This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

How to Play the Bank Stock Panic

"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 - Get Report), 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 - Get Report) 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.
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
AXP $76.06 0.00%
BAC $17.88 0.00%
C $58.46 0.00%
DFS $55.81 0.00%
FNFG $9.71 0.00%

Markets

Chart of I:DJI
DOW 17,689.86 -56.12 -0.32%
S&P 500 2,103.84 -4.79 -0.23%
NASDAQ 5,128.2810 -0.5040 -0.01%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs