Investors Await Bear Report, Fed Meeting

The Fed has been using the various tools at its disposal even creating some that investors have never seen before to try to mend the ailing financial markets. Just last week, the Fed said it would pump up to $200 billion into the system by taking mortgage-backed securities as collateral, and then with the aid of JPMorgan Chase & Co. created a plan to lend funds to the Bear Stearns after the investment bank ran short of cash.

On one hand, Wall Street has been relieved the Fed has proved it is willing to act aggressively. But on the other, investors are more anxious than they've been in years; many didn't believe the credit crisis that began last year due to spiking mortgage defaults would reach this magnitude.

"We're sort of in uncharted waters here," said Brandon Thomas, chief investment officer for Portfolio Management Consultants, the investment arm of Envestnet. "Usually the market does a really good job discounting things that are unknown. Now it seems like the unknown is too unknown they don't know how to discount it."

No one probably neither the Fed nor Bear Stearns itself knows exactly how sick Bear Stearns is, and whether it will be able to operate again without the Fed's and JPMorgan's support.

"It's not clear whether this is just a liquidity crunch or an insolvency issue," said Ali Samad-Khan, head of operational risk management consulting for the Enterprise Risk Management practice at Towers Perrin. "There's a fine line between an insolvency problem and a liquidity problem."

A bank that is simply illiquid will be able to pay all its obligations once the tight credit markets return to normal. An insolvent one, however, has fundamental damage and little chance of ever repaying its debts.

Another big unknown is how problems at Bear Stearns will trickle through the rest of the financial industry. If Bear Stearns cannot pay its obligations, its counterparties mostly banks and hedge funds will suffer losses.

Bear Stearns may not actually be insolvent, but the stock market has been burned before and adopted a leery stance after news of the bailout on Friday especially given the quarterly earnings due this week from Bear Stearns, Lehman Brothers Holdings Inc., Goldman Sachs Group Inc., and Morgan Stanley.

When Bear Stearns releases its first-quarter results Monday, investors will to want to hear what the investment bank's next step is sell itself, shed its assets and become a smaller company, or keep seeking out cash as it waits out the credit crisis.