Trade Update: LEH

We were stopped out of our Lehman Brothers short yesterday. Despite the obvious fundamental failings of Lehman which include the most expensive credit default swaps of the major banks it is a major bank and yesterday the Plungers came in at 3:00 and squeezed the shorts. We want to get back in on the short when LEH breaks down below the March of 34.

Offered Up

When the shotgun wedding of Bank of America and Countrywide was announced the most reviled CEO since Ken Lay Angelo Mozilo, placed his right hand man of the housing bubble, David Sambol in the drivers seat to lead the new company’s mortgage business when the honeymoon began. That was when the fix was still in and everyone on the inside still got everything they wanted. But before the wedding Sambol that weird uncle of the bride who was set to rake in $28 million to stick around for three years raised too many eye brows in congress after irking too much disgust in public for making billions of dollars in junk loans to credit worthless borrowers.

Countrywide Financial Corp. President David Sambol, who became a target for critics of the mortgage company's loan practices and executive pay, will leave after Bank of America Corp.'s takeover instead of running the combined home lending operations as originally planned.

For its part the bank touted the reasonable decision. According to spokesman Robert Stickler,

``We felt it was very, very important that we have someone who is rooted in our culture and the way we do business and who has relationships throughout the company,'' Stickler said. ``That's why we are sending one of our most senior executives to California.''

and for his part Chuck Schumer touted the righteous decision

``Bank of America has done the right thing in deciding not to make Mr. Sambol part of its future plans,'' said Schumer, a New York Democrat, in an e-mailed statement, adding he hopes Bank of America will ``clean up'' Countrywide's lending. ``You cannot divorce Countrywide, the company, from the executives who pioneered Countrywide's predatory practices.''

Yea OK, thanks Yuk. Did you mention how Sambol keeps the cash he just doesn't have to work for it? Too bad they didn't write Sambol out of the deal to begin with, why would Bank of America want to keep him on for $28 million anyway, was it that sterling lending record of his?

Now anyone with a three digit IQ can see that Sambol was simply offered up after the deal to guarantee a continuous stream of mortgage payments to bank executives looked threatened. And what about Schumer, is he part and parcel of the executive package? If so it's a move right out of the double speak 101 text book. While masquerading as being all about the country and the recovery, the true purpose is to prevent defaults on those all important mortgage payments to bank CEOs. We can have our opinions on that, but Chuck is pushing that ill advised Fannie and Freddie jumbo to bail out the bankers bill right. You know the one to permanently raise the limit from $417,000 to as high as $729,750 in expensive parts of the country.

Not allowing Fannie and Freddie to hold such loans on their books "would be a serious problem" that would "really crimp any recovery," in the U.S. housing market, Sen. Charles Schumer, D-N.Y., said Tuesday.

That's a great idea Chuck if you want to bankrupt Freddie and Fannie, but $729,750 is not exactly in the little guys league.

Caught

Barclays Plc, has been running in full stride, but today the credit crisis ran them down. Despite reporting positive earnings for it's fiscal first quarter 2008, the bank took it's first big write down on assets damaged by the credit crisis.

Barclays Plc, the U.K.'s third-biggest bank, reported a drop in first-quarter earnings because of 1.7 billion pounds ($3.3 billion) of writedowns and said further losses from the credit markets are possible.

The write downs though contained to the Barclays Capital securities division and relatively smaller none the less piont to the obvious, Barclays isn't just running it's running scared. The bank which to date has so expertly concealed its insolvency is slowing down as the momentum of the credit crisis is building.

Down on the street the next to draw blood was Moodys. The maligned rating agency, frantic for it's own sake unceremoniously cut senior at 'Aa1', to negative from stable, and downgraded the bank's bank financial strength rating (BFSR) to 'B' from 'B+', then issued a statement.

Moody's said the rating action reflects Moody's concern that both earnings and capitalisation levels could come under pressure from Barclays' exposure to sizeable positions in both the trading and banking book of credit market exposures; the weakening economies of the U.K. primarily, but also Spain, where cyclical pressure on asset quality may exacerbate the pressure on earnings.

Deeper cuts mayor may not have been worthy, but the credit crunch is turning the big players, like too many rates in a cage, one against the other.

According to the interim management statement as of March 31, 2008 the bank remained exposed to 4.2 billion pounds of U.S. subprime loans, 4.5 billion pounds of Alt-A loans, 12.6 billion pounds of commercial mortgages, 7.3 billion pounds in buyout loans, 565 million pounds in structured investment vehicle assets and 2.8 billion pounds of insured bonds. Barclays also has 4 billion pounds of residential-mortgage backed CDOs.

Now comes the question of how to bandage that $3.3 open wound. The Street crowd clamorous for a rights issue, but Barclays management politely says not just yet, thank you.

In an interview, Chief Executive John Varley rattled off various spending choices -- from hiring teams of former ABN-Amro employees to buying a bank in Russia -- that demonstrate how Barclays's capital level isn't slowing down its business.

"We understand how much capital we need at any given time," he said.

Now the Street crowd cries in anger "raise your capital, issue your rights". Do it the name of margins they say to justify it, but could be just as likely that other banks don't want to be made to look bad.

Barclays appears to be "in denial," said Tom Rayner, a banking analyst at Citigroup. Mr. Rayner also said Barclays's write-downs seemed meager compared with its peers, given the size of its portfolio of troubled assets. Barclays has said direct comparisons aren't valid because it holds a different mix of assets.

It is difficult to look worse that Mr. Rayner employer, in write downs or anything else. But Barclays remains stolid, $3.3 billion written down none raised.

