There has been some misplaced optimism that financial stocks bottomed earlier this month based on the notion that much of the bad news about write-offs had come out. Mid-month, the Fed increased the amount of money available to banks to $200 billion. The collateral the agency is willing to take is not of a much higher grade than wall paper.

Last week, unexpectedly, financial shares took a terrible turn South. Among the really large companies in the group most were off 10%. Lehman (NYSE: LEH), Washington Mutual (NYSE: WM), Merrill Lynch (NYSE: MER), and Wachovia (NYSE: WC) were down much more. As money moved into 10-year Treasuries at a rapid pace, Wall St. was signaling that it wanted out of the sector. Something is still rotten in De mark.

Oppenheimer downgraded earnings estimate for a number of companies in the sector last week. There are still rumors that Lehman is in trouble. The market’s move into Treasuries may have something to do with that. The news that Lehman was bilked out of $250 million is not likely to help the shares.

Citigroup (NYSE: C) is now back below $21. If it drops another $3, it would breach its low. Wachovia is only slightly above its period low. Merrill (NYSE: MER) is close. And, Lehman fell every day last week.

Goldman Sachs estimates that US financial companies will eventually have credit losses of $460 billion. Only $120 billion of that has been written off already. Wall St. is concerned that there will be another Bear Stearns-like (NYSE: BSC) event. If most of the banks and brokerages make lows this upcoming week the majority of traders see something extremely bad coming.

The disaster which began last summer has not reached, to any great extent, the  home equity loan markets, money market pools. or the derivative credit swaps market. It only takes one more explosion to bring on another crisis.

Douglas A. McIntyre

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