24/7 Wall St.

It was just this last summer that the heads of Merrill Lynch (MER), Lehman, and Morgan Stanley (MS) said the financial crisis had peaked and its energy was dissipating.

It would be hard to find a bank or brokerage house that has not missed its forecasts in one or more of the last four quarters. Securities analysts’ projections for next year are useless.

Reuters makes the observation that Citigroup Inc’s repeated assurances that it did not need additional capital, followed by its quick about-face in accepting billions of dollars in aid from the U.S. Treasury, has many investors wondering what other banks are hiding.

The answer to the question of why Citi was wrong about its future is more frightening than the idea that investors, regulators, and customers are being duped. They aren’t. The banks simply don’t know what they own and, after a year of trying, still don’t know how to value it. Executives at these firms cannot make projections because of old flaws in their systems of stuffing their balance sheets with unstable financial instruments and trying to follow hundreds of thousands of data points which can change their values day-by-day.

The government and financial industry still want to fill a hole, but don’t know how big it is. That means that the sums of money put into institutions to "save" them will almost always be inadequate. The balance sheets of the firms are tied to the general housing and credit markets in such byzantine ways that the will never be correctly assessed until home values, consumer obligations, and corporate debt find a bottom.

There is no trick to getting exact numbers for the assets and liabilities which banks hold. The entire system is too fluid now. What no one wants to admit is that until the "deleveraging" process is over and the value behind financial instruments moves down to its foundation, any figure banking management or the government wants to come up with as the full cost of saving the credit system is only a guess.

Douglas A. McIntyre