The Big Bank Bloodbath

In an eerie flashback to 2008, big banks have been turned into ground beef this week. Every major U.S. bank closed below book value on Wednesday:

Bank

Price-to-Book Value

1-Month Decline

Bank of America (NYSE: BAC  )

0.33

(32%)

Citigroup (NYSE: C  )

0.47

(31%)

Wells Fargo (NYSE: WFC  )

0.96

(15%)

JPMorgan Chase (NYSE: JPM  )

0.77

(11%)

Sources: Capital IQ (a division of Standard & Poor's) and Google Finance.

This is rare. The last time the banking sector saw pessimism this broad was early 2009, when many thought big banks -- particularly BofA and Citigroup -- were about to be nationalized.

When a bank trades below book value, the market could be saying a few things. Either it believes management is overstating the value of the bank's loans, that the bank won't be able to earn an adequate return on those loans, or that the bank will have to raise new capital, thus diluting existing shareholders.

The recent sell-off has probably been driven by all three. Investors have questioned how banks have been valuing their loans ever since accounting rules were changed in 2009. Most big U.S. banks also have significant exposure to Europe, whose banking system is being rocked by rumors and panic. To deal with these problems, U.S. banks may have to raise more capital in the near future -- an expensive proposition now that share prices have plunged.

But none of this is definite. The market is reacting to fear and speculation. Of the four major banks, Bank of America seems like the only one that might truly need to raise capital. And even there, no one knows for sure. On a conference call yesterday, BofA CEO Brian Moynihan stressed that the bank does not need to raise new capital. That was somewhat reassuring, but there's an unwritten rule in banking: The first sign that a bank needs to raise capital is when its CEO feels the need to convince investors otherwise.

No one knows how this might end. All big bank stocks may very well be a bargain at these prices, particularly the more high-quality names like Wells Fargo and JPMorgan. But with the wounds of 2008 still fresh in investors' minds, will bargain hunters step up to the plate? We'll see.

Fool contributor Morgan Housel owns Bank of America preferred stock. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of JPMorgan Chase. The Fool owns shares of and has created a ratio put spread position on Wells Fargo. The Fool owns shares of and has opened a short position on Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On August 11, 2011, at 5:40 PM, dbtheonly wrote:

    BAC at one third book value seems like one to take a swing at. I got in yesterday @ $6.75. No matter how badly they've screwed up the book value 33% seems safe.

  • Report this Comment On August 11, 2011, at 6:03 PM, bretco wrote:

    Isn't this more like gambling than investing ?

    We'll see ?

  • Report this Comment On August 11, 2011, at 6:13 PM, xetn wrote:

    BAC, for one, still has a huge overhang of properties in default. And not just in residential. I believe they will be struggling for the next several years to unwind from this mess. I am equally sure that there many others in the same boat. Few have addressed the commercial property issues.

  • Report this Comment On August 12, 2011, at 9:51 AM, dwot wrote:

    I thought BAC was on a death watch. The book value doesn't take into account all of the bad loans coming back at them because they can't prove they did due diligence in things like verifying income. There is something like $242 billion of questionable loans that some would call fraudulent loans that are coming back at them that they are trying to get out of for $8.5 billion, only that plan isn't being agreed to by the current holders of the liar loans.

  • Report this Comment On August 12, 2011, at 12:28 PM, TheMotleyTimbear wrote:

    @bretco Yes

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