Sucker's Rally

Big rally yesterday in bank stocks: Wells Fargo up 23.7%, Bank of America up 19.3%, and Citigroup up 7.7%.

While the rally was concluding, I was having coffee with a mortgage banker friend. His analysis based on a year of buying distressed mortgages, renegotiating them, and transforming them into good credits. He's a hands-on refinancer, who meets directly with his borrowers - not somebody who reads computer printouts in an exurban office park. His conclusion based on that experience: We have no way touched bottom in the banking sector.

He says:

Beyond the non-performing loans, there are almost $2 trillion worth of mortgages that are performing - but only barely. Often these are mortgages where the debt exceeds the current market value of the property. More often, borrowers are meeting their payments only by squeezing all their other obligations - notably credit card bills. The risk that these asset classes will stop performing soon is very large. When they do, bank balance sheets will explode again. And that's aside from the troubles in the commercial real estate sector ...

His prediction: President Obama will have to return to Congress in September to ask for at least another trillion in bailout funds.