Gutted

Bear Stearns was gutted from within. The take down from the board room could not have been more vicious if done with a straight razor in an ally, but by the callous smoothness of it the victims never knew they had been cut, just that they were bleeding. As the shares hovered at 74 the trigger was pulled and the ensuing brutal fall wouldn't end until 2.84. On March, 14 it opened at 54.24 the following day it closed at 4.81, most of the crushing 50 point decline on a single stick and gap leaving no way to run. Share holders, some of them life long employees with shares loaded into retirement funds were wiped out. With all eyes on the Street for bears no one suspected the sharks in Stearns own board room.

But a raiding and hoarding of Bear Stearns options specifically March deep out of money puts of 20, 22.5 and 25 and by the subsequent implied volatility it was clear that someone expected the crash. The puts were so far out of the money with only 5 days remaining until expiration the options exchanges had to be requested to write them. And as soon as they were written they were devoured in a feeding frenzy that only a mad man or a very certain of himself insider would engage in, we bet the latter. Why?

First, it's important to understand that buying a put gives you the right to sell the stock at the strike price. So to buy a put that requires the stock to decline over 50% is essentially a bet that the company is possibly on the brink of going out of business or about to deliver some terrible news.

You have to ask yourself would you make a huge bet that a stock is going to crash for no known reason and do it less than 5 days. No one would do that unless they were mad or certain.

In this Itulip post John Olagues makes the case that the Bear Stearns collapse was artificially created so that insiders could take large short positions in Bear Stearns stock prior and so that J.P. Morgan would in effect be paid $55 Billion of US tax payer money to shore up themselves and to buy Bear Stearns.

On March 10, 2008, the closing price of Bear Stearns was 70. The stock had traded at 70 eight weeks prior. On or prior to March 10, 2008 requests were made to the Options Exchanges to open new April series of puts with exercise prices of 20, and 22.5, and a new March series with an exercise price of 25.

Question: Why did the options exchanges not open the far out of the money puts for trading the first time that BSC hit 70, when the Aprils and March had far more time to expiration. Certainly if the requesters were legitimate hedgers or speculators, buying the March and April with two and three months to expiration was more appealing.

Answer: The insiders were not ready to collapse the stock and did not request the exchanges to open the new series then.

So it appears that as rumors began swirling early in the week that Bear was having liquidity problems and might possibly be bordering on insolvent, someone took that to heart and bought the puts as disaster insurance.

So we have a specially requested issue on deep out of the money puts on or before March 13, which tells you when the perpetrators (insiders) decided to to take it down. But SEC Chairman Cox, Fed Chairman Bernanke, Bear CEO Schwartz, Jamie Dimon of J.P. Morgan and others blamed the crash on false liquidity rumors about Bear Stearns back on March 11. In fact Cox, Schwartz and even Jim Cramer was brought in to pump the stock claiming there was no liquidity problem. THEY LIED!

Reuters, however, on March 10, 2008 was citing Bear Stearns sources that there was no liquidity crisis and that there was no truth to the speculation of liquidity problems. And none other than the Chairman of the Securities and Exchange Commission on March 11, 2008 was stating that "we have a good deal of comfort with the capital cushion that these firms have."

We even had the "mad" Jim Cramer proclaiming on March 11, 2008 that all is well with Bear Stearns and that the viewers should hold on to their Bear Stearns.

And on March 12, 2008, Alan Schwartz CEO of Bear Stearns was telling David Faber of CNBC that there was no problem with liquidity and that "We don't see any pressure on our liquidity, let alone a liquidity crisis."

The fact that the requests were made on March 10 or earlier that those new series be opened and those requests were accommodated together with the subsequent massive open positions in those newly opened series is conclusive proof that there were some who knew about the collapse in advance, while Reuters, Cox, Schwartz and Cramer were telling the public that there was no liquidity problem.

So they were all in on it, the press, the SEC, Treasury, the FED, even scum ball Cramer. It was a scam a huge scam.

This was no case of a sudden development on the 13 or 14th, where things changed dramatically making it such that they needed a bail-out immediately. The collapse was anticipated and prepared for, even while the CEO of Bear Stearns and the SEC Chairman of the SEC were making claims of stability.

With the body of Bear Stearns still warm on March 17 down on the street it was Lehman Brothers the short sellers were circling, it was Lehman Brothers who saw the deadly volatility spike in it options. On Friday March 14, Lehman Brothers (LEH) closed at 39.26, the following Monday March 17, it opened at 25.38 and closed at 31.75 after going all the way down to 20.25. From there on March 18 it miraculously regained its losses and closed at 46.49. Obvious Fraud. For you to believe otherwise you would have to believe that on three consecutive trading days the fair, efficient free markets valued Lehman Brothers as high as 41.92 (high of 3/14) to as low as 20.25 (low on 3/17) then back to 46.49 the close and high on March 18. I don't believe it and neither should you. And if you still don't believe the media are corporate mouthpieces then why were there no media cry of foul, why were no protestations were heard, why didn't CNBC give John Olagues half of the profile of Paris Hilton's new sex tape? And now ask why didn't Lehman go the same way as Bear Sterns right then, as Olagues says because the insiders weren't ready to take it down yet.

So this is what we have, the business model du jour. The deliberate insider gutting of Bear Stearns showed all the other corporate copycat criminals a way out of their personal ashes, by torching the bank instead. Lehman Brothers was not quite ripe in March, but now the meat is hanging on the bone, the bears are on the lose, there will be blood and we are already in. We are short a 1/4 position and will add to it, but puts is what we are really after. We may go after the June 17.5 puts LYHRW, when the market opens Tuesday.

