Despite his poor performance in recent years, Legg Mason (LM) portfolio manager Bill Miller remains bullish on stocks. He writes in a letter to Legg Mason Value Trust shareholders Wednesday that “with most investors being fearful, I think it makes sense to allocate some capital to the greedy side of that pendulum, and that means putting cash to work in equities.”

Miller’s comments come after the Value Trust posted a 20% decline in the first quarter, weighed down by big bets on Bear Stearns (BSC), Countrywide (CFC) and Washington Mutual (WM), among others. But Miller says the fund has been doing better in April’s healthier market. And he notes that despite the criticism of his money-losing Bear Stearns investment, Legg Mason actually has had a much bigger position in JPMorgan Chase (JPM) - whose shares have risen since the big bank agreed to buy Bear in a Fed-induced rescue.

Miller’s 15-year-long streak of outperforming the S&P 500 is history now, in the wake of poor performances in 2006 and 2007. But that doesn’t mean Miller is ready to let go. “My friend Jeremy Hosking, who has delivered around 400 basis points per year of excess return over two decades at Marathon (in London), corrected me recently when I spoke about our underperformance,” Miller writes. “‘You mean, your deferred outperformance,’ he said. I thought it a clever line, but it contains an important point.”

You might assume the point is that no one should ever bring up Miller’s recent negative returns, but that’s not quite it. “For value investors, price is one thing, and value is another,” Miller explains. “When prices move against us, it usually means that the gap between price and value is growing, and our future expected rates of return are higher.”

While that sounds nice, the recent action in some big Miller holdings - his top 10 positions at March 31 included UnitedHealth (UNH) and General Electric (GE), both of which recently saw big stock price drops after poor earnings performances - offers a reminder that high expectations can be tough to live up to.

By James Ledbetter (Colin is off for two days, so you’re stuck with me.)

On Tuesday morning, I asked the assembled financial wisdom at a Fortune.com meeting - this included Roddy Boyd, Allan Sloan, and Shawn Tully - if there was any scenario by which JPMorgan’s (JPM) bargain-bin deal to buy Bear Stearns (BSC) for $2 a share could fail. The answer came back a resounding no, for convincing reasons I will detail below.

Today, though, the answer seems slightly less clear. The Wall Street Journal reports that billionaire Joe Lewis - who owns some 12 million Bear shares - has filed with the SEC to register his dissatisfaction with the proposed deal. (On top of his already substantial holdings, Lewis added 569,000 shares on March 13 at the painful price of $55.13 apiece.) In language that nicely echoes Malcolm X, Lewis says that he and his crew “will take whatever action that they deem necessary and appropriate” to protect the value of their investment. That could mean, the Journal reasonably predicts, making an alliance with Bear employees - who own 30% of the stock - and other disaffected shareholders, like Bruce Sherman’s Private Capital Management, which last I checked owned more than 6% of Bear. Add that to Lewis’s 8% and it’s not impossible to see a majority of shareholder voting to reject Morgan’s shrewd offer.

Could it really happen? My understanding is that, in order to shun the JPMorgan offer, the company would have to declare bankruptcy, and in bankruptcy the shareholders have to get in line behind other creditors, thus by no means guaranteeing a better outcome than $2 a share. On top of that, as Roddy pointed out on Tuesday, such a move would spawn litigation that our grandchildren will still be writing about some day. Moreover, it was argued, it still wouldn’t restore the fundamental asset that Bear has lost, which is credibility: Even if Bear could rise from the dead, why would anyone want to do business with them at this point? Those remain powerful arguments. But even if their plan is a long shot, you could lose a lot of money betting against furious billionaires hellbent on protecting their assets.

Bear Stearns (BSC) is working desperately to sell itself to JPMorgan Chase (JPM)  before financial markets reopen overseas this evening. Shareholders of the trading firm, which stunned Wall Street Friday by admitting it had essentially run out of cash, could get as little as $15 a share, CNBC reports. The Wall Street Journal says a deal could be worth less than $20 a share, or around $2.2 billion. The companies may announce the outlines of an agreement as soon as this evening, Bloomberg reports, even if they haven’t yet hammered out a final agreement on the price.

