Many investors want desperately to believe in the safety of a stock investment. Though the concept of a truly risk-free equity investment is naïve, all investors in 2012 should understand that bank stocks are risky. Investors who cannot stomach the idea of speculation should not invest in financial companies like JPMorgan Chase (JPM), Bank of America (BAC) and Citigroup (C).

Risk in Many Forms

You may think of risk as a byproduct of competition in a dynamic business environment. Banks are indeed risky in this sense. However, banks are also risky in that they are highly politicized. That means that they are, and will continue to be, subject to the scrutiny of courts, regulators, and legislators.

Judicial Risk

The Federal Housing Finance Agency sued lead underwriter JPMorgan Chase and 16 other banks regarding the loans underlying mortgage backed securities. According to the plaintiff, the underwriting was not done in accordance with the initial guidelines, and the banks were aware of existing defects and did not inform or protect the investors. Bank of America and Citigroup were among the lenders who were sued for misleading and false statements of material facts that caused Freddie Mac (FMCC.OB) and Fannie Mae (FNMA.OB) to lose billions in damages.

U.S. District judge Denise Cote overruled the defendant’s claim of insufficient evidence on the plaintiff’s part and therefore failed to dismiss the Federal Housing Finance Agency v. JPMorgan Chase case. Judge Cote’s decision was partly influenced by witnesses who had clearly described the practices of banks to grant loans to almost anyone alive regardless of their ability to pay.  To continue reading, click here.