My negative thoughts and feelings of foreboding about the Financial stocks (mortgage, investment banking, banking) have not changed from those expressed on previous blog posts. I regard them as off-limits until further notice, since unknown problems can (and will) continue to pop up. If you are a trader, have at them, but an investment in financial stocks is highly risky.

WaMu (WM) may go into receivership, for example, and is desperately seeking Susan, or any other available suitor. Has a WaMu disaster been averted? No, but even if we were told it had, how would you or I have any possible way to know? WE DON’T. As one MSNBC commentator noted on-air, these financials will tell us everything is fine and then announce a couple of days later that they’re out of business.

Now, the Masters of the Universe at Goldman Sachs (GS) and Morgan Stanley (MS), proud, old names (really old) are going to turn themselves into bank holding companies so that they can borrow money from the Fed cheaply. They will then be regulated as BANKS by the Fed itself, not the SEC. And if you believe Goldman and Morgan are doing this to take advantage of great opportunities (instead of to survive at any cost), I have some land in South Florida to sell you.

You see, when Reagan ushered in the great wave of deregulation - including the tearing down of the Glass-Stegall Act, which forbid banks to be both investment banks and commercial banks - one of the senior partners at my old law firm predicted this sorry day would come. He understood greed. But no, I argued, the smart guys in Wall Street simply should be loosed to unleash their creativity, instead of being bound by unimaginative laws created as make-work by Washington’s legislative drones.

And so it did.

What my old partner Jack understood and I didn’t was that, because the Wall Street smart boys (and girls, these days) care about nothing but their bonuses and the size of their houses in the Hamptons, what we’d get one day is precisely what we got.

And these are the people Americans trust to manage their money? Good God!

Wall Street as we know it is changing under our feet. Lehman is gone and even if absorbed by Barclays it’s still gone as it existed before, Bear Stearns bought up, now Merrill Lynch bought up. There goes the last of the big investment banks. They’re GONE, people. A staple of American business, raising the money that fueled American business and thus American growth since before there even was an America… they’re gone.

This will severely crimp capital raising, don’t kid yourself. Who will underwrite corporate junk bonds now? Who will bring out deserving new public companies? Who will fund the hedge funds (hopefully no one)? Investment banks do these things (or did). Banks loan money to people who don’t need it, remember? Foreign money vendors will fill the gap to some degree, but they will cherry pick the best and safest.

Well, the good news is these Masters no longer will be able to engineer and loose upon us these toxic financial products that not even their creators truly understand. Banks, you see, are actually regulated, and bank regulators don’t find these things amusing.

If you agree with me about the dangers that inhere in the financials but nonetheless are squirming at the thought of missing their surge, buy some slightly OTM October calls, or ITM if you want better delta. Use a trailing stop if the trade is working, but set a reasonable sell-stop limit going in, to protect downside. And good luck with that.

This entry was posted on Monday, September 22nd, 2008 at 11:19 am and is filed under Sector/Industry. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.