As this new business model takes hold people (buy and holders) will lose everything, wiped out. It will be a colossal crime that few will even know occurred, as always they will watch CNBC, listen to Cramer and read the Wall Street Journal and never know what hit them. They will never know they were cut only that they are bleeding.

Bears Prowling for Lehman

It’s deja vu all over again as again the bears are all over the scent of Lehman Brothers’ blood. Back in March, just after Bear Stearns was gutted, it was Lehman Brothers who saw the deadly volatility spike on their puts:

Down in the pits fear morphs into greed as the same ominous options activity is taking place now on Lehman’s put contracts:

Options traders are making big bets that Lehman stock will drop an additional 24% by Thursday, when March options expire, Dow Jones Newswires reported. Traders also are betting that the shares will continue to plummet over the next month.

Lehman is caught in the same frenzy of credit capture and denial as Bear Stearns was in last week…

And it looked as if PUT buyers were in the know as on Friday March 14 Lehman Brothers closed at 39.26, then opened Monday March 17 at 25.38. And just as soon as Lehman’s shareholders felt their heart pounding with the thud of that $14 plunge like a parachute that didn’t open, the bank rigged its earnings, turning a cliff dive into a roller coaster:

Lehman dazzled last week with earnings that beat the street: dropping by more than half. The firm only wrote off an additional $1.8 billion (miniscule compared to some of the write-down and exposure estimates from our previous coverage, below). Now, don’t all run out and buy Lehman shares too fast. Of course, the street did, and shares surged by 46% the day of the announcement.

It was all well and good so long as you paid no attention to the man behind the curtain. But bears, especially hungry ones see everything:

David Einhorn, the manager of a hedge fund that holds a short position on Lehman, said he suspects the bank’s most recent quarterly data were inflated with one-time, unrealized gains, The Wall Street Journal reported Friday.

And so here we go, it’s deja vu all over again:

There’s been a sharp increase in implied volatility in the options market, suggesting that investors are concerned that this weakness will beget more of the same down the road. Thursday, put option volume outnumbered call option volume by three-to-one, and activity is notably weighed towards pessimism on Friday as well.

The world-wide Ponzi scheme is coming apart at the seams. Lehman Brothers was walking the Green Mile in March only to have that mile lengthened, but they are still a dead man walking nonetheless. We have yet to see how much farther it has to go, but it will certainly end.

Sleight of Hand

The Bull Sh!t keeps getting deeper as the bankers, CEOs and the government they own continue to bury us in it. Beyond the Kudlows , Jim “Bear Stearns is not insolvent” Cramers and Auther Andersonisk mystic accounting methods we now have off income statement balance sheet write downs and Basel II.

Banks and securities firms, reeling from record losses resulting from the collapse of the mortgage securities market, are failing to acknowledge in their income statements at least $35 billion of additional write downs included in their balance sheets, regulatory filings show.

The banks are using sleight of hand accounting to avoid the loss which would otherwise be incurred. The delusion is simple but powerful. By leaving the bad debt on the balance sheet instead of the income statement until it recovers –and it will recover(told you it was powerful)– they avoid the booking the loss. Once the asset makes its inevitable recovery the bank will triumphantly sell it for a profit and book that instead.

Banks that are more willing to acknowledge their balance- sheet write downs, such as Amsterdam-based ING, say the valuations of assets will be reversed when markets recover.

OK great, what do I do with all the Yahoo I bought at $450 per share at the height of that other bubble? Yahoo closed last night at $27, that’s a difference of $423 per share. Now if I haven’t lost it how do I spend it?

While were waiting for the answer to that, let’s puke at Basel II.

The new bank-capital regime, known as Basel II, has gone into effect in some European countries and is being implemented in the U.S. and others starting this year. It allows financial institutions to use in-house risk models instead of just relying on external credit-worthiness ratings in calculating their risk- weighted capital requirements.

What, did he really say that? “It allows financial institutions to use in-house risk models instead of just relying on external credit-worthiness ratings,…” That just means they don’t need to do ANY risk modeling at all. WOW what an improvement, for the banks! Oh, but wait, there’s nothing to worry about.

Even if regulators are soft on banks and brokers when it comes to capital requirements, investors won’t be, according to Samuel Hayes, professor emeritus at Harvard Business School in Boston.

Oooo, emeritus, let hear what he has to say.

The collapse in March of New York-based Bear Stearns Cos., once the fifth-largest U.S. securities firm, shows that fulfilling regulatory capital requirements isn’t sufficient to survive, Hayes said. The SEC has said Bear Stearns was “well-capitalized” until the moment it faced bankruptcy as clients and creditors lost confidence and withdrew their money.

WT.? is he kidding? Not even funny, investors (some life long employees lost their life savings) got scorched in the Bear Stearns take down, burned to the last bloody red cent, and the only reason they got killed is because regulators said they were well capitalized when they were not. The purpose of regulation and regulators is to regulate the banks and protect investors from events exactly like the Bear Stearns murder. Imagine if you can that the SEC came out and said Bear Stearns was not well capitalized when in fact it first became “not well capitalized “(probably years ago). Let me just ask you, Mr. Emeritus, how many investors would not have lost it all on their Stearns position because they never would have taken it to begin with, if the SEC did its job? And let me ask you one thing more. Who’s side are you really on?

Alert: LEH

The put volatility on Lehman Brothers is picking up. I will do a follow up on this over the weekend, but the Bear may be back on the prowl. So take a 1/4 short position on LEH.

