Financial markets wait for next shoe to drop

After a recent run-up in mid-March, many stocks in large money center banks and brokerages are back near multi-year lows. A great deal of news about mortgage-backed paper write-downs and poor first quarter forecasts is already in the market. So, what's wrong? It would seem like most of the trouble is already known to the market.

There may be several things which could hurt that financial sector nearly as badly as the housing crisis. One is related to the current problem. There are $1.2 trillion in home equity loans on bank books. With many houses valued at below mortgage value, this could be a real problem. Home equity holders could block home sales if consumers do not get the money to pay-off both the primary mortgage and secondary mortgage at a closing. The could further gridlock the housing market.

Perhaps more troubling is that large pools of credit card and auto debt have not hurt financial company earnings. These are sliced into pieces and sold as derivative paper just as mortgages were. A lot of this paper is still sitting on balance sheets.

According to The New York Times: "what investors fear is that financial companies' pain will not end with the troubled mortgages, which by some estimates have already resulted in more than $200 billion of losses." And, they are right to. Housing is not the only big sector of the US economy. There is a reason that a company like Merrill Lynch (NYSE: MER) fell another 14% last week. A lot of the bad loans and bad derivatives are not washed out of the markets yet.. That means that shares in banks and brokerages could make new lows.

Douglas A. McIntyre is an editor at 247wallst.com.