July 21, 2008 – 1:04 pm

Today it was Bank of America’s turn to beat the lower expectations they previously handed to analysts and keep the stock rally going.

Though the 41 percent drop in earnings was the bank’s fourth straight quarterly decline, Bank of America became the fourth of the five largest U.S. banks to top forecasts, joining Citigroup Inc (C.N) JPMorgan Chase & Co (JPM.N) and Wells Fargo & Co (WFC.N).

It is part of a concentrated effort to pump up the banks and lead investors to believe the worst of the credit market has passed.

“It suggests the credit crisis isn’t as bad as people thought” for lenders, said Steve Roukis, managing director at Matrix Asset Advisors Inc in New York, which invests $1.4 billion. “A week ago there was tremendous fear about systematic risk to the system. There’s definitely a floor here.”

Well, actually Steve Roukis,¬†brace yourself because it’s worse and that’s quicksand, not a floor. The credit crisis is worse than people thought and the floor for insolvent lenders like Bank of America is the ultimate one of zero. The only temporary stopping place along the way being the pink sheets. Don’t take our word for it, Steve. Rather, watch the bank’s actions. Witness, Steve:

Bank of America set aside $5.83 billion for bad loans, up from $1.81 billion a year earlier, largely for home equity, residential mortgage and homebuilding exposure.

Steve, that means they expect the bad loans to get worse and pile up. Read on, Steve:

Net charge-offs more than doubled from a year earlier to $3.62 billion from $1.5 billion.

And that means they expect the amount of non-recoverable loans to go from worse to worse-er. Dang, Steve come on.

Steve, you may or may not want to notice that today’s numbers, in which the bank said write-downs on CDOs dropped from $1.75B to $645M, were sans Countrywide. Let me ask you a question, Steve. Where do you think the bank expects possible future write-downs to come from?

Countrywide lost $2.33 billion in the quarter, including about $3.7 billion of credit-related write-downs and losses, Bank of America said. About 7,500 jobs, or 3 percent, will be eliminated from the combined companies, the bank has said.

Actually, by the banks own reasoning, the drag of Country could be enormous and possibly even fatal:

Chief Financial Officer Joe Price said another $12 billion to $13 billion of Countrywide loan write-downs are possible, equal to about one-sixth of the loan book and toward the higher end of what the bank expected.

For the future, the bank may as well expect it to be higher than expected. Take a good long read, Steve.

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