Sell short 25 shares of LEH @ 36.13 stop @ 38.13

Hardest Hit

Among the financial giants teetering from credit crunch three large letters say “hardest hit” — UBS. The Swiss bank has taken a staggering $38 billion of credit write-downs so far. In response UBS has set a blistering pace to repair the crushing impact of the write-downs and related losses to the balance sheet. So far the banking giant has raised $26 billion in cash, has cut jobs and costs, and is shedding debt. Yesterday the pace of repair quickened as UBS moved on multiple fronts by simultaneously shoveling a portfolio of severely damaged assets into a SIV to be managed by Black Rock and issuing $15 billion in a rights issue.

UBS AG Wednesday said it has closed the sale of troubled mortgage-backed securities to a distressed asset fund at a discount, indicative of the Swiss banking giant’s efforts to reduce risky positions.

Zurich-based UBS said it sold assets of the subprime and Alt-a category with a nominal value of $22 billion for around $15 billion to a special investment vehicle led by U.S. fund BlackRock, 49%-owned by Merrill Lynch & Co.

Interestingly, $11.5B of that asset sale is being financed by UBS itself, so the sale does not raise as much cash as you would think.
Separately the bank sold new shares, netting $15 billion in a rights issue.

The Swiss banking giant, UBS, said Thursday that it would raise more than $15 billion by issuing sharply discounted shares as it tried to restore capital depleted by losses on mortgage securities. The capital increase marks the second time that UBS has had to raise funds since the credit markets tightened last year with the collapse of the American subprime housing market.

It seems that UBS is doing everything except perhaps generating profits — as with the credit crisis hardening they are not likely to be had soon. So, what’s the point to the hanging-on? Capital raised is not the same as profits generated and sooner or latter a return to sustainable profitability is all that can save the bank. The damaged debt UBS sold they had to finance, and the shares sold were dilutive — each and every one of them. This is the credit bubble after the burst and there are no free rides. For each penny raised — UBS has $26.5 billion worth already – some taxpayer or shareholder somewhere took a hit, and the hits keep piling on. While the authorities and talking heads play up the “support” banks like UBS are receiving, the little guy is getting soundly drubbed.

Volume is a Traders Best Friend

When you put the breaks on in your car does it stop immediately right on the spot or does it cover some more ground be fore coming to a stop?

Let me try this way. Suppose you watch a rocket launch, but you can see the fuel gauge. If you see the tank is nearly empty while everyone else is looking at how fast and far up it's going you will be better able to guess the approximate engine cut out point and turn around point. Its the same way with stocks. Volume refers to the AMOUNT of money coming into or out a stock, it's the fuel and the short covering is the almost empty warning.

The reason I think the turn around in oil is finally here is because of the volume. Don't believe me? Well read this, where the professionals tell the truth for a change.

Alert: DUG

Take a 1/2 position in DUG
Buy 50 shares DUG @ 27.32. Stop @ 25.00

Oil is rolling over a bit. Is it a head fake? I dunno, but if it is we will take only a little bit of pain, but if the long over due retracement in oil is upon us we are in early and will add and score!

Alert: OIL

sell 50 shares OIL @ 80.02

Alert: IAU

12:45-- Bought 100 shares IAU @ 91.47

Cover IAU and go long a full position IAU

Buy to cover 100 shares IAU @ 91.55, then
Buy long 100 shares IAU.

Trade Alert: SLVUpdate:

We were stopped out of our short on SLV yesterday at $171.00 as the metals and oil surged. We will try to enter back into SLV. This time of year is usually the doldrums for silver, but SLV could go back up to retest 52 week high.

Trade Alert: GLD IAU

We are long GLD and short IAU as a hedge. IAU broke the 100 dma after putting in a double bottom near 85 earlier this month. Let cover our short position on IAU and hold the long on GLD open. If gold breaks $925 per ounce we will add either another long GLD or IAU to double up in gold. The dollar is dropping again and oil is doing who knows what or for how long. We will have to be careful in here, but we want to be long gold.

Alert: XLF

Sell short 50 shares of XLF@ 26.48 with stop @ 27.02 position.

Set stops on SLS @ 171.00.

Trade Alert: OIL DUG

We stopped ourselves out of a full position of DUG yesterday for about a $3 loss per share. Half of the shares were naked long the other half were hedged against OIL which has gone nowhere. Remember that DUG=ProShares UltraShort Oil&Gas an index which trades negatively to oil and natural gas, so which ever way oil and gas go DUG should go the opposite. But it's not. To see why take a look at UNG and OIL. UNG has finally begun to roll over as you can clearly see on the daily chart. We tried to short UNG last week, but there were no shares available for shorting which is how we ended up in DUG. But now look at OIL in the daily time frame. PEGGED! Yea pegged and going higher, by how much? I dunno but it could have an explosive break in either direction and we will want to pour in once that direction is determined. OIL will have to pull back sometime as there is a forced de leveraging underway world wide the only question is how much higher will it go first.

So there you have it UNG rolling over, OIL stuck add them up and you get the DUG breaking down under the last support it saw at around 29. Right UNG has clearly changed direction , but I don't have a strong feeling about which way oil and therefore OIL is going to break. But up or down I feel the the instrument to give us the best bang for the buck is DUG. So we will look to enter a short position on DUG on any strength (or anything) with a stop above where the gap should fill at 29. Place the stop at 30.50 to stay away from the specialist.

WaMu is Bleeding

Some wounds can kill and others once inflicted will never heal. Those that never heal are inflicted by betrayal, by trusted ones, by those sworn to protect and are by far the most painful. But it was Washington Mutual who concealed its coming betrayal with such a rarely achieved devastating perfection. In an Enronesque ploy the bank carried on as if all were normal, canceling not a single scheduled event, not even a awards trip for its top performing mortgage sales staff.

