Shorting WaMu

User Forum Topic
Submitted by powayseller on September 2, 2006 - 9:17am

In Q2 06, WaMu's deferred interest income, the unpaid but earned interest on option ARMs, was 20% of their net income.

WaMu is my best short contender as of right now. The market, clueless as usual, does not price in the risk of loss.

Look at Toll Bros: Toll climbed and climbed until the media started reporting about the housing bust in 2006. The same will happen with WaMu. Although Barron alterted me first to this problem, everyone seems to think that the borrowers will keep making their payments. Once it turns out they are not, sometime in 07, WaMu will get punished just like H&R Block's Option One.

This is a bet I'm willing to trade on.

Schahrzad Berkland / Analysis

Submitted by technovelist on September 2, 2006 - 9:37am.

Sounds reasonable to me. Are there put options on WaMu? If so, buying some that expire next year is probably the safest/best way to play it.

Submitted by powayseller on September 2, 2006 - 11:32am.

I've been told that about 75% or more of options expire worthless, so the people making the money are the option writers. In a CME study, over 82% of options expired worthless, because making money on options requires being right on timing, direction, and magnitude, a triple whammy. So no options for me.

I should really get a book on shorting, as I know very little, and am probably just dangerous to myself at this point.

Submitted by sdappraiser on September 2, 2006 - 11:38am.

From my experience, WAMU has been the most vigilant client I've had over the last several years as far as qualifying their clients. In addition, very strict appraisal guidelines with an internal appraisal staff department and very selective contract fee appraiser list.

I'm sure there are bad loans on the books, possibly from the many bank purchases they have made, but their main wholesale and retail division, which probably accounts for the majority of their volumn (anyone care to verify this), is probably the most sound loan portfolio in the industry.

From the thousands of REO and NOD properties I've noted in the last year, I only recall several from WAMU or Long Beach.

Powayseller, what makes you so sure this is a good short? With a 5% yield I would be consider buying this now.

You DO know that if you short this, you are on the hook and have to pay the person you borrowed the shares from the $2.08/share dividend right?

Submitted by davelj on September 2, 2006 - 11:52am.

"The market, clueless as usual, does not price in the risk of loss."

How delightfully naive you are. The market, in fact, does price in the risk of loss, but perhaps not at the "correct" time or to the same degree that you do. The market is certainly not clueless, although it is fairly impatient. I guarantee you that I can find 100 analysts who are not short WAMU's stock who have forgotten more about the company's financials in the last 60 seconds than you will ever know. That is they understand WAMU far better than you ever will and they still choose not to short the stock. Why? Timing is everything to a professional.

I actually agree with you that at some undetermined time in the future WAMU's stock might decline for reasons that we would agree on. But the timing and extent of that decline are highly uncertain - even for professionals that watch WAMU every day. That you think that you have some analytical insight that these analysts don't have is incredibly naive. In fact, you're at a distinct disadvantage. The ONE advantage you do have, though, is patience. Most professionals can't wait a year or two for the WAMU boat to sink - they have to be right within six months or so. Otherwise, their job is in jeopardy. Furthermore, there are some very smart people who are short WAMU, so you've got that going for you. But, stocks can trade anywhere in the short term - they'll defy the fundamentals. Remember: the stock doesn't know you own it, and doesn't care.

I'm going to beat a dead horse, but I'd stay away from shorting individual stocks. It's a full-time pursuit and I know plenty of savvy professionals who have lost their asses shorting "obvious" shorts. And remember that lots of the people analyzing WAMU's stock have myriad sources inside the company that tip them on loan trends, etc. You'll never be able to compete with that. The stock market is like a poker game: If you can't spot the fool at the table, it's probably you.

Having said all that, do I think WAMU's stock will be lower at some point over the next two years than it is today? Yes. But it's not a bet I'm willing to take. And, more importantly, it's not a bet I have to take. There are no called strikes in investing - you can pick your spots and swing for the fence when you get lobbed a softball. WAMU - long or short - is no softball.

Submitted by Diego Mamani on September 2, 2006 - 12:13pm.

You are right davelj. You must be new to the blogosphere... where such gems as "the market is clueless as usual" and "I can time the RE market" are posted all the time. Or someone predicting high inflation and utter chaos in one post, and then predicting deflation and utter chaos in the next thread.

