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I have always had the suspicion that Wells Fargo's (NYSE:WFC) loan values were inflated and wrote as much in January. Wells sits at ground zero of the housing implosion and the fact that their numbers held up so well was a mystery...unless they were very slow to take write downs for bad loans. The company's own 10-K reveals that my suspicion was correct. Numerous banks are equity deficient which explains the continued weakness in the stocks.

According to Jonathan Weil at Bloomberg,

Perhaps never before have so many banks’ balance sheets been so patently full of hot air. Bank of America Corp. last week disclosed that its loans at the end of 2008 were worth $44.6 billion less than what its balance sheet said.

Investors may be placing too much faith in bank's capital ratios. If the bank's own estimates of fair value were applied to the company's balance sheet the banks would be technically insolvent. Weil continues:

Bank of America, for instance, had $35.8 billion of tangible common equity as of Dec. 31, before it completed its government-aided acquisition of Merrill Lynch & Co. That figure falls to negative $1.7 billion once it’s adjusted so that all financial assets and liabilities are measured at fair value, using the numbers BofA disclosed in its footnote. The fair-value version shows BofA needs lots more common equity -- badly.

Wells Fargo’s tangible common equity was $13.5 billion as of Dec. 31. On a fair-value basis, it was negative $133 million. That makes the bank’s $40.9 billion stock-market capitalization look awfully rich.

In total, eight of the 24 banks in the KBW Bank Index had negative tangible common equity on a fair-value basis, including SunTrust, KeyCorp, Fifth Third Bancorp, Huntington Bancshares Inc., Marshall & Ilsley Corp. and Regions Financial Corp.

This indicates to me that these companies will soon be back at the government's teat to get more capital injections, further diluting current shareholders.