Problems with the Banks and their Balance Sheets

Two days ago, the Dow dropped over 280 points after Bank of America had posted earnings of 0.46 cents a share crushing expected estimates of 0.04 cents per share.

The question is, after this news, why did the market fall? My accounting professor made an interesting point that seems obvious and is occurring now and will be for the next few quarters.

"The banks balance sheets and income statements look good because they have devalued an asset (risky mortgages) from say $100 to $50. Then the banks have found someone to purchase that lousy asset at say $55. Their financial statements show a $5 dollar accounting profit, but in reality and hopefully in the footnotes a -$45 economic profit is shown."

So even though the numbers "look good," based on that $5 accounting profit, investors saw the truth and the lack of economic profit.