Even though financial stocks rose along with the market Tuesday, the stock-market declines of the past few weeks have been especially harsh on banking stocks.
The KBW bank index climbed 7 percent Tuesday to $39.58, following an 11 percent decline Monday. A month ago, it traded around $48.
Investors remain worried about regulatory probes, investor lawsuits and additional problems that could emerge as big banks continue to work through toxic mortgages and other remnants of the financial crisis.
When will financials recover? Analysts say investors first need to get over the initial shock of the Standard & Poor’s downgrade of U.S. debt Friday, a development that rattled the broader market as well. Bank executives say the economy and housing prices must improve before their mortgage businesses can fully recover.
Investors need more certainty about when banks’ mortgage problems might be over.
“People don’t know what’s going on,” said Chris Whalen, co-founder and managing director at Institutional Risk Analytics, a bank-rating agency and consulting firm.
Bank of America has been especially hard hit, in large part because of its $4 billion purchase of Countrywide Financial, a lender known for exotic mortgages, in 2008. Countrywide’s former executives later settled regulators’ charges of illegal insider trading and fraud. Bank of America has agreed to pay $12.7 billion to settle claims from investors who say they were misled into buying mortgage securities that were poor quality.
Bank of America, the country’s largest bank by assets, is perhaps the most vulnerable to the two biggest lingering mortgage problems: investor claims and investigations by regulators. Claims from investors who say they were misled into buying bad mortgage-backed securities continue. Regulators continue to investigate paperwork problems on foreclosures.
Bank spokesman Jerry Dubrowski said Bank of America is “aggressively working on getting those challenges behind us as quickly as we can. They are losses related to legacy issues and the housing crisis.”
The bank is the largest U.S. mortgage servicer.