There are some very bright posters here, but because of low barriers to entry, some posters could be 6-year olds pulling our legs. Some posters sound very assertive and authoritative, regardless of whether they know what they are talking about. But we get to used to it, and learn to tell the good from the not so good.

Submitted by powayseller on September 2, 2006 - 1:03pm.

Definitely, the market is often clueless, therefore I don't believe in efficient markets theory. For a recent example, just look at H&R Block; the day the Option One news came out, the stock dropped 9%. The market was clueless about the risk that Option One was taking on. If the market was smart, then H&R Block would have been discounted long before the news came out. The same thing happened with Toll Bros; it only started falling at the same time the RE market fell, not before.

I can understand a stock falling on unexpected news, i.e. a new lawsuit, a drug with bad test results. But when a stock falls because of an EXPECTED earnings shortfall, what else can one assume other than the market is clueless? We on piggington certainly expected this type of loss, even if we didn't put money on it. Certainly none of us are buying bank or lender stocks now.

One thing I do agree on with both of you: I have no chance going against the insiders or the big traders. I'm no trader, and only a half-ass investor, better at knowing when to get out of the way, than figuring out where to jump in.

I appreciate the input on WaMu, but I wonder if they can maintain their income, when 20% of it is unpaid interest. In the mortgage industry, that is considered a sign of a stretched borrower. Since 20% of their net income is unpaid but earned neg-am income, so if even half of that has to be written off, WaMu will certainly take a fall in its stock. Another weakness for WaMu is its credit card acquisition (Providian). I expect to see a lot more credit card defaults in 07 and 08, as consumers file for bankruptcy.

Thanks for your comments, everyone.

Submitted by sdduuuude on September 2, 2006 - 1:06pm.

"I don't believe in efficient markets theory."

This explains alot.

Submitted by davelj on September 2, 2006 - 1:07pm.

I'll tell you what I find fascinating. The average man (or woman) on the street wouldn't dare to try to diagnose a serious illness - he'd go to a doctor; wouldn't dare to do his own legal work - he'd go to a lawyer; wouldn't entrust the preparation of his small business's financial statements to a non-accountant - he'd use a CPA; generally wouldn't try to sell his own house - he'd use a realtor... but when it comes to putting a substantial amount of money into some stock that he knows little about - no problem!! No professional counsel necessary. No discussions with management, no financial analysis, no discussions with other major holders, no reading of the footnotes. Nothing. Perhaps a reading of the stock's yahoo message board, a perusal of the last quarter's earnings release, a discussion with a know-nothing broker (sorry, that's redundant) and a quick reading of some guy's opinion in Forbes. No acknowledgement of the asymmetrical information flow between professionals and non-professionals. Nothing of the sort. They just pull the trigger. No problem. I've always been amazed at the willingness of the average person to make such financial decisions without any legitimate basis for doing so. But at least it's a constant source of entertainment...

Submitted by Bugs on September 2, 2006 - 1:07pm.

A little tidbit to keep in mind about WaMu: They just laid off their entire appraisal staff, including their supervisors and managers. For most of their employees, their final day is 09/12/2006.

WaMu has contracted with 2 appraisal management companies (LSI and E-Appraiseit) to perform all appraisal and review functions. The fee appraisers who were working directly for WaMu were already cut off, and those who have no other options have already started working for the AMCs, at fees that are 35% - 50% less than what they were getting before. Nobody on the appraisal side of this sees this move as having good results.

I've had occasion to speak with a couple of the soon-to-be laid off local managment as well as a couple of the already-laid-off fee vendors, and everyone I've spoken to is deeply angry and resentful. Since they now have to do a lot more assignments to make the same amount of money, and since the AMCs are notorious for constantly harrasing their appraisers with 5x daily phone calls and lowball fees, there's a lot of scheming going on right now on how to do the absolute minimum amount of work necessary to collect the reduced fee. Time is money. Unlike before, most of these people are not taking the position that the company's exposure to bad loans is a high priority.

I'm already hearing real horror stories about how bad some of these AMC appraisals going to WaMu are. The AMCs are notorious for failing in their review functions and meddling with those appraisers who are trying to complete their due diligence. They're quite candid that their priorities are about getting appraisals back fast and cheap, everything else be damned.

In the appraisal community, most of the AMCs are generally reviled as parasites, and the people who choose to work for them have often been characterized as being the bottom of the barrel. Lots of really inexperienced appraisers and has-beens who can't find work anywhere else.