At the end of February, around 200 of Seattle-based Washington Mutual’s (WM) best performing retail loan consultants, their guests, and top company brass set off for four days of sun, snorkeling, and gambling at Atlantis Paradise Island resort in the Bahamas.

This was one of many such incentive trips over the years the retail banking and mortgage company had bankrolled for the top 10% of its commission-driven mortgage team.

But it just gave a false sense of security, as by May most would be without a job.

For those salespeople who had been with the company during the real estate boom of the past few years, it was only the latest of many such trips. For first-time invitees it was a trip they had worked hard to earn. But for all of them, though they didn’t know it then, it would be their last.

Like many victims of the mortgage collapse, most of the loan officers, especially those who were in the Bahamas, feel burned.

So, the bank continued to burnish the thin veneer of its glossy outside to a high brilliant luster, while corrupt and corroding from within it was collapsing.

As the subprime crisis worsened and the numbers of defaults increased, WaMu saw its share price drop 70%, from a high of 44.66 on May 24, 2007. Like most other mortgage lenders, it was hemorrhaging money. Since April, 2007, it had lost 74% of its market value. At its first-quarter earnings call Apr. 15, the company announced it had lost $1.1 billion during the quarter and also needed to set aside $3.5 billion to cover loan losses in the quarter.

For staff who had been in the Bahamas, the news was particularly hard to fathom. They were, after all, members of the elite President’s Club, top earners who were able to generate annual revenues of $40 million to $200 million.

Hard to fathom? At first perhaps, but for share holders who depend on share price not snorkeling trips for dinner, that 74% cliff dive hit them right between the eyes. Betrayed, befuddled, searching for answers investors found only lies and corruption.

Washington Mutual Inc. (WM) failed to foresee the speed and severity of the decline in U.S. house prices as the housing-market meltdown rocked the giant thrift, its president and operating chief said Wednesday.

Steve Rotella also told the UBS 2008 Global Financial Services Conference in New York that “2008 will be a very challenging year for earnings,”

Yea sure Steve, but we all saw it. Banks earn profits by lending, profits drive stock options into the money, officers and board members therefore make money based on share price. Now riddle me Steve this: if the insiders sell the corporate soul to the devil, and get out before there is hell to pay do they keep everything? Just asking, because Mary E. Pugh, chair of the bank’s finance committee, has stepped down along with board member Anne Farrell. The banks claims Farrell left, due to the company’s mandatory retirement age. Sure, sure, but the stench gets even more foul.

WaMu CEO Kerry Killinger also announced changes to the controversial executive compensation plan. The plan originally included a rather shady way of calculating bonuses, ignoring some of the credit losses that have clobbered shareholders (and cost former employees their jobs) when determining compensation for top executives.

All the time Steve what did you think of the risk rotten loans?

The investor said President and Chief Operating Officer Stephen Rotella endorsed “risky” loans including adjustable- rate mortgages.

On last quick question Steve, if you were so clueless on the housing crash why were you so busy preparing for it?

Nonetheless, WaMu has secured about $50 billion in “highly reliable excess liquidity,” Rotella said, leaving the bank free from relying on capital markets for commercial paper or unsecured debt. Like others, as WaMu lessens exposure to housing and mortgage risks, it has focused on retail-banking operations to drive revenue growth.

Investor pride is powerful, as powerful as the human psyche is fragile, first it denies, then admits faults and failings only grudgingly, but can in the end it can accept fault undeservedly and disparage its own very best capabilities. Eventually against your most difficult resistance and cognitive dissidence the certainty that you were sold out sets in and as easily as seasons change anguish turns to outrage and outrage seeks to vent.

A WaMu employee stepped to the microphone at last Tuesday’s shareholder meeting and unleashed a fierce attack on the bank’s leaders, particularly President Steve Rotella.

The public rebuke was stunning — and its private aftermath is equally unexpected.

The 2,000-plus shareholders and employees heard Tom Golon, a loan consultant for 10 years in WaMu’s downtown Seattle home-lending center, declare that “this man has driven the company to the edge of bankruptcy, and he should be fired, and his bonuses should be taken back from him.”

Golon, who is among the approximately 3,000 employees losing their jobs at month’s end, called Rotella “the man most responsible for the demise of WaMu,” adding that he was “kicked out of (JP Morgan) Chase four years ago and came over to WaMu to do his damage.”

He did it, they did it! The decimation of share prices, first quarter loss of $1.14 billion vs a profit in Q1 of 2007 in addition to billions taken in write downs and losses with billions more admittedly on the way, bulking up loan loss reserves by $3.51 billion (set aside) two dividend cuts a forced dilutive sale of shares in excess of $7 billion and another $50 billion in various other forms of liquidity all in preparation for a shi# storm for the ages in the global housing market rattled economy.

WaMu has long been a dangerously wounded beast investors have been undeniably better served to avoid. For its part current management probably does not want to finish the beast, they will bleed it to within a centimeter of its life, then bleed it a little more, but not kill it, you can’t beat blood out of a dead WaMu. Yet for this bank the most difficult decision will be whether to live or die.

If by some miracle Stephen Rotellas retail banking and liquidity processing can save WaMu, it will still be at a steep cost. Nothing comes free in the post credit burst. Raised capital will bang up current investors in dilution and only further burden the already over laden share price. Newly invested capital is put at instant extreme risk as with Enron and Bear Stearns. Or the bank could be left to fail turning current investment into certain total loss, but alleviating further risk factors for current and would be future investors. The stark alternatives now force the impossible decision on all participants, which is worse, death or salvation.

