June 11 (Bloomberg) -- Investors are oblivious. Didn’t bank stocks drop as much as 90 percent during the subprime mortgage fiasco?

Still, people bought about $53 billion in new bank shares recently. Those purchases helped make Wall Street’s big news this week: 10 banking companies paid back $68 billion in bailout money to the U.S. government.

Three of the biggest U.S. banks returning funds had increased their ability to repay by selling new common shares in the past three months. Morgan Stanley, Goldman Sachs Group Inc. and JPMorgan Chase & Co. raised a total of $17 billion.

Two banks not yet confident enough to pay back the government yet have been treated even more kindly by willing, or should I say gullible, investors.

Bank of America Corp. raised $13.5 billion by selling shares. Wells Fargo Co. last month sold $8.6 billion in stock, one day after estimating it could raise just $6 billion.

Investors’ eagerness to throw money at ailing financial companies is eerily reminiscent of the capital blunders they made last year. As the industry’s mortgage losses were piling up, banks and securities firms managed to lure investments from sovereign investment funds and to offer shares of both common and preferred stock that were oversubscribed.

Some Timing

In April 2008, Wachovia Corp., which later had to be taken over by Wells Fargo, managed to sell $8 billion in common and preferred stock. Wells Fargo said this week that it was concentrating on making the Wachovia acquisition work rather than repaying its government funding.

In May 2008, American International Group Inc., the insurance company that has since tapped the government for $182.5 billion in rescue funds, raised about $13 billion in stock and units convertible into shares.

Investors may be placing their new bank bets on the basis of first-quarter earnings reports. The reports were good though the earnings may not have been.

The Financial Accounting Standards Board this year caved in to the demands of banks and let them set the value of poor assets on their books rather than assessing market values.

Only the bean-counters at Citigroup Inc. may know if the bank’s reported profit of $1.6 billion for the quarter was anything close to reality.

Ominous Projections

What’s more, according to the worst-case scenario the government put out after its recent stress tests of the industry’s finances, 19 big banks may lose another $600 billion this year and next.

Financial companies in North and South America have already written off $976 billion in bad loans and raised $727 billion in new capital.

Investors are betting that the worst of the credit crunch caused by the mortgage debacle is over and that the recession that started in late 2007 is close to an end.

These folks also are doing what the government wants, putting private capital into banks to replace bailout money.

This whole process may be going too fast. Banks want to pay back money they received under the Troubled Asset Relief Program to stop government officials from interfering in their business.

Yet, the same day Treasury Secretary Timothy Geithner announced the TARP paybacks, he said the government plans to adopt guidelines for executive pay as part of new financial regulations. The interference that bugs bankers the most is that which curbs their personal incomes.

Better Strategies

Banks might be smarter to keep the government money until they can rid their balance sheets of bad loans and report truly stronger profits.

Investors might be smarter to wait too. But the speculative juices remain strong, and not just for beaten-up bank shares. Ford Motor Co. last month was able to raise $1.6 billion from a public offering of common shares though the demand for news cars and trucks has plummeted. Ford is relatively stronger than bankrupt rivals but it’s still mired in red ink.

No doubt, some investors are already salivating over an offering of General Motors Corp. shares once that automaker gets through bankruptcy.

(David Pauly is a columnist for Bloomberg. The opinions expressed are his own.)

To contact the writer of this column: David Pauly in Normandy Beach, New Jersey dpauly@bloomberg.net

Last Updated: June 11, 2009 00:01 EDT