Wall Street banks shiver in Bear's shadow

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NEW YORK (CNNMoney.com) -- The financial services sector was shaken early Monday, the first trading day following news of JPMorgan Chase's buyout of Bear Stearns - for just $2 a share - in the face of a cash crisis that brought the firm to the brink of bankruptcy.

JP Morgan was the one bright spot in the banking sector with its shares jumping nearly 12% in early trade, helping lift the Dow into the black, as investors signaled their approval of the deal.

JPMorgan (JPM, Fortune 500) managed to buy Bear for "next to nothing," said Dave Rovelli, managing director of U.S. equities at Canaccord Adams. With the Federal Reserve backing the deal with $30 billion, JPMorgan "basically stole Bear Stearns," he said.

Indeed, the deal, which is slated to close by the end of June pending shareholder approval, is expected to generate roughly $1 billion in after-tax earnings for JPMorgan over the next 12 to 18 months.

Bear's stock traded as high as $160 a share this time last year. Shares ended Friday's session at $30, off 47% from Thursday's close. On Monday, shares fell an additional 87% to $3.70.

Despite the $2 price tag that JPMorgan attached to the stock, shares of Bear Stearns traded as high as $4 in afternoon action, suggesting that some investors think Bear may achieve a higher price before all is said and done.

Other investment banks, including Morgan Stanley, Goldman Sachs and Lehman Brothers, followed Bear's lead.

Shares of Morgan Stanley (MS, Fortune 500) were 8% lower Monday morning before paring some of the losses during the afternoon. Goldman (GS, Fortune 500) shares fell 6% after dipping as much as 13%, while Lehman (LEH, Fortune 500) shares plummeted nearly 24%.

Bear's implosion also weighed on thrifts and mortgage lenders. Shares of Washington Mutual (WM, Fortune 500) tumbled 14% and Countrywide Financial Corp. (CFC, Fortune 500) fell 8%. Shares of government backed lenders Fannie Mae (FNM) and Freddie Mac (FRE, Fortune 500) were also lower.

Bear Stearns, the fifth largest investment bank in the nation, is perhaps the biggest name to fall victim to the credit crisis. Its exposure to toxic mortgage-backed investments, combined with its inability to find financing, left it with a choice between bankruptcy and selling itself at a fire sale price.

Meanwhile, Morgan Stanley is expected to announce $1.2 billion in writedowns on leveraged loans and mortgages when it reports quarterly results this week. Morgan wrote down $10.3 billion and reported a $3.6 billion loss for the 2007 fourth quarter that ended in December.

Morgan is considered to be in a comparatively strong position relative to Goldman Sachs and Lehman Brothers.

Both of those banks appeared to have dodged the worst of the mortgage meltdown last year, when Goldman reported a fourth-quarter profit of $11.6 billion and Lehman posted income of $886 million.

But there is more fallout to come. Analysts at Citigroup (C, Fortune 500) are expecting first-quarter writedowns of $3.2 billion for Goldman and $1.6 billion for Lehman.

Lehman's stock tumbled 22% in early trading Monday as rumors began to circulate that it could suffer a fate similar to Bear Stearns. But the bank's CEO, Richard S. Fuld Jr., maintains that Lehman has enough cash to keep doing business.

Investors will pay particularly close attention to Lehman's first-quarter results when they are released Tuesday, Rovelli said.

Rovelli hopes Lehman will not follow in the footsteps of Bear Stearns. "Losing two top investment banks in the same week would be devastating for the market."