What Would Jim Chanos Do?

The debacle in the financial stocks has two clear winners. Eric Bolling's 50k bet against Jim Cramer has been all but decided. In January Bolling bet Cramer 50k, wagering that a blend of Energy and Gold would outperform the financials. Cramer has made some good calls this year; this was not one of them. Pick out your favorite charity, Eric.

Jim Chanos made his name in calling Enron on the table when the company was still considered respectable; but his call on credit earlier this year was equally impressive. Did you piggyback him?

``When the accounting drives the transactions you have to be very careful,’’ he said. ``When the smoke clears, we often don’t see that these assets were undervalued. We see that they were overvalued.’’.....Chanos said in May that Moody’s might face lawsuits for keeping its ratings of subprime loans too high.....Moody’s is ``integrated into the whole underwriting cycle of structured finance,’’ or bonds based on the repayment of mortgages and other loans. ``We believe they and the other rating agencies have been reticent to downgrade anything.’ Chanos Lives for Contagion

The BuySide was buzzing with short ideas several months ago; we tried to point out some of the chatter circulating in a late September piece addressing FAS 157:

A year ago the FASB issued Statement number 157, which provides guidance for using fair value to measure assets and liabilities, and should result in a consistent approach to valuing complicated instruments. You might not have a degree or interest in accounting, but you might have an interest in Bear Stearns' stock and want to briefly peruse Tier 3 exposure on Wall Street. 9.27.07

Today these issues are all over the news. Getting short in the summer was one thing, piling on here is another. Today SellSide reports, which are essentially copies of recent blog posts, are being quoted in the media bringing up these very issues, and the banks and brokers are trading to new lows. What to do?

U.S. banks and brokers face as much as $100 billion of writedowns because of Level 3 accounting rules, in addition to the losses caused by the subprime credit slump, according to Royal Bank of Scotland Group Plc.

The Financial Accounting Standards Board’s rule 157 will make it harder for companies to avoid putting market prices on securities considered hardest to value, known as Level 3 assets, Royal Bank’s chief credit strategist Bob Janjuah in London wrote in a note today. The new rule is effective Nov. 15.

``This credit crisis, when all is out, will see $250 billion to $500 billion of losses,’’ Janjuah said. ``The heat is on and it is inevitable that more players will have to revalue at least a decent portion’’ of assets they currently value using ``mark- to-make believe.’’ Bloomberg

Our guess is that the shorts are reeling in some of the exposure to these positions today. By the time it is plastered all over like this it might be late in the game, perhaps the 7th or 8th inning, although it is more like the 4th or 5th in terms of the stories playing out. The stocks are ahead, as usual.

Julian Robertson always encouraged his Tiger Cubs to go for the jugular. Turtle Traders would wait for additional technical confirmation, willing to give back some of the trade.  But covering into this publicity might be prudent, is equivalent to the “selling the news”, only the inverse.. Too, the Working Group has been known to pull victory from the jaws of defeat, and we would bet the savvier shorts who were early to the theme, and in fact disseminated it, would likely be covering some of it here. The entire world now knows about the FAS issues, and it might be time to zag.

And if you believe what you read, Merrill’s exposure might have been addressed in the most forthright manner. The firm is in disarray, but if you need to compile a shopping list, this stock might be close to the top of it, given they have at least tackled some of the issues.

That is what we are chewing on today. Food for thought if you will, decisions like this are what make the game worth playing. Are you having fun yet?

And what a game it is. Lets see how they close them.

Banks Face $100 Billion of Writedowns on Level 3 Rule
Bloomberg
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The content contained represent the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No Positions

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