The bankruptcy of Lehman Brothers Holdings Inc. (NYSE: LEH), the sale of Merrill Lynch & Co. (NYSE: MER) and the strain on American International Group Inc. (NYSE: AIG) have put an unprecedented strain on the financial system. Investors looking for a way to recoup their losses are probably out of luck.

If you lost money owning shares of financial services companies, odds of getting your money back are remote. To prevail in an arbitration hearing, investors need to prove fraud such as the broker bought stock without their knowledge, bought stock just to generate commissions (churn), bought it knowing that it was unsuitable, or misrepresented the risks of the investment. These claims are all difficult to prove and even if an investor is victorious, there is no guarantee they will get a full refund.

According to New York securities attorney Mark Astarita, arbitration cases take between 14 and 18 months to resolve. Investors win about 50% of the time. "Stocks go down every day," he said when we spoke earlier today. "There needs to be wrongful conduct" to win a case.

DealBook reports that Wall Street firms are expected to dismiss 20,000 more workers in the next two years. That's based on plummeting profit expectations for these brokerages.

The earnings forecast for Wall Street is gloomy. New York's Independent Budget Office (IBO) estimated that Wall Street's profits for 2007 will sink by 85% to the lowest level since 1994. When the final totals are in, profits for 2007 are expected to be $3.2 billion, down from $20.9 billion in 2006. Perhaps optimistically, IBO expects a quick and dramatic recovery -- with Wall Street's profits expected to spike 106%in 2008 to $6.6 billion and rise 85% more in 2009 to $12.2 billion.

I hope for New York's sake that IBO is right about 2008 and 2009. IBO expects bulk of Wall Street's job cuts -- 12,600 -- to occur in 2008 followed by 7,600 cuts in 2009. The IBO's analysis does not take into account layoffs at The Bear Stearns Companies (NYSE: BSC) , whose work force of 14,000 includes about 8,000 employees in New York -- CNBC reported that JPMorgan Chase & Co. (NYSE: JPM) expects to cut 50% of Bear's total work force.

The nation's fourth largest brokerage firm, Lehman Brothers (NYSE: LEH), reported its August 31st quarterly results this morning. Investors began to breathe a sigh of relief as the numbers beat Street's expectations posting $1.54 earnings per share versus the expected $1.43 EPS. Earnings were 3% lower from last year's results, which were accomplished in an accelerating environment.

Lehman Brothers acknowledged a $700 million hit from "substantial value reductions" in mortgage-backed securities. The investment banking and retail brokerage fees were up 3.1% for the quarter and total revenues were $4.3 billion. Lehman Brothers stated that 53% of its revenue totals came from overseas activities, helping to absorb mortgage-backed securities losses.

Lehman Brothers, once known as a pure trading house, has diversified its revenue stream substantially. Coupled with more than 50% of its revenues coming from international sources, the giant firm has shown it can weather the credit-storm.

The stock is up over 4% today on the relief factor. The next few days will see Bear Stearns (NYSE: BSC), Morgan Stanley (NYSE: MS) and Goldman Sachs (NYSE: GS) report their August results as well. If Lehman Brothers is any indication, investors may again feel these stocks have come down too much and begin nibbling away on the buy side. The only remaining significant issue is the credit markets and if they have indeed calmed down. If so, the leverage in the business model of the major four firms could begin to re-accelerate earnings in 2008.

Georges Yared is the CIO of Yared Investment Research and the author of Baby Boomer Investing...Where do we go from here?

Merrill Lynch & Co. (NYSE:MER) posted earnings above and beyond Wall Street expectations, proving the company's many naysers wrong.

The financial services giant posted earnings per share of $2.24 on revenue of $9.7 billion, easiily surpassing analysts' estimates of EPS of $2.02 EPS and $9.25 billion in revenue.

A few weeks ago, brokerage stocks were being crushed when Bear Stearns (NYSE:BSC) was facing sharp hedge fund markdowns from toxic mortgage losses. Bloomberg has an article pointing to some $11 billion that the Wall Street firms are having to eat because of a credit crunch on some of the private equity deals.

Chairman & CEO, Stan O'Neal, noted in the release that revenue diversification made the strong performance possible despite uneven market conditions in what he described as "at times, a hostile market environment." That is referring to the current mortgage and debt markets that have been punishing big Wall Street firms..

The firm did not offer any formal guidance since brokerage firms are subject to conditions in the stock and bond markets. Super-leveraged debt instruments and derivatives help brokers live by the sword and die by the sword. So, as long as the markets remain healthy overall, then Merrill and its main competitors among so-called bulge bracket firms should be fine.

Merrill Lynch shares had traded over $89.00 in early trading, but shares are nearly back to flat at $87.45 on the day.

Jon Ogg is a partner at 24/7 Wall St.; he does not own securities in the companies he covers.

Citgroup Inc. (NYSE:C), which already plans to spend $13.4 billion for Japanese brokerage Nikko Cordial, now reportedly has its sights set on ABN AMRO Inc. (NYSE:ABN), the Dutch bank that's in discussions to merge Wit Barclays Plc. (LON:BARC).

If the Japanese deal -- which has encountered some opposition -- happens and Citigroup is able to outflank Barclays for ABN AMRO what will it do then? ABN AMRO has a market capitalization of about $80 billion. Nikko Cordial and ABN AMRO would be a lot for Citigroup to integrate at once.

Chief Executive Charles Prince, though, may have no choice but to take that risk.

Shares of Citigroup have risen only 4 percent over the past five years, underperforming its peers including Morgan Stanley (NYSE:MS) up 44 percent, Merrill Lynch & Co. (NYSE:MER) up 56 percent and Goldman Sachs Group Inc. (NYSE:GS), up 134 percent.

Even so, the prospect of Citigroup entering the bidding from ABN AMRO should worry Barclays. Other U.S. and financial services firms who are seeking growth overseas may enter the fray as well.

The ABN AMRO saga has just begun.