Mike Mayo, one of the more respected banking analysts, has managed to sidestep a Wall Street muzzle and has just surfaced singing a new song. His latest tune below contradicts recent media spin about the improved financial sector, thus revealing the hollow PPT nature of this Spring rally. Revenge is sweet when you can drop the DOW triple digits on one report.

Cheers - VHF

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Mayo Says Loan Losses Will Exceed Depression Levels

By Michael J. Moore

April 6 (Bloomberg) -- Mike Mayo, who left Deutsche Bank AG last month and joined CLSA, assigned an “underweight” rating to U.S. banks and predicted loan losses will exceed levels from the Great Depression.

U.S. stocks dropped after Mayo gave “sell” ratings to banks including Winston-Salem, North Carolina-based BB&T Corp. and Cincinnati’s Fifth Third Bancorp. Bank of America Corp. and JPMorgan Chase & Co., the two biggest U.S. banks by assets, were assigned “underperform” ratings, Mayo said in a report today.

“While certain mortgage problems are farther along, other areas are likely to accelerate, reflecting a rolling recession by asset class,” Mayo wrote. “New government actions might not help as much as expected, especially given that loans have been marked down to only 98 cents on the dollar, on average.”

The 46-year-old Mayo gained a reputation for independence at Frankfurt-based Deutsche Bank for his willingness to put a “sell” rating on banks and to criticize investors and companies for trying to curb objective analysis. At Deutsche, Mayo had “sell” or “hold” ratings on all 18 companies he covered, according to data compiled by Bloomberg. CLSA is an affiliate of New York-based Calyon Securities.

Bank of America, based in Charlotte, North Carolina, fell 21 cents, or 2.8 percent to $7.39 at 10:14 a.m. in New York Stock Exchange composite trading. New York-based JPMorgan dropped 91 cents, or 3.1 percent, to $28.37. The KBW Bank Index lost 4.2 percent, the first decline in five days.

Card Losses

Mayo said he expects loan losses to increase to 3.5 percent, and even as high as 5.5 percent in a stress scenario, by the end of 2010. Mortgage-related losses are about halfway to their peak, while credit-card and consumer losses are only a third of the way to their expected highest levels, according to Mayo, who declined to comment beyond the report.

The nation’s largest banks may be transitioning from a financial crisis marked by writedowns of capital to an economic crisis featuring large loan losses, Mayo wrote. The U.S. government cannot provide much relief because its actions will lead to either banks having to raise new capital or toxic assets remaining on banks’ balance sheets, Mayo wrote.

Mayo said solutions to the banking crisis will take time, as the increase in risk happened over a decade or more.

CLSA’s underperform rating reflects the expectation that the stock will underperform the local market by 0 to 10 percent, while a sell rating expects it to fare worse by more than 10 percent, according to the report.

Meredith Whitney, who left Oppenheimer & Co. in February to found Meredith Whitney Advisory Group LLC, said in a Forbes interview that banks will continue to write down their mortgage assets as home prices decline further than lenders expected. The unemployment rate also has exceeded banks’ projections and could lead to further loan losses, Whitney said.

To contact the reporter on this story: Michael J. Moore in New York at mmoore55@bloomberg.net.