on the books of a bank before earnings are released. That suggests that wise investors wait for earnings before investing in any bank in which they have an interest. In the earnings report, there will be the actual write-offs as well as the reserve for bad loans.

This reserve for bad loans is just a good guess. It's mandated by the regulators that banks have loan loss reserves, but it's more of an art than a science. Past history is a good guide for what percentage of reserves should be taken for what types of loans, but that's history. Sometimes history repeats, sometimes it doesn't. And sometimes the regulators are much stricter on the loan loss reserves in times of crisis (like now) and will require more than adequate reserves to cover any possible problems. While investors can see what the loan loss reserve is for potential loan losses in the future, they can't be sure that's the right number. It may be too low. It may be too high.

Investing in banks is a little different from other stocks. That's because of the regulators. They have the keys to the vault of any bank and can take those away any time the bank doesn't play the way the regulators want. The regulators have the responsibility of keeping the banking industry safe and sound as well as keeping the belief in our banking system extremely positive. If a bank were to fail today, it would be because the regulators weren't given the whole truth when they did their audit. Banks aren't going to surprise investors and depositors and simply close the doors in today's environment.

But they can go out of business. Regulators will start sending feelers out to healthy banks about their weaker brethren long before any problems hit the headlines. Weak banks are put on notice: either shape up or be sold. Regulators don't wait until the last minute to send the note either. They're not going to let a bank close and damage the faith depositors and investors have in the banking system.

So know that any bank investment you make has strong regulatory audits. Also, if the bank pays a dividend, that dividend can be paid even if the bank isn't earning enough to cover it. That's because dividends require cash, and banks always have plenty of cash, either from depositors or borrowings from the Federal Home Loan Bank. However, no bank can keep paying the dividend from borrowings or depositors. It has to be a short term short fall for this to be a viable strategy. Still, there is some comfort in knowing the dividend can be paid even if earnings aren't sufficient. That can't last long, but it makes the banking industry a little different from most other dividend-paying stocks.

The problems may still be deeper for the banks. Pre-announcement of losses have been well shy of reality. Look for more such surprises. But don't ignore this industry altogether. There are plenty of banks that don't have any sub-prime loans on the books. And some that do, have already written them off. Just wait for any earnings announcement before you decide to buy any of them. That way you'll get a much better picture of what it is you're buying.