A sale at $15 to $20 a share would mark quite a comedown for Bear, whose shares closed Friday at $30 apiece after a 47% plunge. The shares fetched $170 last year and more than $70 apiece as recently as last Monday. That was before fears of a liquidity crisis swept the markets last week, prompting Bear execs to claim on TV that the firm’s access to cash was adequate. They were forced to change their tune after hedge fund clients and others pulled billions of dollars in cash out of Bear Stearns in a classic run on the bank. The Fed bought time for a sale this weekend by agreeing to backstop a JPMorgan loan to Bear Stearns, but the ratings agencies may have forced a hasty resolution of the matter by downgrading Bear Friday - a move that effectively keeps the firm from borrowing money in the market.

Now, regulators are eager to have a sale of Bear announced sooner rather than later, so that fears of Bear’s possible demise don’t spur a massive selloff when Asian trading opens Sunday evening New York time. The Journal reports that while “all sides were pushing hard to complete an agreement,” the talks were “fragile.” While JPMorgan would surely like to take over Bear’s prime brokerage business, which caters to hedge funds, it may not be eager to take on the risks associated with Bear’s mortgage book. If a deal doesn’t get done today, the Journal reports, the firm could be forced to file for Chapter 11 bankruptcy as soon as this evening.

The near collapse of Bear Stearns (BSC) is weighing on rival Lehman Brothers (LEH). Lehman shares dropped 12% in heavy trading Friday after JPMorgan Chase (JPM), at the behest of the New York Fed, agreed to finance cash-strapped Bear for the next month. Lehman’s selloff came even as the firm said it had arranged a $2 billion credit line with a syndicate of banks.

But fears surrounding the near-death experience at Bear, down 47% in late afternoon action, overwhelmed the Lehman news. Bear’s plunge comes as big banks and brokerages pull back on lending amid a sharp decline in the value of all sorts of debt securities. With lenders declining to extend credit, heavily leveraged firms like Bear face the prospect of a classic run on the bank, in which demands for repayment substantially exceed the cash on hand, making the firm insolvent. There’s no sign Lehman is in that situation yet, but investors clearly sense trouble is brewing. The annual price of insuring against a debt default on $10 million in Lehman bonds rose 15% Friday to $465,000, Reuters reported.

Rumors that Bear Stearns (BSC) is seeking a merger with a big bank failed to lift the stumbling broker’s shares Friday. The stock was down 40% at midday even as investors mulled over speculation that Bear might seek to sell itself to JPMorgan Chase (JPM), which on Friday agreed to finance the cash-crunched firm for the next month, or to an overseas investor such as U.K. titan HSBC (HBC) or China’s Citic. Bear has said a merger isn’t part of its strategy, but it seems clear now that the firm is in distress and may be forced to find a buyer.

JPMorgan and HSBC are among the big financial institutions that have appeared most robust in the wake of the subprime meltdown of the past year. Citic agreed in October to take a 6% stake in Bear Stearns, but the deal is now being renegotiated in light of the sharp declines in shares of both firms. Even if Bear is able to line up a deal, the company is looking at a steep discount to trading prices before this week’s liquidity problems nearly brought the firm down. Bear said it will hold a conference call at 12:30 p.m. Eastern time to discuss its situation. Investors will be hoping CEO Alan Schwartz makes a better showing than his predecessor Jimmy Cayne did back in August, when he inexplicably stepped away from a similar conference call without explanation - a sequence that didn’t exactly ease worries about leadership at the stricken firm.

Bear Stearns’ (BSC) brush with failure sent investors fleeing the stock with renewed vigor Friday. Shares in the broker lost as much as half their value in furious morning trading after Bear admitted that its liquidity “significantly deteriorated” yesterday. That marked quite a turnabout from Bear CEO Alan Schwartz’s statement Monday that “Bear Stearns’ balance sheet, liquidity and capital remain strong.” At 10:20, Bear Stearns was down $22.94 at $34.06 after earlier hitting an 11-year low at $26.85.

After a steep opening selloff, though, other banks and brokers recovered to trade modestly lower. Goldman Sachs (GS) was down 2% to within a dime of its 52-week low, and Lehman Brothers (LEH) sank 4% after earlier tumbling as much as 11%. Clearly there are investors betting that at these low levels, the stocks offer a good risk-reward profile. With any luck those bets aren’t being made with borrowed money.

Update: Bear Stearns (BSC) shares plunged 27% Friday morning after the mortgage-heavy brokerage firm needed to be bailed out by a big money center bank with government backing.  

 JPMorgan Chase (JPM) agreed to provide the struggling broker with secured funding for 28 days. The financing will be backstopped by the Federal Reserve Bank of New York - the latest signal that federal officials are deeply concerned about the health of the financial sector and are trying to show investors that they will prevent big institutions from faltering. Bear Stearns admitted in its statement Friday morning that it was on the ropes before the deal came through.

