Finance Stocks Dominate The Market In 2012 Despite Continuous Fines, Scandals And Fraud (CHART)

Investors Just Love Banks, For Some Reason


Quick, what was the best-performing stock sector in the U.S. in 2012? Here's a hint: It was the sector that could not stop getting into trouble and paying billions of dollars in fines on a near-weekly basis.

Yes, financial stocks in the Standard & Poor's 500-stock index had a better 2012 than any other group in the stock market, jumping more than 26 percent for the year through December 26, according to FactSet data. That increase far outpaced the broader S&P 500, which gained a still-respectable 13 percent this year, according to FactSet.

The jump happened despite the fact that banks spent 2012 doing violent injury to themselves and each other, like a year-long Three Stooges revival. At least once per month, and often more frequently than that, there was an announcement of a major bank settlement or screw-up.

And all along, their stock prices kept rising.

Why, you might be asking? For one thing, bank stocks are, generally speaking, super-cheap. The biggest banks trade at or below their "book value," meaning the amount of cash you'd get if you just put them out of their misery and sold off their parts. They're cheap because their bigger problems -- including still more legal headaches and fines to come -- have not really been solved.

But this cheapness also means their stocks can generate some serious returns without much effort if the financial winds start to blow their way. That happened this summer as worries about the collapse of the European Union, which would have hit banks hard, faded.

Though banks' stock prices were higher this year, they could possibly be higher still -- if the banks were smaller and less prone to committing disastrous mistakes and/or crimes.

Still, the strength of bank stocks has been remarkable, especially when contrasted with the absolute horror show that has been their public relations this year. Why, it is almost as if investors think these banks are essentially getting away with incompetence and fraud at a massive scale, with only the occasional stinging wrist slap to fear!

Come with us now on a trip down memory lane, to soak in the absolute disastrousness of the banks this year and to marvel at just how little investors cared.

February 9: Mortgage Foreclosure Settlement: Several big banks agree to pay $25 billion to settle charges of sloppy and/or downright fraudulent mortgage-foreclosure practices. Already on this day, financial stocks were up 13 percent on the year, matching the full-year performance of the S&P 500.

March 13: Stress Test Fails: Citigroup and three other major banks flunk Federal Reserve "stress tests," meaning they didn't plan to have enough capital to survive a major downturn. Bank stocks were up 18 percent on the year.

March 14: Greg Smith Eruption: Former Goldman Sachs banker Greg Smith takes to The New York Times to explain that he left Goldman because it had become a soulless place that existed only to rip off clients. Bank stocks still up 18 percent.

April 5: London Whale Surfaces: Bloomberg writes that a trader working for JPMorgan Chase's chief investment office in London has accumulated such a massive position in credit derivatives that he is known as the "London Whale." JPMorgan dismisses the story. Bank stocks up 19 percent on the year.

April 13: The Tempest: JPMorgan Chase CEO Jamie Dimon dimisses the London Whale story as a "tempest in a teapot." Bank stocks were up 16 percent at this point amid worries about Europe and maybe some very short-lived anxiety about the London Whale.

April 17: Citigroup Rejection: Shareholders deliver Citigroup a stunning reversal, rejecting its pay plan for CEO Vikram Pandit. Bank stocks are back up 19 percent on the year.

May 10: London Whale Resurfaces: JPMorgan admits its London Whale's trades were actually "egregious" and warns it could lose billions. Bank stocks now up a mere 15 percent on the year.

May 18: Facebook Flop: Facebook's IPO, overpriced by Morgan Stanley and other banks and overhyped by the media, flops miserably. Bank stocks up a mere 6 percent on the year, oh noes.

June 15: Gupta Guilty: A jury finds former Goldman Sachs board member Rajat Gupta guilty of insider-trading charges. Bank stocks now up 10 percent on the year.

June 27: Barclays Settlement: British bank Barclays Capital agrees to pay $450 million to settle charges of manipulating the key interest rate Libor. The bank was done in by moronic trader emails. Within days of the settlement, both the chairman and CEO of Barclays step down. Bank stocks still up about 10 percent.

July 3: JPMorgan's Power Problem: The Financial Times reports that JPMorgan, already dealing with its London Whale problem, is also under investigation by the Federal Energy Regulatory Commission on charges of manipulating the market for electricity in California and other states. Bank stocks back up nearly 14 percent on the year.

July 16: HSBC's Money-Laundering Problem: A Senate subcommittee report accuses British bank HSBC of years-long failure to monitor money laundering in its branches by Mexican drug lords and other ne'er-do-wells. HSBC executives apologize to the Senate and promise to do better. Bank stocks up 13 percent.

August 6: Standard Chartered's Money-Laundering Problem: New York's bank regulator accuses British bank Standard Chartered of ignoring money being laundered by Iranians in its U.S. branches. Bank stocks up 14 percent.

Sep. 12: Bank Of America Layoffs: BofA announces 30,000 job cuts. Bank stocks up 21 percent.

Oct 1: Bear Stearns Sued From Beyond The Grave: New York's attorney general brought civil charges against Bear Stearns, now owned by JPMorgan Chase, accusing it of lying to investors about the quality of mortgages it sold before the crisis. Once again, dumb emails were involved. Bank stocks up 20 percent.

Oct 15: Greg Smith Eruption II: Details from Greg Smith's book, "Why I Left Goldman Sachs," start circulating around Wall Street. Most focus on details like a naked Lloyd Blankfein and mild cruelty to interns. Bank stocks up 23 percent.

Oct. 16: Pandit's Defenestration: Just a day after hosting an earnings conference call, CEO Vikram Pandit is unceremoniously shown the window. Bank stocks up 24 percent.

Nov. 6: Worst Trade Of The Year: After spending heavily on the presidential candidacy of Mitt Romney, Wall Street watches in horror as Romney is drubbed by the man they backed in 2008 but abandoned in 2012, President Obama. Meanwhile, bete noir Elizabeth Warren is elected to the Senate. Bank stocks up 24 percent.

Nov. 16: Swiss-American Settlement: JPMorgan and Credit Suisse together agreed to pay $400 million to settle charges that they misled investors about the quality of mortgage bonds they sold before the crisis. Bank stocks up a mere 17 percent, following a minor post-election market selloff.

Dec. 5: Deutsche Bank Big Losses: The Financial Times reports that former employees are accusing Deutsche Bank of hiding $12 billion in losses to make itself look better during the financial crisis. Separately, Citigroup announces 11,000 job cuts. Bank stocks up 21 percent.

Dec. 10: HSBC's Big Wrist Slap: The British bank agrees to pay $1.9 billion to settle charges that it ignored money laundering, but it will not be charged with any crime. Bank stocks up 22 percent.

Dec. 18: UBS's Bigger Wrist Slap: Swiss bank UBS agrees to pay $1.5 billion to settle charges that it rampantly manipulated Libor for years. A couple of its former traders are arrested, and the bank's Japan unit pleads guilty to criminal charges, a rarity. Bank stocks up 27 percent.

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