Nothing is easier than self-deceit. For what each man wishes, he also believes to be true.--Demosthenes Ever since the financial markets started to crumble a year and half ago, bankers just can't seem to tell the truth, even to themselves. From Dick Fuld saying that everything was fine at Lehman until days before he filed for bankruptcy, to Ken Lewis still saying that he did a good job for Bank of America ( BAC) by buying Countrywide and Merrill Lynch -- there seems to be a disconnect from reality among many bankers. As an investor, you should avoid financials and sell any rally in the sector until bankers finally start to throw in the towel and tell the truth or be put out of their misery by FDIC takeovers. Why haven't bankers been telling the truth? It is just too ugly for them to accept. Their false statements are as much self-deception as market manipulation, especially since many of them would have been personally better of admitting their problems a long time ago. Let's start with the scope of the problem. Most banks are insolvent. I'm not just talking about the big banks such as Citigroup ( C), Bank of America, Goldman Sachs ( GS), Morgan Stanley ( MS), JPMorgan Chase ( JPM), et al. I am talking about most banks in the entire country if they were doing any significant amount of real estate lending during the bubble, and most of them were doing a lot of it. What do I mean by insolvent? I mean that the value of their liabilities far exceeds the value of their assets using any reasonable valuation metric. This is why bankers are so aggressively pushing for a change or suspension of mark to market accounting and also for regulatory forbearance as far as their capital ratios. What is regulatory forbearance? It is basically the government turning a blind eye to the obvious insolvency of banks in the hope that asset values will ultimately recover and fix the problem without putting the banks into receivership.