Monday

Many questions hung in the air Monday, March 17, 2008. Most of the market waited on edge to find out what would happen at the open. Starting that weekend and leading into Monday morning, it became about four words. Those four magic words — Is this the bottom? — still linger in the minds of analysts and traders now almost a full week later. Very few questions were answered Monday. In fact, it became only more confusing as the week went on.

The Fed backing a buyout of Bear Stearns by JP Morgan allowed all the questionable assets held to remain a mystery. The Fed did confirm the worthlessness of these assets by giving JP Morgan a $30 billion dollar loan. Still, everyone certainly wondered how companies like Lehman and Goldman would do in the days that followed Bear Stearns fall, as they were due to announce earnings. All these companies stocks, indeed most financial stocks, saw increased activity Monday. Without the kind of guidance a Bear bankruptcy would provide though, it fell on the Stock Market itself to decide who lived and died. The Fed thought with a buyout rather than a bankruptcy it had actually purchased $30 billion dollars in “calm”.

You could safely say at the end of trading Monday, all three companies, Bear, Goldman and Lehman, seemed to survive the initial impact — hell, Bear was up beyond the $2 buyout price. But, as the week progressed the calm faded. The economy moving at a markedly slower rate shown through on all the earnings reports. By Friday, BusinessWeek was talking about S&P downgrading Leman and Goldman after earnings had fallen around 50%.

We continue to wonder what will come of these and other firms like Morgan Stanley and Merill Lynch. A good suggestion for those that own stocks in the financial sector now though, is certainly to get out and wait for a bottom if you plan to get back in at all.

Bear, Goldman, Lehman, Morgan and Merill

The S&P, which downgraded Lehman and Goldman Friday, will decide in thirty days whether or not to do the same for Morgan Stanley. Morgan too may be downgraded when you consider the firm has already made use of The Fed’s entirely new loan facility for Investment Bankers, as discussed in this article from The Telegraph, entitled ‘Paranoid’ Morgan Stanley taps Fed’s new lending facility.

As Reuters points out here, Rohit D’Souza, the global head of equities and alternative investments at Merrill Lynch (MER.N: Quote, Profile, Research), is planning to leave the New York investment bank. I thought some things from his bio information on the Merrill website were important. I even went so far as to make bold a few of the words I shared from the link’s content, below…

Mr. D’Souza is responsible for all equity sales and trading activities globally, as well as all debt and equity businesses in the Americas. Before being named to his current position in July 2006, Mr. D’Souza served as head of Global Equity Markets with responsibility for all trading and sales-trading activities for cash equities, equity-linked products, strategic trading, and all of the global equity financing and services businesses.

All these events will weigh on these equities and other elements of the sector — speaking of getting out though, and I mean besides Mr. D’Souza, it seems others certainly agree its time…

Documents filed with the Securities and Exchange Commission on Thursday March 20 show that Goldman’s President and Co-Chief Operating Officer Jon Winkelried sold some 30,000 shares at about $173.85 each, totaling approximately $5.2 million, from Wednesday to Thursday. Vice Chairman Michael Sherwood unloaded some 7300 shares at a per share price of about $174.85, totaling close to $1.3 million Wednesday. Goldman could not be reached for comment.

The above excerpt as well as the one that follows were taken from an article in Forbes entitled Not So Good Friday For Goldman and Lehman. They talk about the downgrades of Lehman and Goldman in some further detail.

The slashed outlook may be especially difficult for Lehman Brothers to stomach. The financial services firm, whose business mix most closely resembles that of virtually collapsed Bear Stearns (nyse: BSC - news - people ), has dismissed recent rumors that it’s headed down the same ditch as Bear (See: Financials Fall Into Bear Pit). Analyst Sprinzen says Lehman has done a better job managing its liquidity than Bear. As of Feb. 29, the firm’s excess liquidity structure was $34 billion.

Remember despite what is said above about Lehman’s liquidity, analysts and insiders alike also said Bear had an $80/share book value just the Friday before its fire-sale purchase over a weekend to JP Morgan for $78 less a share. So, how can we value that $34 billion liquidity number without salt? If we use Bear Stearns, we can reference articles from as far back as August 4th, 2007, found in the pages of the Business Section of United Kingdom’s The Guardian entitled, Dow Jones tumbles after sub-prime fears engulf Bear Stearns.

After a steady morning, the Dow Jones Industrial Average abruptly plummeted in the final two hours of trading. The New York Stock Exchange imposed trading curbs to calm nerves but the blue-chip index still ended down 281 points, or more than 2%, at 13,181.

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As Bear Stearns’ shares went into freefall, chief executive James Cayne urged investors not to panic and insisted that the bank’s balance sheet remained “strong and liquid”. He said: “Bear Stearns has thrived throughout both tumultuous and fortuitous markets for the past 84 years.”We are experiencing another market cycle and we are confident in Bear Stearns’ ability to succeed in this market - as it has in so many others.”

But on a hastily convened conference call with analysts, Bear Stearns’ chief financial officer, Sam Molinaro, described conditions in the credit market as the worst that he had seen for 22 years. The bank’s shares dropped 6.3% to $108.35.

What this history indicates is that, for a long time people involved with Bear Stearns were asking, “Where is my money?” All the people in August, and the months that followed, downgrade after downgrade, were falling into a sinkhole that would hopefully bail out bad sub-prime mortgage backed investments. When Bear investors fled instead, the rug was essentially pulled out from under execs. The shareholders meanwhile were getting slighted up until and including the very end.

Where Is My Money?

“Where is my money?” — a question certainly that Joe Lewis wanted answered months later, on the morning of Monday, March 17th, as he held approximately 11 million shares of Bear Stearns. The same shares that in August were worth $108. The same shares that sold to JP Morgan for $2.

To make matters worse for Bear Stearns, 30% of its shareholders were some 14,000 Bear Stearns employees. Those 14,000 are survivors of lay offs which began that same summer the above article was written. Now, roughly half, or about 7,000 of those surviving 14,000, won’t make it to JP Morgan. They’ll be forced to look for a job when it could not be a worse time.

Perhaps we each ought to ask ourselves before its too late, where is my money?