What happened in the markets today?

Good luck figuring that out (you can’t, really). Let’s just say it’s some combination of European collapse fears, U.S. too-big-to-fail collapse fears, recession fears, downgrade after-effect uncertainty and Lord knows what else—and roughly in that order. It’s a complicated mix of factors and that should be reflected in tomorrow’s coverage.

A lot of lazy headline writers said it was simply a reaction to the Standard & Poor’s downgrade of the U.S. The WSJ’s Twitter feed captures the absurdity of that in 140 characters or less:

Yields on 10-year U.S. Treasurys down as investors seek safety of Treasurys following Treasury downgrade

This says that investors either had already priced in a downgrade or they think S&P, with its tattered credibility, is irrelevant.

Why would investors flood into Treasury bonds as the S&P downgrades them?

Paul Krugman:

Once again: S&P declared that US debt is no longer a safe investment; yet investors are piling into US debt, not out of it, driving the 10-year interest rate below 2.4%. This amounts to a massive market rejection of S&P’s concerns.

The “signature” of debt concerns should be stock and bond prices both falling; what we actually see is those prices moving in opposite directions. And that’s normally the signature of concerns about a weak economy and deflation risk (see Japan, decline of).

Both the bond and stock markets are signaling fears of another recession and/or another financial crisis. You’re not going to have one without the other.

And as steep as a 635 point (6 percent) Dow fall is, it would likely have been a lot worse had the European Central Bank not (temporarily) eased concerns over Italy and Spain by extending its bond-buying bailout to those struggling economies. The question remains: Can the Europeans solve their debt crisis and if not—and it doesn’t seem likely—how will that affect the global financial system and the economy? This quote from the Journal shows people question whether big economies like Italy and Spain even can be bailed out if things worsen:

“I can’t imagine they’re going to be willing to put up the amounts of the money the markets would want to prop up Italy and Spain, it would have to be hundreds of billions of euros,” said Raoul Ruparel, an analyst at Open Europe, a London-based think tank.

Complicating matters is that our economy already appears to be either in or headed toward recession—with no political will for a big stimulus—and we still have homegrown banking problems ourselves. American Banker has this uncomfortable headline this afternoon:

Market Turmoil Stokes Fear of Big Bank Collapses

When it says “big”, it means too big to fail.

Bailed-out Bank of America plunged today, shedding a fifth of its value. The Banker:

The banking sector suffered a triple hit as Standard & Poor’s downgraded the United States’ debt rating, American International Group Inc. filed a $10 billion lawsuit against B of A, and investors continued to fear the risk exposure of big banks to the European debt crisis.

So what happens if Bank of America collapses? The Dodd-Frank resolution authority gets its first trial by fire:

While the bank continued to tout its high capital, the sharp spiral in B of A’s share price was an echo of how market perception pushed firms near a cliff in the financial crisis. Companies like Lehman Brothers never recovered, and others — like B of A, Citi and AIG — received huge government bailouts to stabilize. Yet under the sweeping reforms of the Dodd-Frank Act last year, the government is prohibited from such targeted aid, and instead enables the Federal Deposit Insurance Corp. — authorized by several agencies — to seize firms that cannot stand on their own.

But BofA isn’t alone. Citigroup kind of got lost in the BofA hubbub today, but it fell nearly as much, down a whopping 16 percent. These are banks with $2 trillion in assets, folks. One-day market moves of 16 percent and 20 percent are enormous for companies of this size, and they’d already been falling sharply in in recent days. Bank of America has lost nearly one-third of its market capitalization in the last three trading sessions, while Citigroup is down a quarter. JPMorgan Chase, also in the $2 trillion TBTF club, fell 9 percent today and is down 15 percent over three sessions.

What’s on their books? That’s the question we’ve wanted to know about our paper-it-over, extend-and-pretend economy for years now. And yet we still don’t know.

Here’s Bloomberg’s Jonathan Weil two weeks ago (note that BofA shares are now at $6.51 a share):

At $9.85 a share, down 26 percent this year, Bank of America finished yesterday with a market capitalization of $99.8 billion. That’s an astonishingly low 49 percent of the company’s $205.6 billion book value, or common shareholder equity, as of June 30. As far as the market is concerned, more than half of the company’s book value is bogus, due to overstated assets, understated liabilities, or some combination of the two.

Now that 49 percent number, “astonishingly low” just two weeks ago, is at 32 percent of book value.

Meantime, five years into its downturn the housing market—the root of this crisis—is still in a shambles with no end in sight.

Watch the bank stocks in the coming days and weeks. They’re signaling that things are not well with the financial system.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.