The retail investors who have sunk large parts of their life earnings into its shares will not easily let go, and management who prefer to bleed the beast forever probably will. So, for WaMu only death can stop the bleeding, bleeding from wounds that will never heal.

Alert: DUG OIL

DUMP DUG!
Sell 50 shares DUG @ 26.90

HELL To Pay

The Master Manipulators are spreading the good cheer that the worst of the write downs and credit crisis related losses are behind us. With the shock wave of the credit bubble poised to burst through every credit instrument known to man delusions and denial are at their highs.

The market has, obviously, taken the view that the worst of the write downs are behind us, and if anything it’s now just a macroeconomic problem we face. I think that’s dead wrong.

Dead wrong is right. All through the housing bubble these manipulators sold the economy’s soul to the devil and now there is hell to pay.

We’re now entering the phase where the macro impacts earnings, but also the stage where real cash losses start to hit the banks (subprime and Alt-A is primarily a mark-to-market issue, but HELOCs are going to be large, outright losses). Once WAMU, WFC, BAC and JPM start to get data through on how rapidly their HELOC portfolios are deteriorating, watch the losses pile up. I’m talking realised losses, not mark-to-market write downs.”

Bank of America and Washington Mutual have already seen the stark reality of rapidly multiplying HELOC losses when reporting Q1 2008 results.

Bank of America Corp., the nation’s biggest consumer bank, said losses on home-equity loans will be even worse than predicted three weeks ago, adding to evidence that more consumers are falling behind on debts.

The statement from Washington Mutual was equally severe.

The Seattle-based thrift reported $1.1 billion in bad home equity loans and lines of credit in the first quarter, up 35 percent from the same time the previous year, according to a recent regulatory filing.

Realized losses are real losses, like words spoken in anger they can never be taken back, only eternally regretted. For some banks that eternity of regret began when HELOC losses become apparent in the first quarter 2008, and as the credit crunch hardens others will find eternity come to a crashing end in insolvency.

The masters would have you believe in a fantasy a fairy tale, that the worse of the credit crisis is behind us. To believe that you would have to believe that all credit exposures are known, all possible effects predictable and that all further accounting will be clear. It’s not, I don’t and the credit crisis is no fairy tale. If things are going to get better, they are going to get much worse first.

Crude and Goldman

Wall Street is a criminal organization, a mafia and the Godfather of that mafia is Goldman Sachs. Goldman Sachs is involved in every aspect of every market criminality including manipulation of the energy markets.

Right now oil seems like it will go up forever. The market has gaped up the last two mornings but there has not been a sustained follow through. Some of this volatility is due to money and shares changing from professionals taking profits by selling to retail and novice investors who will get their heads hand back to them. This is par for the course at the end of any run, it's how they set you up. The professionals at Goldman Sachs, JP Morgan and others push the price up --every morning for now it seems-- to panic you into buying by making you think they never come back down, THEY COME BACK DOWN!

The way traders push up prices is surprisingly simple. They buy in European futures markets, which don't have the limits that U.S. markets do. That drives up U.S. prices where they may already have positions. It's a move to think about next time one of these exchange chiefs talks about all of the benefits of "market globalization."

Most of this run up like everything in our Ponzi stock market is purely speculative at best manipulative or worse otherwise. Keep this in mind as you trade oil in here.

There is a battle here betweens the bulls and bears. If you think the bulls will win, but can't wait to see go long oil useing USO or OIL with a small position and tight stops. Or you can do what i am doing by going long the above and also long DUG as a hedge.

Alert: DUG OIL

Don't be panicked by the gap. The low on DUG is 28.52 , sell only if it breaks the low. Hold the position on OIL. Check back for a special OIL post that will tell you what 's really going on in the energy markets

Stopped Out of It

To get stopped out is common occurrence in trading. Most traders --myself included-- concern themselves with where to place stops, but not enough goes into just where to get back into the market.

Ideally the market should target the next major support level on the downside and bounce from that number, but that is not the buy at which to re-enter the market. The buy at which to re-enter is the closing price of the first level that was broken on the downside.

Catch that? It's the closing price of where you thought you should.

Volcker Feigning FED Criticism

When J P Morgan and John D. Rockefeller pushed through the Federal Reserve Act of 1913 they both came out in public statements against it while funding it on the sly. Deception 101. In 1968 David Rockefeller funded the Black Panthers in an effort to terrorize America into "bartering a little liberty for a little order". According to Howard Zinn the Church hearings into crimes of the CIA was no more than a cover up disguised as an investigation, an act we will all see again when the housing hearings begins playing in a comedy near you soon. Deceit is commonplace! And right now it's Paul Volcker wearing the disguise of FED critic and playing to befuddled houses everywhere. Befuddled, because the phoney critics disguise is misty and ubiquitous among the Street elite and by its very nature usually impenetrable, but paradoxically the phoney critic can be recognized by the that very disguise.

With brilliant simplicity in Phoney Street Critics Juan Carlos Arroyo Calderon shows how the act plays in just three paragraphs when applied to the Wall Street Bailouts.

The first paragraph is one meant to gain your trust and empathy. Classic sales 101. The author rips into the Street to gain street credibility that he is one of you, referring to himself and his readership as “the rest of us.” Then he tries to schmooze your respect by trying a neat mental trick that you can relate to:

The second paragraph launches into the author’s true agenda: even though you may laugh at Wall Street for screwing over investors worldwide, you should actually feel bad for them. “For all its fault and egos,” Wall Street should be loved.

