Bankers Take the Spotlight

With the Securities and Exchange Commission now combing through Wall Street brokerage firms' books to ensure they are being consistent in their accounting methodology, the pressure will likely be on for these firms to be conservative in their valuations.

This could well mean more hedge fund blowups and cascading, fear-driven selloffs. It may also mean more declines for the financial sector, particularly brokerage houses like Bear Stearns(BSC Quote), Lehman Brothers(LEH Quote), JPMorgan(JPM Quote), Morgan Stanley(MS Quote) and Goldman Sachs(GS Quote), among others.

Without accurate valuations, banks are unclear on how much margin collateral to demand, or how much exposure they have in their own warehouses and proprietary trading desks. The uncertainty reached an apex last week, when French bank BNP Paribas seized up withdrawals from two of its funds after acknowledging it is unsure of how at risk the bank is from these types of investments.

"It is unknowable how far this goes, but as surely as night follows day, it is spreading," says Jeffrey Saut, chief equities strategist at Raymond James.

The ensuing panic after BNP's news Thursday caused banks to scramble for cash to cover potential losses and to increase their lending rates to each other. That caused the European Central Bank, the Federal Reserve and the Bank of Japan, among others, to inject unusually large amounts of liquidity into the system.

The Fed had injected $35 billion earlier in the day, after $24 billion on Thursday morning. At around 1:50 p.m. EDT Friday, the Fed set up a third operation to offer an extra $3 billion into the system, seemingly to ensure enough liquidity for the weekend. The special actions were the greatest the markets have seen since after the Sept. 11, 2001, terrorist attacks. The Fed added a daily average of $75.3 billion in the week after the attacks, according to Bloomberg.