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How to Play the Bank Stock Panic

Stocks in this article: BAC C JPM DFS AXP MTB FNFG PBCT DCOM BOH

"Look Dave, I can see you're really upset about this. I honestly think you ought to sit down calmly, take a stress pill, and think things over."

-- Hal 9000 Computer, 2001: A Space Odyssey.

NEW YORK ( TheStreet) -- If you're thinking of dumping large bank stocks Tuesday in reaction to last week's FHFA lawsuit bombshell, you might want to reconsider.

Instead, take a deep breath and mull some other bank stock opportunities, because the automated traders and other market pros will clean your clock if you try to trade based on the lawsuit headlines.

It's perfectly understandable for bank stock investors to panic during the long holiday weekend.

After all, it was a week of maximum pain for Bank of America (BAC), with the Federal Deposit Insurance Corp., a subsidiary of U.S. Bancorp (USB) and Goldman Sachs (GS) joining the throng of parties objecting to BofA's previous $8.5 billion settlement of Countrywide mortgage putback claims.

And of course, there was the Federal Housing Finance Agency's (FHFA) "Friday Night Massacre" of lawsuits against 17 large banks.

(In case any reminder is necessary, former Bank of America CEO Ken Lewis decided to buy Countrywide and its risk in 2008.)

Shares of Bank of America closed at $7.25 Friday, down 46% year-to-date. The shares traded for just 57% of their tangible book value as of June 30, according to SNL Financial, which is understandable, because neither the bank nor its investors can gauge the ultimate risk from all of the mortgage putback claims.

Of course, the company's tangible book value could decline over coming quarters with additional net losses, but the market has baked a significant cushion into Bank of America's stock price.

That plunge was recorded before the FHFA's demand that Bank of America buy back $57.5 billion in private-label mortgage-backed securities, including those sold to Fannie Mae (FNMA) and Freddie Mac (FMCC) by Merrill Lynch and Countrywide.

For investors who think that the FHFA lawsuits are just "leverage" for the regulators in negotiating a settlement with the nation's largest bank, another price drop on Tuesday could be just what the doctor ordered.

But it's a pretty risky play to assume that such a selloff would be the bottom for bank stocks. There are just too many uncertainties right now.

JPMorgan (JPM) was trading for 1.1 times tangible book, according to SNL, but that was before the company faced a whopping demand from the FHFA to repurchase $33 billion in mortgage-backed securities, which among the 17 large banks sued by the regulator, is second only to the demand made of Bank of America.

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