By Richard Saintvilus

On May 10, banking giant JPMorgan Chase (JPM) reminded Wall Street just how dangerous the financial sector really is.

The bank dropped a bombshell on investors upon disclosing it had amassed a significant credit-derivative loss. Initially, the loss was said to be approximately $2 billion, but then the bank said the poor trade had actually reached levels of almost $6 billion this year with a chance of possibly reaching $7.5 billion, when all is said and done.

This reminds me of a quote from Warren Buffett, who once said, "Derivatives are financial weapons of mass destruction." He was right.

It's hard to believe it's been over four months since this announcement. However, when looking at the overall health of the financial sector and what has transpired for most of the year, with names including Bank of America (BAC), Citigroup (C) and Goldman Sachs (GS), the only theme that I can come up with is that so far it has been the year of "banking dangerously."

I say this because aside from the fact that many of the names have (one way or another) shot themselves in the foot, the European debt situation continues to drag on several banks indirectly impacted by the financial concerns abroad. Remarkably, it doesn't seem that investors care a whole lot. I have to confess, I don't blame them.

The initial news hit the markets pretty hard: $2 billion is still $2 billion, regardless of the company's size or assets. On the other hand, Wall Street realized something -- we've been down this road before. After all, it was not too long ago that each of the largest major banks needed a government bailout for their part in the credit crisis.

However, nothing says "I'm sorry" better than a solid quarter with better-than-expected​ earnings. This was exactly what JPMorgan delivered.

In its most recent quarter, the bank reported net income of $5 billion, or $1.21 earnings per share. It produced solid results in its retail banking as well as Treasury services. What's more, it generated lower-than-expected losses on loans. It showed considerable improvements in key areas such as mortgage loan origination, which was up 29% annually and 14% sequentially.

Also showing growth were mortgage loan applications, which surged 37% from the previous year and 12% from the first quarter. So clearly there are plenty of reasons to be optimistic about its chances of a recovery.

But JPMorgan was not alone. Though it was a somewhat underperforming quarter for investment banks, there were a few financiers that continue to show signs of modest improvements, including Bank of America, wich, arguably, outperformed expectations.

Not only did Bank of America report net income of $2.5 billion, or 19 cents per share, but its common capital ratio for tier one showed a 46 basis point improvement since the first quarter and exceeding 11%. What this means is that patient shareholders will be rewarded much sooner rather than later as these improvements can help spur stock buybacks as well as the company's ability to issue dividends.

Not to be outdone is the recent performance of Citigroup. Upon looking at its numbers more closely, it seems the bank continues to produce modest returns on equity, suggesting its current share price just might be significantly undervalued.

What's more, excluding items such as intangible assets from book value and goodwill, one can make the case that the stock should be trading in the low $40 range, representing a potential premium of 40% from current levels.

So as the stock trades today at $30 with a modest price-to-earnings ratio of 8, one can make the argument that there might not be a better bargain than Citi within all of the financials. Its fundamentals suggest there may yet be close to 50% to 70% upside over the course of the next 12 to 24 months.

I suppose this supports my theory of why it appears investors do not seem to care about the current brush of negativity towards financials and are actually looking more towards the future.

At this point I have to say there is plenty to like with JPMorgan, Citigroup, Bank of America and even more impressive has been the performance of Wells Fargo (WFC). It was not mentioned earlier because, well, it has always been the cleanest name in the group and has had very little for which to apologize. Its slogan is "together we'll go far." And it went very far by posting a record profit in the second quarter earning $4.4 billion, or 82 cents per share -- topping analysts' expectations while demonstrating an annual growth of 17%.

The good news is that since the early part of the year and at the height of the news by JPMorgan, cooler heads have prevailed and the world has not come to an end over a bad trade.

What's more, investors are reminded that each of the banks have performed extremely well not only from their recent earnings, but also on some recent stress tests to assess their long-term sustainability. These days, it seems that all of the banks are doing and saying the right things.

They are not completely void of risk but the difference is in assessing the risk in relation to the reward. As evident by the recent rise of bank shares, it seems investors don't mind living a little dangerously.

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