Are the banks cheap?

Since the beginning of the credit crisis last summer, bank stocks have been absolutely murdered -- the KBW Bank index, which tracks 24 of the most prominent U.S. commercial banks (including Bank of America (NYSE: BAC), Citigroup (NYSE: C), and JPMorgan Chase (NYSE: JPM)) is down more than 40% from a year ago, at levels not seen in almost a decade.

Prior to 2008, the last time the Bank index was at this level was the fourth quarter of 1998. Russia had defaulted on its debt over the summer, precipitating the meltdown of hedge fund LTCM. In response, the Fed organized a private rescue of LTCM by a consortium of 14 banks and broker-dealers -- the fund’s massive positions were thought to threaten the stability of the financial system.

If that sounds familiar, it should -- the summer of 1998 offers direct parallels with the current environment. In March, for example, the Treasury facilitated JPMorgan Chase’s rescue of Bear Stearns on the assumption that the troubled broker’s failure posed an unacceptable risk to the financial system.

As serious as the current problems are, when a bubble deflates, it’s common for sentiment to shift from unbridled optimism to exaggerated pessimism. That spurred my curiosity: What is a fair value for the KBW Bank Index?

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[9/8] Which banks to buy?