Continued Financial Fiasco?

Karl Denninger raises some interesting points in noting a consistent thread with the handful (sometimes more) banks that fail every weekend. In the post he details the extent to which the value of assets were overstated. For example;

Waterford Bank, Germantown MD: $155.6 million in assets, $156.4 in insured deposits. They were "underwater" by $800,000, right? Wrong: Estimated loss, $51 million. That is, the assets of $155.6 million were overvalued by approximately 30% at the time of seizure.

Karl goes on to list several more specific banks and asks the reasonable question that if so many small bank are doing this what about the biggest banks like Citi (C), Bank of America (BAC), JP Morgan (JPM) and Wells Fargo (WFC)? He notes that the combined assets of the four are $7.49 trillion (can't vouch for that but I take his word). Using the same percentage of overstatement he says the total overstatement of the biggest four could be between $1.49 trillion and $2.99 trillion.

It is not clear to me that assuming an overstatement in a percentage similar to other banks is valid but the question of whether they are overstating assets by some amount is valid. I am not making a Kudlow-type argument saying that projecting other banks overstatement is invalid because for all I know the big four could be overstating by more but to be clear I don't know and that is the point.

When I first started this site in 2004 I was underweight financials because their weight in the S&P 500 was around 20% which I took as a warning of potential underperformance not Armageddon. At that point I owned a bunch of foreign banks including two European banks and one domestic bank which was BAC. Then in early 2006 the yield curve inverted which is a warning for the economy but also specifically for financials because it makes lending less profitable but this again did not point to Armageddon. At this point in the portfolio financial stocks had drifted to a slightly smaller weight due to the performance of other things.

Then in mid to late 2007 after reading for weeks and weeks why European banks might be worse off than US banks I sold the two European banks (Allied Irish Bank and the couple of months later Barclays, I bought a Chilean bank with the Barclays proceeds). I disclosed selling BAC immediately after announcing the Merrill Lynch acquisition. In the aftermath of stock market event I started rebuilding financial exposure but avoided increasing bank exposure (I added a publicly traded exchange and an index provider).

Part of my ongoing apprehension with domestic financials, so at this point we own no US banks, is it is not logical to me that there won't be more shoes to drop for US financials. Denninger may have isolated a big shoe or not but I do not think it is necessary to know where the next financial sector problem will be or what the magnitude might be.

I realize this is a repeat theme but if this (the entirety of the entire financial crisis) was anywhere near as big as we were lead to believe then isn't it only logical that it will take a long time before we understand the totality of it all? Yet I guarantee there will be very smart people who are not allowing for the possibility of more fallout and will get caught positioned the wrong way yet again.