After a touch-and-go recovery, it's back: Panic is in the air. Stocks are tanking. Gold is rallying. Treasury bonds' yields are plunging. The VIX volatility index shot up almost 20% at one point this afternoon. Despite a stimulus package to end all stimulus packages, and potential progress on a new bank bailout, stocks are back at three-month lows. What's behind the reversion to fear? Banks.

It's worse than you think
It's becoming increasingly clear that banks' balance sheets are radically worse than most thought. Washington, surprise surprise, doesn't appear to have much of a clue as to how to fix them, either. Adding to the panic, Stanford Financial was charged this morning in a $9.2 billion bank fraud, undermining public confidence at exactly the wrong time.

Just how bad might it get? According to The New York Times, independent research firm CreditSights ran a few numbers to determine what banks might fail the Treasury's so-called "stress test." Their conclusion, while more precise, was about the same as mine: Most of them.

According the CreditSights, estimated future losses at the biggest banks are as follows:


Estimated Future Credit Losses

Wells Fargo (NYSE:WFC)

$119 billion

Bank of America (NYSE:BAC)

$99 billion

JPMorgan Chase (NYSE:JPM)

$124 billion

Citigroup (NYSE:C)

$101 billion

Goldman Sachs (NYSE:GS)

$47 billion

Morgan Stanley

$34 billion

Sources: The New York Times.

If those estimates turn out to be anything close to accurate, many banks would probably be forced into the government's arms in one way or another. This is consistent with NYU professor Nouriel Roubini's prediction that, as a whole, the banking system is "effectively insolvent." Scary, scary numbers, but it's important to bite the bullet and accept the reality of banks' health, rather than crossing your fingers and pretending everything's puppies and kittens.

Relax. Breathe. It'll be OK.
Still, all hope isn't lost for patient investors looking in the right direction. For one, a tremendous amount of fear is simply the torture of not knowing details of the Treasury's bank plan. Few big investors want to even think about making bold moves until they know the rules of the game. Once details emerge -- regardless of what the actual details are -- markets could start to regain confidence. Even complete nationalization of our largest banks doesn't mean economic collapse: It predominately just means banks' common shareholders would be wiped out -- which they largely have been already. Markets are being held down more by uncertainty than actual risk, which can be a boon to bargain-hunting investors.

Second, a handful of stocks are actually enjoying bits of good news. Sirius XM Radio (NASDAQ:SIRI), for example, is up over 50% as I write this today on news it averted bankruptcy. An article in The Wall Street Journal pointed out how Oracle (NASDAQ:ORCL) is using its cash-rich balance sheet to scoop up acquisitions as bargain prices. Gold stocks have also been a huge success lately, bouncing off a massive sell-off in 2008 and gearing up for an inflation battle of epic proportions. There's plenty of opportunity in the market today; it's just a matter of where to look.

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