The banking system has been crumbling for over a year, but last month's collapse of American International Group (NYSE: AIG) -- which prompted an $85 billion government takeover -- suggests that insurance is not immune from the problems. As a reminder, AIG got snared in the $62 trillion Credit Default Swap (CDS) market whose growth was spurred by McCain advisor, Phil "Americans are Whiners" Gramm.

And as insurance crumbles, banks keep suffering. Bank of America (NYSE: BAC) and National City Corp. (NYSE: NCC) are both hurting. How much?

• Bank of America's earnings plunged 68% to $1.18 billion, or $0.15/share -- missing by 60% analysts' forecast of 62 cents. Bank of America will raise capital by selling $10 billion of common stock and slashing its dividend in half from 64 cents to 32 cents. One analyst cut the bank's 2009 earnings estimate to $2.50 per share from $3 per share -- this is well below the $3.12 per share from a Thomson Reuters analyst poll -- and lowered his price target by $2 to $26.

• National City Corp. and its National City Bank both suffered debt downgrades from Fitch. For instance, Fitch slashed the bank subsidiary's long and short-term Issuer Default Ratings (IDR) to A- from A. And it lowered the bank and holding company's Individual rating to C from B.

MAJOR PAPERS:

• The banking unit of National City Corporation (NYSE: NCC) recently entered into a "memorandum of understanding" with federal regulators, the Wall Street Journal reported. The banking unit has bad loans, and the agreement basically means that the bank is on probation, as the government pressures financial institutions.
• The Wall Street Journal also reported that Justice Department criminal prosecutors and its U.S. attorney's office in Brooklyn, NY are investigating American International Group Inc (NYSE: AIG) to see if they overstated the value of contracts tied to subprime mortgages.

• Lehman Brothers Holdings Inc (NYSE: LEH) is thinking of releasing its Q2 results a week earlier than planned, and announcing a capital raising plan at the same time, according to the New York Post, in order to reduce negative speculation about its future.
• The Economic Times reported that Indian auto companies Tata Motors Limited (NYSE: TTM) and Mahindra and Mahindra may be interested in acquiring Hummer from General Motors Corporation (NYSE: GM).

MAJOR PAPERS:

• According to the Wall Street Journal, troubled Ohio bank National City Corporation (NYSE: NCC) is considering a plan to sell itself to rival KeyCorp (NYSE: KEY), people familiar with the matter said.
• The Financial Times reported that Lehman Brothers Holdings Inc (NYSE: LEH) yesterday said it had sent information to the SEC about possible abusive short-selling in its shares in recent days. Lehman CFO Erin Callan said the SEC was examining whether hedge funds collaborated to drive down the bank's share price in the days following the near collapse of The Bear Stearns Companies (NYSE: BSC).
• Colombia's heavy oil area could hold 20B barrels of recoverable resources, the Financial Times reported, giving the country greater reserves than leading producers such as Mexico and Algeria, according to Colombia's government.

• The Silicon Alley Insider reported that Douglas Merrill, Google Inc's (NASDAQ: GOOG) CIO, is leaving the company to become the president of music company EMI.

Bank of America (NYSE: BAC) and Wachovia Corp. (NYSE: WB) reported plunging profits this morning. For regional banks National City Corp. (NYSE: NCC) and Fifth Third Bancorp. (NASDAQ: FITB), which also reported earnings this morning, the news wasn't quite that dire, though still far from ideal.

National City lost $333 million, or 53 cents a share, in the quarter ending December 31, compared with a profit of $842 million, or $1.36 per share, in the year ago quarter, when the company sold its First Franklin mortgage business, which resulted in a gain of $1 per share. For the year, National City made $314 million, or 51 cents. Analysts surveyed by Thomson Financial had expected a loss of 26 cents in the most recent quarter and $1.03 for the year. Shares were up about 9% to $15.60 by early Tuesday afternoon.

Fifth Third's fourth-quarter earnings fell 42 percent from a year ago, largely due to a charge for future litigation and for acquisition-related costs. Earnings for the three months ending December 31 were $38 million, or 7 cents per share, compared with $66 million, or 12 cents, for the same period in 2006. Excluding the charges, the bank would have earned 49 cents for the quarter, compared with adjusted profit of 64 cents in the same period a year ago. For the year, earnings were $1.1 billion, or $2.03 per share, compared with $1.2 billion, or $2.13 per share in 2006. Analysts surveyed by Thomson Financial had expected a profit of 27 cents in the quarter and $2.21 for the year. Shares were up about 4% to $23.50 by early Tuesday afternoon.

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