Here is a rough and dirty flow chart of where I see the banks today. There is a real stalemate going on between the banks and the Federal Government. The Sarbanes-Oxley Act requirements to mark to market assets on the balance sheet has the banks very concerned. If they follow these accounting rules as intended, the declining real estate market results in declining asset values (on the balance sheet) leading quickly to insolvency.

It is important to note that the Sarbanes Oxley Act was passed in 2002 (in the nasty wake of the Enron Scandal where wildly optimistic accounting was largely at fault) and has not been tested in a recession before. Many are calling for is repeal or a relaxing of the rule.