You can also tell a phoney by the solutions he advocates. In this particular passage, our phoney believes that despite the enormous losses from bad underwriting risk, Wall Street needs to keep trading and lending to “keep America moving again.” The other solution our phoney advocates is bailout. The last sentence is key: more financial institutions may need to be bailed out or fail before this is over.

Next Mish gets it right on when he outs Paul Volcker as a fake critic of the FED by an analogous argument applied to that cabal.

It is that third paragraph You can also tell a phoney by the solutions he advocates which is most telling and it tells you that Paul Volcker is not "one of you", but now at least we all recognize the disguise.

Volcker said the Fed should have the lead role in financial regulation, but to take that on, it needs a reorganization with a senior administrator and a stronger staff if it's to fulfill that role.

Read what Mish has to say about that.

RBS-Not Right

Royal Bank of Scotland proposed rights issue was formally approved yesterday for $24 billion. The bank is a snake eating its own tail and the band aid can’t begin to stop the gushing from wounds opened by the acquisition of Dutch bank ABN Amro and the US subprime mortgage market. It was a forced move which only further fattens its usurers and elites, but merely delays the inevitable bleeding to death from the inside.

In addition to the $3.6 billion in write downs we now count $24 billion in raised capital.

After absorbing dutch bank ABN Amro and defiantly raising it’s fiscal year 2007 dividend the Royal Bank of Scotland declared there would would be no need to raise new capital. But when the bank woke with a big fat belly doubling portfolio of mortgage-backed securities it finally coughed up to the disgust of investors the notion of a rights issue, and yesterday management won formal approval to dilute itself by $24 billion worth of new shares.

Royal Bank of Scotland Group Plc won shareholder approval to raise 12 billion pounds ($23.4 billion) in the sale of new shares to shore up capital depleted by write downs and the takeover of ABN Amro Holding NV.

Investors gathered at RBS headquarters in Edinburgh voted 95 percent in favor of the plan to issue 6.1 billion new shares in a rights offer. The bank also won 96 percent approval to distribute 1 billion new shares to pay the first-half dividend in stock rather than cash. The new shares, offered at a 46 percent discount to the April 21 price, will increase stock outstanding by about 40 percent, diluting investors’ current holdings.

Don’t be fooled by the 90% + approaval, investors had no choice. Cash stream is a banks blood flow and without it RBS has no pulse.

So far no heads have rolled and Chairman Tom McKillop made it perfectly clear that would not be happening. After gracing the shareholders with a fitting but formal apology

company directors back Chief Executive Officer Fred Goodwin, McKillop said again today.

“The right thing going forward is to support existing executive management,” McKillop said. “They have expertise to deliver the many opportunities ahead of us.”

Are you kidding me?!!! They had the expertise to put you in this fix in the first place. And that’s putting it euphemistically.

The buy out of ABN was a botch to begin with, it made no sense except to the ones directly involved with the fees, royalties and sundry of other payoffs and kick backs, all quite legal if not proper I assure you. Show me the directors and insiders who benefited from them and I’ll show you who’s protecting Goodwin. But Mr. Goodwin well knows that a CEO is just the right rank for a patsy, high enough to quench blood thirst of angry shareholders and draw the attention of investigators, while low enough to give up with out skipping a beat.

Details of the investigation are buried in the prospectus for the bank’s imminent £12 billion rights issue, which will be put to a vote at a shareholder meeting this week.

I seriously doubt much will come of this SEC investigation into his majesty, but if it does I promise you they will eagerly give Goodwin up.

The Other Side of The Ride

Sometime you comes across a gem of advice and this is one I have stumbled on a few times now. I have written it down and putting it in my blog so maybe there is a chance I'll remember it.

One of the best tidbits of advice I received as a young buck was to put yourself in the shoes of the person on the other side of your trade. See what they see. Think what they think. Keep your friends close and your counter-party closer!

Here is the entire story The Other from Minanville.

HSBC's Loop-holes and Lies

We have been reporting the most conservative HSBC write down numbers (those of HSBC itself), but the stench of something rotten -- something covered-up -- kept on rising. Yesterday that rotting carrion of the deception laid out by Michael Geoghegan, HSBC's chief executive was skillfully uncovered by activist investor Knight Vinke, after the bank reported profits along with seemingly acceptable subprime related write downs.

Vinke pointed out the Enron-esque accounting loopholes by which the bank avoided recording a $5 billion fiscal first quarter 2008 loss. Knight Vinke said that

HSBC should have been gloomier about its own prospects. The fund manager, which has been agitating for HSBC to sell HFC, said that the group was the only large bank not to make a fair value adjustment on its loans to customers and other banks.

If HSBC accounted for the loans at their market value, they would be worth almost $30 billion less than $1,218 billion book value that the bank ascribes them, Knight Vinke said. Of that loss, about $23 billion comes from HFC. Taking the writedown would have pushed HSBC into a $5 billion loss last year instead of a $24 billion pre-tax profit, the fund manager said.

The banks response was technical, lawyerly and perhaps a bit condescending:

Douglas Flint, HSBC's finance director, said that Knight Vinke's claims were based on a misunderstanding of accounting rules. He said:

“Customer loans are accounted for differently to trading assets. We wouldn't be permitted by current rules to account for our loan book in the way Knight Vinke suggests we should.”

