Due to the losses on mortgages, Merrill Lynch (NYSE: MER) is expected to take a big hit to earnings this quarter when it reports on Thursday. Analysts estimate the company may lose $4.57 per share, and the stock could face some more rough weather before it gets through all the financial subprime loan turbulence on its books.

Looking back at past earnings, the stock is not headed in a good direction right now. The stock beat estimates for 11 quarters in a row, but that record turned around last quarter when it reported a 45 cent loss and dropped 9% on the earnings release. With Merrill Lynch looking at a $4.57 earnings hit this quarter, things could get worse before they get better.

The banks pumped so much money into the housing market (with not so much as a whimper from the government) that it blew up in their faces. The depressed housing market exposed questionable lending practices at every level of the industry, from the solo mortgage broker to the largest of investment banks and their partners in crime, the rating agencies.

Thousands of mortgage brokers are now looking for work, as are the Chief Executive Officers of Citigroup Inc. (NYSE: C)'s Chuck Prince, and Merrill Lynch & Co,, Inc. (NYSE: MER)'s Stanley O'neal. The difference between the two groups, however, is the multi-million dollar severance packages. The ex-CEO's may have seen their reputations damaged but not their bank accounts. I wonder where they bank - offshore perhaps?

The sad housing market is old news by now, although it keeps getting sadder. The real issue now is, how do we put trust back into a banking system that has proven itself so flawed? We have been seeing almost all of the banks write down the value of their holdings on a daily basis. Now what? The banks essentially were crushed by a Frankenstein monster of their own creation. Any stock portfolio that includes financial stocks has been poisoned for the next year at least.

For most of our lives bankers have been represented to us as conservative creatures, dressed in pin-stripe suits, nary to part with a dollar and certainly adverse to taking any risk. This image was cast in our movies, television, and novels. Unfortunately, with events playing out as they are today, this carefully-crafted stereotype couldn't be further from the reality.

Mr. Drysdale, who managed Jed Clampett's millions in the Beverly Hillbilly's television show of the '60s is just that -- a TV character. If you look back over the last few decades it has all been a facade, and the government has participated in this fraud by loosening banking laws and allowing these institutions to wander farther and farther from rational and safe behavior in pursuit of the highest returns they could get without limit.

If you are old enough, you might remember back three decades when the banks were seeking these high returns in South America, when inflation and interest rates tempted them and they all took a big bath. Then a decade later in 1989 the commercial real estate market collapsed amid over-valuations, and many banks and thrifts collapsed along with them...right into the arms of the Federal Government, which was forced to take them over with yet another bailout. This took about five years to turn around and things were brighter by early 1995.

Last week I was reviewing investment banks for potential inclusion in one of our portfolios. I looked at numerous factors. Initially, what got me thinking about this sector was opportunity for growth versus good value of prices for the shares. At the time I concluded that Bear Stearns Cos (NYSE: BSC) was the best value with the greatest upside. It was hovering in the $153 to $156 range when I put in a limit order at $148 per share, good-till-canceled (GTC). After enough headlines about sub-prime lenders and financial sector woes that cast a giant shadow on most financial stocks, BSC reached my limit.

Last week the quality companies went down with the junk which should not happen, but it often does. Historically, this has presented me with wonderful opportunities to make a good buy and indeed I got scooped up at our $148 figure. Yesterday BSC closed at $153.83.

This morning, Brent Archer posted about Goldman Sachs, reaffirming one of Cramer's nine picks of the year. Allan Halprin also called our attention to The Savviest Stock Picker in America -- Ken Heebner of CGM Capital -- a must read. Heebner favors most of the investment banks right now. I just favor BSC. Here are the tantalizing figures for your consideration: