On Monday, CLSA analyst Mike Mayo dropped some napalm on the banking sector, suggesting that the future looks bleak thanks to the fact that banks have committed "the seven deadly sins of banking." Those sins, according to Mayo are: "greedy loan growth, gluttony of real estate, lust for high yields, sloth-like risk management, pride of low capital, envy of exotic fees, and anger of regulators."

Creativity aside, the meat of Mayo's report was that he believes that loan losses at banks will continue to accelerate and will likely hit between 3.5% and 5.5%, or noticeably above the 3.4% level reached during the Great Depression. While mortgage loans are a substantial piece of the lending pie and have been the primary focus so far, Mayo sees acceleration from other areas including home equity, credit cards, and construction loans.

Maybe even more disconcerting about Mayo's take is that he estimates loans on the banks' books -- with the exception of acquired banks like Wachovia -- have been marked down to only $0.98 on the dollar, which would seem to hardly reflect current conditions. Not only could this mean future losses for the banks as they come to terms with those loans, it could also jab a stake into the heart of the government's program to buy toxic assets from the banks. After all, if banks are trying to sell junk at a premium, buyers may not stay at the table very long.

These conclusions led Mayo to open up with underperform ratings on Citigroup (NYSE:C), Bank of America (NYSE:BAC), JPMorgan (NYSE:JPM), Wells Fargo (NYSE:WFC), PNC Financial, and Comerica. Meanwhile, he slapped an even harsher sell rating on US Bancorp (NYSE:USB), SunTrust, Fifth Third (NASDAQ:FITB), KeyCorp, and BB&T (NYSE:BBT).

What I think Mayo's report highlights in particular though, is that there is still a very high level of opacity in the worst-hit banks. While there is a sense that the flood of loan losses could continue to rise, there doesn't seem to be any clear grasp on who's holding what and what's been realistically marked down. It seems like the government is either too scared to look at the books because of what it might find or it's too timid to lay down the law. You'd think that hundreds of billions of dollars in direct government aid and hundreds of billions more in loan guarantees would say it's time for us to get somebody in there tearing apart the books to figure out what we're really dealing with.

Is temporary nationalization the only solution? Does the Public-Private Investment Program really have any hope of succeeding? It's quite clear that the banks have been sinners for some time now, but I don't see how we can determine the optimal flavor of penance until we're doing more than guessing about what's lurking in those banking vaults.

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Fool contributor Matt Koppenheffer owns shares of Bank of America, but does not own shares of any of the other companies mentioned. The Fool's disclosure policy has never once been caught with its pants down. Of course, it doesn't actually wear pants ...