Suddenly, Things Are Going “Terribly Wrong” for the Big Banks

Monday’s stock selloff is largely being attributed to the drama in Cyprus, which is potentially a big deal and certainly weighed on global markets overnight. But U.S. proxies weren’t down nearly as much as international bourses – or as initially indicated.

Related: Why Cyprus Is a Bigger Deal Than You Think

In fact, U.S. stocks might be solidly in the green now if it weren’t for another development that bears watching: Weakness in financials.

Monday's slide is also being attributed to Cyprus, which has revived fears of "contagion" emanating from Europe and the related counterparty risk faced by banks. But bank stocks were under pressure before the Cyprus "bail in" hit the headlines.

Starting late Thursday, the financials had a really bad weekend when a Senate report found JPMorgan had misled regulators (and investors) in its disclosures surrounding the now infamous London Whale trade.

Related: 'London Whale' Isn't Dead Yet: JPMorgan Is Out of Control, Rosner Says

The bank’s disclosures “were incomplete, contained numerous inaccuracies, and misinformed investors, regulators and the public” said Senator Carl Levin (D-MI), chairman of the Senate’s Permanent Subcommittee on Investigations.

The 300-page report was just an appetizer for Friday’s hearing, when JPMorgan executives were grilled under oath and former CFO Douglas Braunstein essentially admitted the bank kept regulators in the dark about its mounting losses.

“Things went terribly wrong,” testified Ina Drew, who ran the firm’s Chief Investment Office before stepping down under pressure after the London Whale losses first surfaced last spring. The Senate report and subsequent testimony could expose JPMorgan to additional litigation risk, which is a problem for a number of big banks these days.

Related: Size Counts: Small Banks Are King, The Big Guys Still Have Lots of Problems, Says Whalen

Indeed, things kept going terribly wrong for JPMorgan on Friday when the Federal Reserve gave only conditional approval to its capital plans. But that wasn’t just a JPMorgan story as the Fed said the same of Goldman Sachs.

Both firms had "weaknesses in its capital plan or capital planning process that were significant enough to require immediate attention, even though those weaknesses do not undermine the quantitative results of the stress tests," the Fed declared.

In addition, all the big banks were in the crosshairs Saturday when Dallas Fed President Richard Fisher laid out his plans to break up the “too big to fail” banks at the annual Conservative Political Action Committee (CPAC) conference.