By Dan Ferris in the S&A Digest:

The commercial real estate debacle is in full swing, and banks are feeling the pain...

Based on its huge and disastrous investments in commercial real estate, I recommended my Extreme Value subscribers sell short Zions Bancorporation earlier this year, when financial stocks were rallying strongly.

My second stab at the short sale is up 22% since July. Zions' stock hit $20 in the rally, and today sank to less than $13. I still fear that one of its eight western subsidiaries is going to be visited by the Night Stalkers, the FDIC workers who show up on Friday evenings to shut down insolvent banks.

The two other financial shorts I made earlier this year didn't work out the first time around. I was too early. But the underlying economic reality of the two companies is plain for all to see.

Smithtown Bancorp surged to more than $14 in April, but now trades for less than $8. Smithtown grew its loan book by more than 70% in 2008, a terrible year to make so many new loans. Unemployment and bad underwriting should continue to punish the stock.

MetLife, the biggest life insurer in the country, hit $41 in September, but has now backed off to the mid-$30s. MetLife owns about $46 billion of residential mortgage-backed securities. It says the fair value is $43.4 billion, merely 6% less than its cost. I bet it has another 20%-40% of value left to lose.

MetLife's commercial real estate loans don't have to be marked to market, but its residential mortgage-backed securities (RMBS) do. As foreclosures continue to rise and rise, RMBS portfolios, including MetLife's, will suffer steep, quick losses, similar to the way subprime mortgages caused collateralized debt obligations and other securities and derivatives to suffer huge losses.

Crux Note: The S&A Digest comes free with a subscription to Dan Ferris' Extreme Value. To get his full reports on Zions, Smithtown, and MetLife, as well as one of his top gold-oriented stocks - that's still a great buy despite the big rally in gold - click here...

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