APTOPIX Wall Street
Jin Lee  /  AP
Michael Ackerman talks on the phone on the floor of the New York Stock Exchange on Friday, when the Down Jones industrials fell nearly  400 points.
updated 6/7/2008 9:27:04 AM ET 2008-06-07T13:27:04

The chief executives at the world's biggest financial institutions might have been a bit too optimistic by declaring we may be nearing the end of the global credit crisis.

Morgan Stanley's John Mack said in April it had reached its eighth inning or "maybe top of the ninth" of a baseball game. Goldman Sachs' Lloyd Blankfein compared it to football's "third or fourth quarter." Richard Fuld at Lehman Brothers and Merrill Lynch's John Thain were also more upbeat about the future.

Just as Wall Street started to look safer for investors, another wave of anxiety about the financial industry, inflation and the economy dragged down stocks this past week.

Investors continue to worry that the pain might not be over for financial companies — and that the market as a whole will suffer until investment banks release quarterly results later this month.

"Financials have become the kid that brings home a bad report card," said Chris Johnson, president of Johnson Research Group in Cincinnati. "Once they bring home C's and D's, you watch that kid closely week to week. If they bring home A's, you only really care once a quarter."

Cash shortage fears
Johnson was among many investors who thought the sector appeared to have bottomed in March when JPMorgan Chase & Co. rescued Bear Stearns from the brink of collapse. Now there are worries that Lehman Brothers Holdings Inc. is facing a serious cash shortage.

The investment bank has denied it's short of money, though a spokesman said it continues to examine options to increase capital through an outside investor or stock issuance.

Analysts say they are scrutinizing every move the financial sector makes to determine when the elusive rebound will happen. And, after five days of more bad news for banks and brokerages, they are still no closer to answers.

The Philadelphia Stock Exchange/KBW Bank Index gave up more than 5 percent of its value in the past week, hitting a 52-week low. Though many thought the credit crisis was in the rearview mirror, the market has felt some pretty strong reverberations.

Wall Street began the week with high-level shake-ups at Washington Mutual Inc. and Wachovia Corp. Standard & Poor's downgraded the two biggest bond insurer, MBIA Inc. and Ambac Financial Group Inc., and also cut its ratings on Lehman, Merrill Lynch & Co. and Morgan Stanley.

The ratings agency has been most critical of Lehman Brothers, saying its balance sheet was the closest of all the Wall Street firms to Bear Stearns. And, Lehman Brothers itself had to deal with everything from reports it is seeking an outside investor to trading-floor rumors of borrowing money from the Federal Reserve.

Talk of a bottom
So, has the financial sector sunk low enough that it's closing in on hitting bottom?

"I think we're a little early to call a bottom yet, and at this point nobody is in a big rush to add massively to their exposure to financials," said Brian Gendreau, investment strategist for ING Investment Management. "But, that said, they've been battered down so badly that at this point there's little to be lost in investing in them, and that's about as optimistic as I can get."

Gendreau said for long-term investors, the historic lows seen across the entire financial sector does make some big banking companies such as JPMorgan or Merrill Lynch look attractive. He and other institutional investors are keeping an eye on the sector, which historically leads the broader stock market higher.

That puts even more importance on what might come out of three of the nation's biggest investment banks when they report fiscal second-quarter results later this month. Lehman Brothers, Morgan Stanley and Goldman Sachs Group Inc. are all expected to have another tough quarter dealing with the fallout from the credit crisis, and investors will be paying close attention to what their CEOs say this time around.

In particular, there are reports that Lehman might move their quarterly announcement up a week to dispel rumors of a liquidity problem. The nation's fourth-largest investment bank is set to release results the week of June 16. A spokesman would not comment.

Most people on Wall Street feel the market feel investment banks can't really fall that much more, and a rebound will help the stock market ratchet higher. Those who snapped up financial stocks in March are still waiting for a big payday.

"There's a fine line between being early and being wrong," said Johnson. "Its always the darkest before the dawn when it comes to value investing."

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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