Wall St. cheered what seemed to be withering results from Washington Mutual (WM) and Wachovia (WB). WaMu lost $3.3 billion and reserved $3.7 billion to handle loan losses. Wachovia lost $9 billion and its shares moved up over 20%.

The euphoria apparently came from the fact that things were not worse. Bank analysts seemed especially optimistic. "We think Wachovia’s poor second quarter 2008 should mark a bottom," Deutsche Bank analyst Mike Mayo wrote in a research report after the report, according to MarketWatch.

What the market did not appear to notice is that while the numbers were not worse, no one really said they would get better. Wachovia’s CEO commented that the bank had ways "to protect, preserve, and generate capital, and additional options are open to us." That is double talk. It does not forecast an improvement. It simply says that the bank will do what it can to stay afloat.

Jamie Dimon, head of JPMorgan (JPM), who most observers think is the most astute bank CEO on the planet, made the comment that the credit situation could get worse. By that, he certainly meant that, in his opinion, it will get worse. He could have said the global credit situation was stable. He elected not to.

What the run-up in bank stocks fails to acknowledge is that the troubles in housing are getting worse as each day passes. Bad news or good for firms that hold mortgages or mortgage derivatives?

American Express (AXP) earnings showed that consumer credit is getting much worse. That is among the fairly affluent who can qualify for an Amex card. Things are probably tougher among those who can only get a Visa (V) or Mastercard (MA). The defaults on the balances for these credit cards go back to the banks that issued them, or pools of consumer loans held by the financial companies as derivatives.

Corporations, especially those with modest credit ratings, are getting late on interest payments.Spreads on junk bonds are getting worse. In a recession, why would anyone think that situation will improve?

Banking executives do not want to stand in front of their shareholders and say the ship is taking on water and may go down. That is human nature, even if it shades the truth.

The bad news for bank stocks is that not a single executive from a major financial company is willing to step forward and say the worst is over and we are heading back up from here.

Douglas A. McIntyre

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