Monday morning brought forth a more honest appraisal of the financial condition of banks which caused a reversal of last weeks ridiculous celebration of mark to model nonsense.

According to a bank analyst’s report prepared by Mike Mayo of Calyon Securities the amount of loans that banks will need to write off will exceed levels seen during the Great Depression.

Mike Mayo gave the banking industry an “underweight” rating, citing “the ongoing consequences” of banks’ reckless risk-taking. Suffering U.S. banks face a three-fold problem: higher structural risk, cyclical pressures, and “catch-22 government actions,” said Mayo

“The seven deadly sins of banking include greedy loan growth, gluttony of real estate, lust for high yields, sloth-like risk management, pride of low capital, envy of exotic fees, and anger of regulators,” Mayo said in the report.

These “sins” created front-load earnings and pushed costs further down the line, Mayo said. Now those costs are appearing and many of the current problems being experienced are only midstream at best, he added.

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With residential real estate prices still falling and commercial real estate starting to crumble, with record credit card defaults occurring, and unemployment soaring, those who think that changing accounting rules to mark to model from mark to market are going to save the banks from failure are delusional.

The deteriorating assets being reevaluated by the banks own mark to model dreams do not in the least change the quality of the assets. All that does is to delay the day of reckoning, make public a dishonest accounting of the banks exposure to questionable and in some cases worthless assets, and delay any hope of recovery.

In spite of the government’s frantic efforts to prevent it many of the banks are insolvent. If you buy into a bank rally you had best be taking very short term positions and kick the stocks out of your portfolio fast. Investors taking long term positions in financial stocks, thinking that beaten down prices make such purchases safe are taking on huge risks. Shareholders will be wiped out when the true worth of toxic assets has to be made public.

Disaster will probably occur in late 2009 or early 2010 as further losses become too large to hide, even with mark to model accounting rules in effect.

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