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Banks behaving badly

August 7, 2012: 12:55 PM ET

It sure seems like big banks are acting like villains from old silent movies – and investors are tied to the train tracks.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks.

Happy days are here again for the stock market. If you love round numbers, then today is your day. The Dow is back above 13,000. Nasdaq has vaulted above 3,000 again. And the S&P 500 has topped the 1,400 level.

Is the enthusiasm (some might call it greed) misplaced? Perhaps. But there is one aspect about the market rally that clearly stands out as a bona fide head-scratcher. Bank stocks are leading the way.

Related: Beware of investor complacency

Say what? Big banks have done nothing to restore confidence in the market over the past few months. This is just a quick recap of some of the more egregious sins, scandals and shortcomings.

British banking giant Standard Chartered (SCBFF) was just accused by New York regulators of illegally concealing transactions for Iran. Barclays (BCS), another British financial behemoth, settles charges tied to fixing a key bank lending rate known as Libor with regulators in the U.S. and U.K. Yet another British bank, HSBC (HBC), is said to have laundered money for Mexican drug cartels, according to a recent report by the U.S. Senate.

JPMorgan Chase (JPM) reports a massive trading loss (or is it hedging?) resulting from bad bets in its London-based chief investment office. Morgan Stanley (MS) gets sued by investors for its role as lead underwriter in the bungled Facebook (FB) IPO.

Related: Small bank takes on giants in Libor lawsuit

I haven't even mentioned last week's Knight Capital Group (KCG) trading glitch debacle. Or the fact that a former executive at Goldman Sachs (GS) wrote an op-ed earlier this year in which we learned that the investment bank thinks customers are "Muppets." Or that Barclays, despite getting most of the blame for the Lie-bor scandal, is only one of just 16 U.S. and European banks being looked at for rate-fixing.

But check out how well bank stocks have done in the past month! Shares of Barclays and JPMorgan Chase are up about 10%, easily outpacing the S&P 500's 4% gain.

Citigroup (C), another of the banks involved in the Libor investigation, has gained nearly 15%. And Citi, I'll remind you, is a bank that has yet to take any action regarding the executive compensation package of CEO Vikram Pandit even though shareholders voted against Pandit's $15 million pay raise back in April.

It's unfortunate that investors are rewarding the bad behavior of the big banks by bidding their shares higher and higher. But it also is a bit strange. For one, the possibility that the European and U.S. economies may slow further is not good news for banks.

Still, even if you put aside macro concerns, shouldn't investors be more nervous about what other skeletons may lie in the closets of the world's financial firms? One of the main arguments against owning large banks for the long haul is that tougher rules may be on the way that could eat into the sector's mighty profits. And the case for more regulation grows with each new appalling headline about more shocking allegations lobbied against a big bank.

Related: The Wall Street machine is broken

Of course, big banks are not all being run by nefarious villains out to make big bucks off the backs of the little guy. But it certainly does seem that way, doesn't it? And until that changes, this is a sector where negative headlines will remain a major risk.

You don't need to take a high and mighty, Occupy Wall Street-esque moral stance if you want to avoid big banks. It's simply a smart investing strategy to do so.

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Paul Lamonica
Paul R. La Monica
Assistant Managing Editor, CNNMoney

Paul R. La Monica is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage.

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