But for an investor, reputational damage like this offers a glaring opportunity. If your goal is to buy low and sell high, then you have to buck the crowd. “When ‘conditions’ are good, the forward-looking investor buys,” notes Fred Schwed in his timeless classic Where Are the Customers’ Yachts? “But when ‘conditions’ are good, stocks are high.”
Take Wells Fargo & Co (NYSE:WFC) and U.S. Bancorp (NYSE:USB) as examples. These are two of the best-run banks in the country. Everybody knows this. And as a result, they trade for a pretty penny. Wells Fargo & Co (NYSE:WFC)’s stock sells for 1.9 times tangible book value, while U.S. Bancorp (NYSE:USB)’s goes for a staggering 2.9 times tangible book.
Can these valuations head higher? Sure, but absent some type of irrational bubble, it’s hard to envision that either of them would double. There’s simply a limit to how much investors will pay for even the best banks.
Bank of America Corp (NYSE:BAC), on the other hand, presents a case in contrast. At its closing price on Friday, it changed hands for 1.08 times tangible book value. This was second only among the top banks to Citigroup Inc. (NYSE:C), which is priced slightly below tangible book value.
Now, to be fair, both of these banks come with significantly more risk attached to them than, say, Wells Fargo & Co (NYSE:WFC). For its part, Bank of America Corp (NYSE:BAC) is currently embroiled in litigation over whether a New York judge will approve an $8.5 billion settlement dating back to the financial crisis. If it’s not, then the nation’s second largest bank could potentially be on the hook for significantly more liability.
And Bank of America Corp (NYSE:BAC) also continues to be heavily weighed down by toxic mortgages. In 2011, the operational division that oversees these legacy “assets” recorded a pre-tax loss of $30.6 billion! And while that declined dramatically last year, it still added up to a pre-tax loss of $11.4 billion. Suffice it to say, this will wreak havoc on even the best bank’s bottom line.
Citigroup Inc. (NYSE:C), meanwhile, carries the effectively unquantifiable risk of being directly exposed to virtually every economy on the globe. On top of this, given that it relies to the least extent on domestic deposits, its funding base is far and away the most vulnerable to a liquidity crisis.