Bottom line here is that WaMu's exposure to fraudulent loans and poorly developed appraisals is skyrocketing at a critical time. They could not have picked a worse time to give up on appraisal quality. They should be tightening up their standards at this juncture, not gutting them.

Another thing I'm hearing is that WaMu is rolling out a new loan program that will more easily enable overencumbrance of properties. This is also a poor decision (on a long term basis) to be making at this time.

It'll probably take a while before any of these decisions come back to roost, so it may not figure into your decisions to short right now. But sooner or later these decisions are going to cost them - big time.

Submitted by Steve Beebo on September 2, 2006 - 1:27pm.

Bugs is correct in that from this point forward, WaMu will be getting, on average, poor quality appraisals and also poor quality reviews of appraisals.

They did have very good appraisal reviewers who knew their individual markets very well - but that's gone now. In the short run, this move will save them some money by paying low fees for less than average quality appraisals, but in the long term, it can only cost them money as the quality of their loan portfolio will suffer.

Submitted by sdappraiser on September 2, 2006 - 1:41pm.

I agree, going forward they will have serious issues to deal with. I am one of those who will no longer be doing work for WAMU as I refuse to deal with the likes of LSI. I'd rather take the day off than work for sub-standard fees and deal with the phone monkeys.

In my previous post I was speaking directly towards their current loan portfolio which I believe is probably very solid. If standards and quality go down the drain like most believe, I think it will take at least a year or two for that to be reflected as an increase in defaults.

I still don't think this is a good time to short WM. Countrywide and Wells have been cutting corners on collateral evaluations for years and it shows in the REO and NOD lists.

Submitted by powayseller on September 2, 2006 - 1:42pm.

davelj, I don't know at whom you're directing your comments, and for what purpose. I don't recall anyone on this thread saying they would buy or short stocks off a Yahoo message board recommendation. I buy stocks only after studying the financial statements and making a list of 3 reasons for buying the stock, and I've posted about this before. You can e-mail me at, or post your name and e-mail address so I can contact you, and we can further discuss what your problems are with me, off this forum. I request that you stay on topic, which in this case, is shorting WaMu.

Bugs, with loan purchases decreasing, it seems WaMu won't get stuck with too many new loans-gone bad. I would think that the bulk of their problems, if any, were created in 2005 - 2006, when their neg-am income went up five-fold. Do you think that this appraisal change would increase their neg-am income even further, from the current $203 mil/quarter?

Submitted by Bugs on September 2, 2006 - 3:44pm.

That's a good question for which I have no answer. I THINK a lender like WaMu is more likely to retain market share, even in a declining market. I know they do a large percentage of the high-dollar mortgages here in SD County and they're hooked in as the primary mortgage lender on several of the new home subdivisions.

I know that about 50% of the appraisals WaMu was sending out for field reviews were getting cut and those loans were not being made. Many of those would now fly through the AMC reviews because they take so many shortcuts. If it's bad to take shortcuts in an appraisal, it's 5 times worse to do it in a review.

To be sure, a bad appraisal and an overencumbered property do not make for an automatic loss, but it does increase the odds when the borrower has little or no skin in the game and the markets are in decline.

Submitted by davelj on September 3, 2006 - 12:59pm.

PS, my comments were just that - comments. If you re-read my post you'll see that I was talking about the "average" investor. If you don't view yourself as the average investor, that's perfectly o.k. with me. But apparently you thought of yourself when you read my post - "why" is a question for you to ask yourself.

That you "buy stocks only after studying the financial statements and making a list of 3 reasons for buying the stock," while perhaps more effective than prayer, is not what I personally would consider proper due diligence for an investment. Although I'm sure that Barnes & Noble sells plenty of books that suggest your approach is more than adequate. So, to each his/her own. Personally, I typically spend several weeks doing due diligence on companies I invest in, which are typically private or semi-private businesses. Of course, that's what I'm paid to do.

While I'd like to maintain my anonymity here, since you apparently feel the need to know, I'll email you with a link to my firm's website. I'm sure it will answer all of your questions and you can form your own views regarding the credibility of my opinions, if not the extent to which you agree with them.

Submitted by powayseller on September 3, 2006 - 3:55pm.

davelj, has your approach been promising? What is the rate of return you have earned over the last decade?