“Bear Stearns has been the subject of a multitude of market rumors regarding our liquidity,” CEO Alan Schwartz said in a company statement. “We have tried to confront and dispel these rumors and parse fact from fiction. Nevertheless, amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated. We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations.”

The announcement comes a day after Bear Stearns shares fell as much as 17% amid worries the firm could collapse under the weight of declining values in the mortgage securities market. JPMorgan made a nod to those concerns in its announcement Friday morning. “Through its discount window, the Fed will provide non-recourse, back-to-back financing to JPMorgan Chase,” the bank said. “Accordingly, JPMorgan Chase does not believe this transaction exposes its shareholders to any material risk.”

JPMorgan also noted the possibility that mere financing may not be enough for Bear Stearns, whose shares have lost more than 60% of their value amid the ballooning mortgage problems of the past year. “JPMorgan Chase is working closely with Bear Stearns on securing permanent financing or other alternatives for the company,” JPMorgan said.

Bear Stearns (BSC) is in a nosedive. Shares of the New York-based brokerage house plunged as much as 17% in morning trading Thursday as investors wondered how Bear will weather the latest downturn in the mortgage securities market. Thursday’s selloff took Bear shares down to $50 and change - less than a third of their price last year, before bad bets on subprime mortgages blew up two Bear Stearns hedge funds.

Since that episode, which led to several management shakeups at the firm, billionaire investor Joseph Lewis has been buying the stock with abandon. Bloomberg reported Tuesday that Lewis, now Bear’s second-biggest shareholder with a 9.4% stake, was considering buying even more stock in the wake of its recent selloff. He is surely hoping his luck will turn at some point: Lewis made the bulk of his purchases back in July, when Bear Stearns shares traded between $120 and $145. With Treasury Secretary Henry Paulson warning Thursday that the financial markets are in for more stress, it may be a while before the stock sees those levels again.

Bear Stearns (BSC) missed the early part of Tuesday’s Fed-fueled financial sector rally after an analyst warned that the struggling brokerage firm might be forced into a merger. Analyst Richard Bove cut his price target to $45 a share from $67 and reduced his 2008 earnings estimate by more than half. “The problem is Bear’s business model is broken,” Bove said, according to Bloomberg.

Bove’s move comes a day after Bear Stearns shares dropped sharply in spite of comments by CEO Alan Schwartz that “there is absolutely no truth to the rumors of liquidity problems.” Bear survived an earlier round of liquidity worries in the second half of last year, in part by cutting a capital-raising deal with China’s Citic. That deal is now being renegotiated to reflect sharp declines in both companies’ share prices.

This month’s credit market panic aside, the big problem for Wall Street is gauging the firm’s future health. Punk Ziegel’s Bove says Bear’s dependence on the fast-deteriorating mortgage business means it won’t match its 2006 profits for years, which he said is reason to sell the stock. Investors did so with gusto, sending Bear Stearns down as much as 10% to a low last seen in late 2002. Update: Bear Stearns share rallied in late afternoon trading as the financial sector surge accelerated, sending the Dow Jones Industrial Average up 360 points, or 3% - its biggest single-day percentage gain in five years.

Another obscure corner of the debt market is causing pain for taxpayers. States and cities selling municipal bonds are finding they have to pay more to issue so-called variable-rate demand notes, The Wall Street Journal reports. As with the collapse earlier this month of the now infamous auction-rate securities market, the problem is that Wall Street dealers such as Bear Stearns (BSC) and Morgan Stanley (MS) have stopped buying the debt, which allows municipalities to borrow for the long term at lower short-term rates. The dealer pullback has caused demand to dry up and interest rates to spike. The rate California paid on a recent $300 million issue quadrupled to more than 8%, the Journal reports.

Meanwhile, in a novel twist, the failure of the notes to sell at auction could leave them piling up on the balance sheets of so-called backstop banks such as Bank of America (BAC) and Citi (C), which are already stuck with billions of dollars of loans and other assets they can’t sell. That’s not even the worst news in the municipal bond market, though: Bloomberg reports that the California city of Vallejo is near a bankruptcy filing brought on by the collapse of the housing market, which has resulted in lower tax revenue, and rising pension costs. “Bankruptcy is a last resort,” councilwoman Joanne Schivley said, Bloomberg reports. “But guess what folks, that’s where we are now at.”