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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.