Banks In America Rally (NYSE: BAC)

NEW YORK - The U.S. Banks rallied sharply on Thursday but remain at historically low levels. Bank of America the nations largest lender rallied over 5 percent as investors soothed worries over how much money the bank will have to pay due to the foreclosure scandal. The foreclosure scandal which has rocked the nation over the last month involves banking employees foreclosing on homes without properly reviewing the necessary documents. Goldman Sachs estimates that the top six banks in the U.S. may face $26 billion in potential losses.

Not only is this amount tiny for the institutions in question which wrote down billions during the recession but its likely they already have the necessary reserves. Bank of America has $35 billion of non performing loans but it has $43 billion of reserves. It is also true that that its not a straight subtraction since the loans that are non performing can be sold meaning BAC has plenty of reserves for any future losses. These banks will likely earn over $60 billion in the next year meaning any potential losses are covered two times over.

This number by Goldman is also a guess guess and is essentially drawn from thin air. Goldman argues the banks will face losses by buying back their loans. But this is unlikely since they sold the loans at a certain price, so they would only face losses if they bought the loans back at a premium price which would not make sense. If the bank is forced to buy back these loans, they also have the ability to make money if these loans go up in value.

U.S. Banks remain extremely cheap. Bank of America is valued only four times as much as ICICI bank of India, despite having supreme credit quality and being over twenty times the size. Investors are going under the philosophy ignorance is bliss as they buy risky assets in foreign countries that they don't understand.

Bank of America could see a large increase in price over the next week as investors who fled the companies shares roll back in.