Bear Stearns is gone. Lehman Brothers (LEH) is fighting to stay afloat as an independent company. Merrill Lynch (MER) is right up there with the investment banking operations of Citigroup (C) as the domestic firms with the most bad mortgage exposure. Goldman Sachs (GS) is seen as the cream of the crop, but they surely are being dragged down with everyone else too even though they reported pretty good numbers this morning.

Although the investment banks are down a ton, I have not been taking the contrarian side of that trade and scooping up any shares. And I do not plan to do so either. There are two main reasons I just do not feel comfortable investing in pure investment banks.

First, the highest margin products for these firms have either peaked this cycle already or have disappeared completely and will take years to recover. Structured products carried the highest levels of profitability, but many are no longer going to have a place within the industry. Others will take months or even years to regain their luster.

M&A activity has also peaked with the private equity boom. Deals are still going to get done, but 2007 was the peak of the cycle. As a result, overall margins at investment banks will decline as they de-lever and no longer sell as much of their highest margin products.

Second, the balance sheets at these investment banks really are black boxes from an investor prospective. Even though disclosures have improved in many cases over the last few quarters, we really do not know exactly how these firms make their money and what they are holding. Their financial statements break out categories such as sales and trading or principal transactions, but that really does not tell us what exactly they are selling and trading. Balance sheets remain quite opaque.

Without transparency and high margin products to keep profits growing (ROE's will decline as leverage comes down) and investors informed, it is really hard for me to justify investing in these firms that have no core banking deposits like traditional banks do. The Wall Street business model is just a lot more complicated than a traditional bank. As a result, the latter group is far more attractive to me when bargain hunting in financials.

Full Disclosure: No positions in the companies mentioned at the time of writing