Bank of America“The largest loss in Bank of America‘s (BAC) history.” That’s the sound bite from the bank’s second quarter earnings report, which disclosed an $8.8 billion bottom-line loss.

If it seems odd that B of A would announce such a massive loss this far out from the financial crisis, perhaps an analogy will help. Imagine you’re at a party and tip back a few too many. You then proceed to kick over the punchbowl onto a white rug, use a standing lamp as a javelin, have your Olympic-caliber throw stopped short by a flat-screen TV, and make a pass at your best friend’s wife. And that’s just what you can remember.

Now imagine the next week, when the pounding headache has finally subsided to some extent. It’s time to make apologies and, more importantly, settle up with the host and other party goers to cover the damages (both emotional and physical) that you caused.

That’s more or less where Bank of America is right now.

Time to Settle Up

During the second quarter, Bank of America agreed on amends with a wide-ranging group of investors that includes BlackRock (BLK), MetLife (MET), and the Federal Reserve Bank of New York. The deal covers mortgages that had soured after being packaged into bonds. Assuming the agreement gets approved, Bank of America would pay the group $8.5 billion.

Additional mortgage-related settlements during the quarter helped plunge the bank’s Consumer Real Estate Services segment to a $14.5 billion loss.

Other Than That, Mrs. Lincoln…

For rather apparent reasons, B of A would prefer that investors not focus on the $8.8 billion loss, and instead consider what the bottom line would have looked like if all that bad stuff weren’t there.

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As CEO Brian Moynihan put it, “Obviously, the solid performance in our underlying business continues to be clouded by the costs we are absorbing from our legacy mortgage issues.”

To be fair, some aspects of the quarterly report could legitimately be considered highlights:

Deposits at the bank rose by $8.2 billion, up 2.4% from the second quarter of last year.
Provision for losses in the Global Card Services business fell drastically, from $3.8 billion last year to $481 million.
The bottom lines for the wealth management, commercial banking, and investment banking businesses were also much improved from last year, climbing 54%, 69%, and 74%, respectively.

Investors = Skeptical

If you want an easy gauge for how investors feel about Bank of America’s stock, look no further than its valuation. Currently, B of A trades at less than half of its book value; it’s historically fetched 1.5 to two times book value. Investors seem comparatively sanguine about competitors like JPMorgan Chase (JPM), Wells Fargo (WFC), and (gasp!) Citigroup (C), which are trading at respective book value multiples of 0.9, 1.2, and 0.7.

Bank of America’s work certainly isn’t done, but at least it’s getting done. At this point, I think investor pessimism may have overwhelmed reality. B of A’s rock-bottom valuation could make it a good pick for risk-tolerant investors.

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