If you had to guess how much the financial crisis has cost Bank of America (NYSE:BAC) over the last few years, where would you begin?
According to my analysis, which includes both forgone income and actual losses, the answer is a whopping $124 billion.
Here's how I arrived at this figure: Had Bank of America generated a return on assets of only 1% from 2007 through the third quarter of this year -- which is entirely reasonable given that its average return on assets from 2000 through 2006 was 1.33% -- then it would have earned a total of $166 billion in net income.
Instead, it earned a mere $42 billion.
Suffice it to say that the magnitude of these losses and forgone earnings go a long way toward explaining why Bank of America's stock price crashed during the crisis and has remained depressed -- as of today, its shares are still 66% below their pre-crisis high.
This analysis also helps to flush out a characteristic unique to the bank industry -- namely, that losses from the irregular, but not infrequent, crises that besiege the industry can offset many years of prior gains.
This is a point that Nassim Taleb, author of The Black Swan: The Impact of the Highly Improbable, has made on multiple occasions. In a 2009 column published by the Financial Times, for instance, he claimed that "banks have never made money in the history of banking, losing the equivalent of all their past profits periodically -- while bankers strike it rich."
Although I have not independently verified Taleb's claim, I'm confident it isn't a wild exaggeration. My confidence stems from the fact that we have experienced three separate financial crises over the last 30 years alone, each of which led to the failure or forced sale of many thousands of insolvent lenders.
According to data collected by the FDIC, 2,036 banks and thrifts failed during the savings and loan crisis of the 1980s, 925 went under as a result of a commercial real estate crisis in the 1990s, and more than 500 have been seized by regulators since the onset of the financial crisis of 2008-09.
My point is that this is a treacherous industry for individual investors to navigate. Does it mean you should avoid it altogether? Not necessarily. But it does mean you should be unusually mindful when investing in a specific bank.
John Maxfield has no position in any stocks mentioned. The Motley Fool recommends Bank of America. The Motley Fool owns shares of 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.