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How to Profit From a $30 Billion Blunder

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By David Sterman

NEW YORK ( StreetAuthority) -- Reckless actions will get you punished.

That's what JPMorgan Chase's (JPM) CEO, Jamie Dimon, was surely thinking after he learned that a key employee at his firm had lost roughly $2 billion on an ill-conceived trading strategy.

JPMorgan Chase CEO Jamie Dimon

In fact, his firm's losses from this debacle could easily reach twice or three times as much as that initial amount, causing Dimon more sleepless nights ahead.

But was this misstep really worth $30 billion? That's the stunning amount of market value that this venerable bank has lost in recent weeks since the trading scandal was announced. Shares have been tarred and feathered so badly that they now trade below tangible book value.

Twin Pressures

That steep drop in shareholder value also likely stems from a pair of other factors.

First, the trading losses make it more likely that the entire banking sector will be put in handcuffs when it comes to risky trading for the firms' own accounts.

The Volcker Rule, banking legislation that was expected to be passed by 2014 in a watered-down version, now looks set to have some real teeth in it.

Still, the hit to profits will not be as great as some would have you believe.

These folks believe that any regulation is inherently evil, and they should understand that a more tightly regulated banking sector reduces risk and expands the valuation of key banking franchises.

The second factor: Greece's potential loan default has spooked investors and analysts, as potential exposure to that country and neighboring weaklings is being assessed. Kicking off the trading week, analysts at JMP Securities, for example, slashed ratings on all of the major banks it follows.

Yet with the large-cap banks now down 21% in the second quarter (compared with an 8% drop in the S&P 500), that downgrade looks to me to be an after-the-fact reaction. Indeed, many bank stocks were quite inexpensive before the downdraft began. And in some instances, they are now stunningly cheap.

Take Citigroup (C) as an example. Tangible book value has been steadily rising (and will likely continue to do so), and shares had been slowly rising, closing a gap that had grown too large.
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