Buying banks stocks could pay off big, or leave you flat

— -- A: The temptation to scoop up shares of beaten-up bank stocks is apparently irresistible.

My mailbox is full of messages from readers asking the same question about Bank of America and the other big banks. Given bank stocks' breathtaking decline, I guess it's only natural to try to pick a bottom. Bank of America shares, for instance, are down 90% from their peak, making it look cheap.

I'll start this conversation this way: We're in uncharted territory. The government has taken unprecedented steps to save the large banks, including Bank of America. If you want to gamble, and when I say gamble I mean risk losing everything, there's nothing to stop you.

Just understand the huge risk you're taking. When you buy a company's stock, you're on the lowest rung of the capital buffet. If the company runs into serious trouble, common stockholders are last in line for any claim to assets.

All the employees, vendors and bond holders will be paid before common stock holders see a dime. So, understand that before you decide to invest in Bank of America.

However — and I want to underscore this — I'm not saying Bank of America is in trouble. Last year, the company posted a solid profit of $4 billion. And the bank says it's on solid ground. CEO Ken Lewis said, "We see no reason why a company that is profitable with strong levels of capital and liquidity and that continues to lend actively should be considered for nationalization." Bank of America says it does not need more taxpayer money to survive. You can read more about this here.

But just because a bank says that doesn't mean you should invest in it. The way I see it, if you buy Bank of America stock, you're playing a financial game of chicken. It's a bet that the housing market and mortgage market will improve before the financial system weakens further. You're betting that Bank of America's loan portfolio will heal before the government feels the need to step in. Could that happen? Certainly.