But I'd put them in the category of the tobacco lawsuits -- a huge but essentially "one-off" issue that will pass in time. Big legal claims against tobacco companies tanked their stocks in the 1990s but faded as a concern as suits were resolved and underlying demand for the product did not go away. I think it will be the same with the banks.

"This creates an earnings head wind, but it is not something that will lead to solvency issues," says Nancy Bush, a former Wall Street bank sector analyst who is now a contributing editor at SNL Financial. While she thinks it may take three years to resolve the legal issues, the effect on the stock could wear off much sooner. "We believe they have enough capital and earnings power to handle it," says Lentell.

Bank of America just took a $21 billion charge largely related to mortgage issues, which may well have been the bank's "big bath." Morningstar analysts expect an additional $7 billion in charges from here. "There won't be the same magnitude of surprise, but it will be an issue that stays with us for several years," predicts Bush.

Note that Citigroup and JPMorgan have much less exposure to this risk -- so any drag on their stocks from the housing mess could ease sooner.

The double-dip dilemma

The more serious worry, of course, is that the economy slips into a double-dip recession -- bad news for Bank of America and its banking brethren sectorwide. Banks would all face higher losses on mortgages, credit cards and commercial loans. Plus, lending would dry up even more.

But a lot of experts still think we may avoid another downturn. Yoshikami puts the odds of a recession at 30% if Europe is able to stabilize its financial crisis. He cites recent relatively decent U.S. jobs numbers and solid corporate earnings. Plus, falling oil prices, low interest rates and a weak dollar all act as stimuli.

ISI Group's Ed Hyman, one of Wall Street's most well-regarded economists, also rules out a recession in the U.S. He expects 2.5% growth in the U.S. in the second half of this year.

If the worst happens, though, these three big banks are all in a much better position, financially, to weather these storms than they were during the last crisis. Bank of America has been making particularly good progress.

  • Total reserves, which are set-asides against potential losses, were at $37.3 billion in the second quarter, compared with $29 billion in the first quarter of 2009, according to SNL.
  • Tangible common equity, a common measure of financial strength, stood at $125.4 billion at the end of the second quarter of 2011, compared with $65.7 billion at the end of 2009, says SNL.
  • And it has $400 billion in cash. "Just think about the sheer amount of capital, the sheer amount of liquidity we have, over $400 billion," Moynihan told investors earlier this month. "Our capital levels are among the highest they've ever been. They're sufficient to run the company, even after we took $20 billion (in charges) in the second quarter."

Bank of America's key strength is that it's a dominant player in retail banking, with a strong presence in high-growth states like Texas. Through its vast nationwide network of 5,800 branches, it has $1 trillion in deposits. "The strength of Bank of America is its core funding," says Isaac. "Its liquidity is strong. I don't believe there is any possibility at all that Bank of America is so overwhelmed by its troubles that it fails."

Next, despite all the problems its acquisition created, Merrill Lynch is a profit machine for B of A, contributing to $35 billion a year in earnings before taxes and provisions for bad loans. "That gives them substantial ability absorb future losses," says Lentell. That's one reason he doubts the bank will have to raise more capital, a current fear among investors.

All the Big Three, in fact, seem better prepared for a crisis than the last time around. Goldman Sachs analyst Richard Ramsden estimates that 35% of the assets at Bank of America, Citigroup and JPMorgan Chase are liquid, meaning they are in cash or readily convertible to cash, compared with 27% in late 2007. And core deposits make up 54% of funding, compared with 43% in 2008. "The current environment is not 2008 all over again," Ramsden wrote in a recent note.

Despite these kinds of assurances, Bank of America and Citigroup trade now at about half their tangible book values of $12.65 and $48.75, respectively. And JPMorgan, at $34 a share, is closing in on its tangible book value of $31.52.

Appetite for risk

So does all this mean you should rush out and buy B of A, or any of the big banks, on this dip? Not quite.

Peter Kolvaski, who manages the four-star rated Alpine Dynamic Financial Services Fund (ADFSX), is holding off on buying. He thinks they could fall more, as investors anticipate a double dip that may yet happen. Yet he sounds bullish.

"There is potential for very substantial percentage increases in these stocks as they bounce off the bottom here, but I don't know when that will be -- this month or two months down the road. Between now and the end of the year, there could be more volatility," he says. "But fundamentally the U.S. banks are stronger today than they were two years ago, yet the valuations are not that much higher today."

Likewise, Yoshikami is not adding to his Citigroup position now, and he isn't ready to buy the two other big U.S. banks. He'd rather wait for more clarity on Europe."I would rather lose a little upside to get more certainty. It's a matter of how much risk you want to take."

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This suggests a strategy to me. The big banks are safe to buy, and in fact look cheap because their financials have solidified. But risks remain, and as long as bank stocks are falling faster than the market, there's no rush. You can wait and still beat the crowd.

At the time of publication, Michael Brush did not own or control shares of any company or fund mentioned in this column. He has suggested that readers of his investment newsletter consider buying Bank of America and Citigroup.

Michael Brush is the editor of Brush Up on Stocks, an investment newsletter. Click here to find Brush's most recent articles and blog posts.