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Bank Stocks: Risky by Nature

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Citigroup (NYSE: C  ) CEO Vikram Pandit offered his assurances this morning that a possible European banking crisis wouldn't clobber his bank. Citi's exposure to Europe is "extremely manageable," he said.


But where have we heard this before?

Maybe it was November 2007, when a Citigroup analyst said Morgan Stanley's (NYSE: MS  ) maximum loss exposure to the souring U.S. housing market was "very manageable."

Maybe it was December 2007, when AIG (NYSE: AIG  ) CEO Martin Sullivan assured investors that "U.S. residential housing exposures are manageable given AIG's size, financial strength, and diversified global businesses." The possibility of loss was "close to zero," he said.

Or in late 2007, when an analyst bullish on Bank of America (NYSE: BAC  ) opined, "The losses are not only manageable for the bank, but were long ago discounted by investors," echoing the words of the bank's CFO earlier that year.  

Perhaps it was July 2008, when then Treasury Secretary Hank Paulson said of the weakening banking sector: "This is a very manageable situation."

And so on.

All of these quotes were made by people with more information, better research, and deeper clarity into a bank's books than any individual investor can dream of. For investors, the biggest risk with bank stocks isn't that they'll underappreciate the complexity of the company's balance sheet. It's that the people running the show do, too.  

Fool contributor Morgan Housel owns preferred shares of Bank of America. Follow him on Twitter, @TMFHousel. The Motley Fool owns shares of Bank of America and Citigroup. Motley Fool newsletter services have recommended buying shares of AIG. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (3) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 19, 2012, at 7:12 PM, prginww wrote:

    Question: For the likes of JPM, C and BAC, are they permitted to use off-exchange instruments as a portion of their required reserves?

  • Report this Comment On June 19, 2012, at 10:00 PM, prginww wrote:

    Interesting quotes. I was going to say a lot, but will just leave you with one thought.

    Typically in an analysis of a bank you see a figure Price/Book. That is of course the stock price per book value of the bank's assets. Remember this: that book value was provided by the bank!

    It is in their best interest to inflate and lie about their book value...and you can't do a thing about it.

  • Report this Comment On June 21, 2012, at 8:21 AM, prginww wrote:

    Citi has been a big dissapointment for me but I am trying to keep to my investment philosophy that a short term investment is three years and am adding time to that considering the times we have gone through. I also hold BAC and other banks.

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