But we suggest to Mr. Flint that a full disclosure would have included just such information rather than the above dodgy rebuttal. Here is how Yves Smith puts it:

Amazingly, HSBC's denial was weak, arguing that the losses were in consumer loans and therefore weren't required to be marked to market. In other words, if HSBC kept its books on the same basis as a US bank, its losses would indeed be much higher. However, HSBC is also claiming to have only moderate delinquencies on its mortgage book.

HSBC is gambling that there really are no long-term impairments on that consumer loans book. If they are wrong, then at best the losses will bleed out over a period of years rather than all at once. Seems to us it would be better for investors long-term to get it over with.

On the other hand, this way works better if insiders want to sell up front...

Alert: DUG OIL

Buy 50 shares DUG @ 29.14
Buy 50 shares OIL @ 75.33

Trade Update: DUG

We are going to hedge or DUG oil short play with OIL. We are short 1/2 position DUG, fill that one out right now @ 29.19. There is a nice saucer shape bottom forming on the inter-day chart so this is a good place to add to. I fully expect to get stopped out of OIL some time this week, but what I expect does not matter. the leverage here is about 2 to 1 OIL to DUG so we will go long OIL with a 1/2 position. The US dollar and geo-political events will be the drivers in this one.

Trade Alert: SLV

SLV just shot up over 171 in only a few minutes. It is dicey here, but don't panic. The stochastic in the 15 minute chart is at 100%, SLV is at the 100 dma on the daily chart, but more than that the volume is pathetic. I think its a sham, a short squeeze. Hold the position with an itchy trigger finger on the mouse.

HSBC Doubles Up Q1 Write Downs

After writing down just $2.1 billion to asset-backed securities, monoline credit exposures, credit trading positions, and leveraged loan financing positions, for all of 2007, HSBC reported a $3.2 billion write-down on subprime mortgage assets in the United States. And while the bank and the finical media are trumpeting that the first-quarter profit was better than in the same period a year ago,

Underlying revenue was "comfortably ahead" of a year ago after a $2.7 billion gain due to the changing value of the group's own debt. That gain largely reversed out in April, but even without it, revenue growth remained positive in the first quarter, HSBC said.

we keep our eye on the fact that the fiscal first quarter write down doubled the same period of 2007. In addition

The group also said Monday that its global banking and markets arm took a write-down of $2.6 billion, including $500 million on subprime assets, $1.1 billion of non-subprime credit trading assets and $700 million on its exposure to bond insurers.

Significantly growth came from Asia and Latin America where inflation has yet surface. So, despite the top line improvement

...it's worth noting the lender itself was more cautious. "The outlook for the rest of the year remains unusually difficult to foresee in the current environment," the bank said.

HSBC is a bank relying on top line growth from emerging markets to off set the write downs incurred by damaged US subprime mortgages. It is not so much the bank as its fortunate exposure to superior markets responsible for the revenue growth. But as the credit crunch and inflation spread globally, the growth and profits will shrink locally in the same emerging markets the bank depends on to drive that top line number. We won't lose sight of this fact or the fact that the write down total just climbed by $3.2 billion, from $2.1 billion to $ $5.3 billion.

Trade Update: DUG IAU GLD SLV

We are short oil and gas via DUG short gold and silver with IAU and SLV respectively and also long gold by GLD. This week I think will be big for the commodities after Goldman Sachs came out with oil to reach $200 a barrel. It will, but not before profit taking which is the part they don't tell you. So it's simple if the commodities break down we follow them down on the short side waiting to close out our profits and go long. On a breakout we will stop out of our short positions and stay long gold with GLD. As always the market is my master.

Banks Dumping Debt on Taxpayers

The worlds largest banks are feeding on the worlds public sector more than ever. Bloomberg is reporting that Citigroup and UBS are exiting the auction rate securities market.

Taxpayers from Massachusetts to California are paying Wall Street banks to end derivative contracts gone bad as they exit the collapsing auction-rate bond market, with penalties in some cases topping $10 million and compounding the pain of rising borrowing costs.

Confused? Typically municipalities issue auction-rate bonds (securities) using banks to underwrite the offering.

Auction-rate securities (ARS) are long-term variable-rate instruments with their interest rates reset at periodic and frequent auctions. The underwriters in this case pay that variable-auction rate to the city in return for the fixed rate.

Things usually go something like this-

Suppose the city sells a bond for a a fixed 3% rate. At the auction the following month the city may receive a 4% payment from the bank. Fine for the city. But suppose during the following month the creditworthiness of insurer becomes damaged (usually the underwriting bank). Then the city may get only a 1% payment from the bank at the next auction, remember their rate is fixed. Now where do you think the 2% difference is going to be made up. Well Joe's six pack just got more expensive and were not talking about the one on his stomach.

For example

Sacramento County did a swap with Morgan Stanley in conjunction with a sale of $79.5 million in auction-rate securities for its airport in May 2006. The contract was to last until the bonds, which were insured by New York-based XL Capital Assurance Inc., matured in 2024.

The county agreed to pay the bank a fixed rate of 3.785 percent in return for a variable payment that was supposed to cover the cost of the bonds. The rate it received from Morgan Stanley was capped at 65 percent of the one-month Libor, which averaged 5.08 percent that month.

Again someone is going to have to make up the difference, who, and will they even know? All Joe six knows is that his pack just got heavier, but does he know why?

Then there is the monster subprime loser UBS who exited the auction rate bond market on the sly.

The move, part of a massacre slashing 5,500 jobs, was framed in other terms when it was announced on May 6. The bank was going to sell the municipal department. UBS was getting out of the business ``on the institutional side,'' as Jerker Johansson, chief executive officer of the investment-banking unit, put it in a conference call. UBS would move some traders over to the wealth-management division.