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Not a week passes that someone doesn’t take his or her best shot at the nation’s banks. Granted, they are fair game, with so many disappearing in the last two years in the face of Wall Street’s meltdown.

It came as no surprise then on Sept. 29 when FDIC head Sheila Bair admitted it vastly underestimated the extent of the banking industry’s problems. Its insurance fund, created in the 1930s to protect customer deposits and restore confidence, started in 2009 with $34 billion. In May, the Federal Deposit Insurance Corp. projected the need for $70 billion more to be in position to seize assets of failed banks, and it recently increased that number by 40%.

While more than 125 banks have failed since 2008, the situation pales compared with the financial institution failures during the savings and loan crisis between 1987 and 1991 when 1,900 institutions went under.

Christopher Whalen, senior vice president and marketing director of Institutional Risk Analytics, believes 1,000 banks are at risk, with 2,200 under extreme financial duress. “The cost to that is going to be big. The FDIC is talking about a $100 billion deficit,” he warns. “I can tell you, it can be three or four times that.” Whalen adds that he doesn’t believe the industry will hit “peak loss rates” until the first or second quarter of 2010.

“Bank balance sheets are contracting,” Eric Fry wrotes in his September newsletter Rude Awakening. “In part, this contraction has resulted from events like foreclosures and write-offs, but this contraction has also resulted from the simple fact that banks are not lending.”

The Federal Reserve System concurs. In its recent Senior Loan Officer Opinion Survey, it reported that banks tightened standards on all types of loans in the last quarter and expect to maintain strict criteria on lending until at least the second half of 2010.

While Whalen expects the banking system to survive, he doesn’t believe they will return to the glory days of recent years when they were the darlings of Wall Street. “We are talking about a sea change here,” Whalen says, grimly.

“We are going back to the 1950s. Banks are going to become very boring again,” he explains. He adds that they aren’t going to be making a 25% return on equity anymore. The good ones will be in the teens, and the industry average will be in the high single digits.

However, Tim Ghriskey, chief investment officer at Solaris Asset Management, is not on the same page as Whalen.

Ghriskey expects that the larger banks will have to readjust normalized returns on assets and returns on equity. He sees the latter coming in closer to the 12% level, which he says is more in line with their historical experience, instead of the high teens enabled by the use of excess leverage for the couple of years before Wall Street’s meltdown.

Granted, he says, there are still some issues out there, especially for the midsize and smaller banks with a significant number of mortgage resets coming throughout this year and into 2010.

Then, too, he acknowledges, commercial real estate is still a problem, in spite of how well-anticipated the problems are, especially for the banks that have exposure with construction loans.

Ghriskey is less concerned about another well-anticipated problem: credit cards. “If credit cards were going to blow up, they would have already done so,” he says.

“Banks are going to be squeezed in certain areas as a result of regulation,” he says. Ghriskey adds that their fees on a lot of basic consumer business are going to be reduced and that there will be more pressure to bring down high interest rates on credit cards.

“There are certain lines of businesses where they are not going to make the money that they made in the past, so their ROEs are going to come down, but they are still going to make good money,” he says. “The issue with the credit cards is the health of the consumer. We don’t think that is a huge issue here.”

Nevertheless, Ghriskey says that banks are making a lot of money in this environment. They can basically borrow money from the Fed at zero interest, or close to it, and lend it out at much higher rates.

“We have increased exposure to banks throughout this year and are overweight the group now,” he says.

Ghriskey likes Morgan Stanley (NYSE: MS). “It’s in that category of investment banks where there are multiple ways in which these companies make money,” he says. Ghriskey adds that he likes how Morgan Stanley has positioned itself for the future relative to its peers and that he doesn’t mind that it is a bit more conservative.

Ghriskey has a position in Bank of America Corp. (NYSE: BAC), too, he says. “It is an investment that has a bit of hair on it, but we believe it is a situation that is going to improve. The valuation is intriguing at this level. We see a lot of positive change happening.”

Whalen has some positive advice for the industry going forward. “It is crucial for the industry, Washington, and the buy-side community to start talking about how we fix securitization,” he says. “You must have national standards for defaults, delinquencies, and probably need to have the FDIC and government-sponsored enterprises come together and create a template for securitization that everybody can accept. We might have to require that they all become [Securities and Exchange Commission] registered so there is no issue on disclosure. The beautiful thing about SEC registration is it is all available to retail.”

“If you had to register all these securities with the SEC,” Whalen says, “the games would be over and every month you’d get a servicer report and they would have to file an 8-K report and give the Street the data for free.”