The financial sector rebounded today on higher-than-expected earnings by two large investment banks while there are still many liquidity concerns floating around the marketplace for other firms with large exposure to subprime securities and illiquid fixed investments. Meanwhile, many analysts are expecting a wave a consolidation to hit the sector under government-funded bailouts for the remainder of those in trouble. Here are a few of the highlights:

Goldman Sachs Group (NYSE: GS) had successfully avoided the subprime crisis when its own traders made a big bet on a decline, but the tough credit markets are finally catching up to the world's biggest securities firm. The company announced a $1 billion loss on residential mortgage loans along with another billion dollar loss on credit products and investment losses. However, shares rose over 8 percent as the damage was far less severe than many predicted.

Lehman Brothers (NYSE: LEH) is another firm that was able to avoid the subprime crisis, but is now finally succumbing to the rough economic climate. The firm reported a 57 percent drop in its net income on weakness in its fixed income division. Its fixed income revenues declined 88 percent amid very poor liquidity in the credit markets forcing the company to write-down the value of many of its securities. However, the damage is less than what many were expecting.

Bear Stearns' (NYSE: BSC) second largest shareholder, Joseph Lewis, called JP Morgan's (NYSE: JPM) offer "derisory" and plans to vote against the buyout. Shares are being repriced for such a vote as many are now speculating that the deal will not be immediately approved. If the market continues to improve, the company may be able to negotiate for a higher price or other bidders could end up coming to the table. This speculation has shares currently trading at more than double the proposed buyout price.

Merrill Lynch (NYSE: MER) shares are up over 4 percent today despite a report by Wachovia citing it as the next riskiest brokerage after Bear Stearns. The firm still has some $30.4 billion in subprime exposure and the worst liquidity ratio at only 52 percent. However, many do not feel that the investment bank is in any real danger as the problems as Bear Stearns were seen as more of a management issue than a liquidity issue in the first place.

There is also some speculator that Lehman Brothers or Citigroup (NYSE: C) may be the next two banks to be acquired in a widely-expected wave of acquisitions to hit the financials following these large declines. The Federal Reserve can't buyout firms itself, so it tends to sponsor larger companies in acquiring weaker ones. We already saw this with the Bear Stearns-JP Morgan deal and may see it with these two companies if they end up showing increased exposure.

In the end, the financial sector is extremely volatile these days and promises to remain that way for some time. It will be interesting to see whether the Federal Reserve ends up sponsoring more buyouts while strong companies like Goldman Sachs and Lehman Brothers continue to impress the street.