By the way, I would love access to companies to ascertain more than they are required to publish in their SEC reports. So many times I have wished I could call the CEOs with a list of further questions. Have you access to that kind of info?

Can you get WaMu info for us? What do you think of shorting WaMu? You've criticized my approach, but didn't answer the purpose of this thread, which is shorting WaMu. Would you do it, and why or why not?

Submitted by HereWeGo on September 3, 2006 - 9:40pm.


There are WaMu options that expire in January of 2008.

WWIMI, with a $45 strike price, trades at 5.75. Given the 9/1 stock price of 41.90, that's an eminently reasonable premium.



I have a question wrt/ the supply side of shorting. Let's hypothetically assume I own 1000 shares of WaMu, and that poway wants to short WaMu. How could I go about lending some of my shares to poway? What sort of premium should I expect for the loan (or, from a differnt perspective, what is the carrying cost of a short position?)


Submitted by justme on September 4, 2006 - 12:54am.

WaMU passes the buck.

According to this story at Marketwatch,

Wamu passes on >90% of their mortage loans to the bond

This seems to mean that WaMu perhaps isn't as vulnerable to
bad loans as one might think, at least not in terms of
danger of capital losses.

However, as poway has indicated already, it seems that
earnings are in danger of taking a big hit.

In general, I would caution against shorting. For example,
one could argue that Google is quite overvalued. But I would
think more than twice about shorting it.

I'm speaking from similar experience,
here , and I lost a big bundle :)

Submitted by powayseller on September 4, 2006 - 3:18am.

If WaMu keeps recording $200 mil/quarter of unearned option ARM income, by the end of 2006 they would have close to $1 bil of neg-am income, and I wonder if that entire amount has a chance to disappear. Just think how likely it is that an optionARM borrower will make the payment on the unpaid interest after their loan resets to a higher rate. If the ARM resets go as we think, many of those borrowers will give their keys back to the bank, and then there goes a big chunk of WaMu's past recorded income, and future income stream, plus the bad loans they have to record on top of it. One thing's for sure, WaMu's share price has stayed steady for 2 years, so the risk of losses is not yet priced into the stock.

Bugs and SDAppraiser, when you see NODs, which lenders are the main ones? The article listed the top 10 subprime lenders in the US, with Wells Fargo at the top and WaMu last.

Submitted by powayseller on September 4, 2006 - 3:02pm.

davelj wrote to me "That you "buy stocks only after studying the financial statements and making a list of 3 reasons for buying the stock," while perhaps more effective than prayer, is not what I personally would consider proper due diligence for an investment. Although I'm sure that Barnes & Noble sells plenty of books that suggest your approach is more than adequate. So, to each his/her own."

The 3-reasons approach was recommended by Peter Lynch in one of his books.

Another question for davelj: in your post on WaMu you suggest that at least 100 traders would not short WaMu, but then you go on to say that some very smart people have done so. So what is your take on shorting WaMu? Please, instead of writing about me, which is very boring to everyone, could you add something tangible to the discussion?

Submitted by justme on September 4, 2006 - 8:59am.

Here's another tidbit: Wamu is working on floating bonds
in Europe. There may not be anything sinister about that,
but on the other hand it is tempting to think that perhaps
they are trying to unload some US mortgaes in another market.

This looks like a bearish sign to me, but what do I know...

Submitted by LookoutBelow on September 4, 2006 - 9:41am.

Wall Street= "Casino Royale" as my Dad used to tell me, "The players winnings dont keep the lights on at these casino's, but their losings sure do" !!

I have always had more success in knowing when to get OUT of a market, like real estate and some stocks, I really dont have a clue as to "when" to get in to a market. Its very complicated and you dont know 1/10th what the players do. Your guessing, they have access to lots of privvy info and they are ...well, guessing too !

Shorting is risky business. Good luck.

Isider trading is alive and well in American business today, problem is, your not allowed to be an INSIDER !!!

The stock market is a scam. Think Las Vegas. Odds are probably better in Vegas.

A little story here:

At one time in my career, I was in upper middle management of a fortune 50 company, I thought I KNEW what was happening as I was involved in some of the things that were planning to happen....Truth is, I knew "NADA", and my stock portfolio showed it.

Im so good at knowing when to get out of something that I have a serious collection of cassette tapes and 8 tracks !!! STILL !!! I even have a BetaMax !!
Im not nearly as smart as I thought I once was. I just got lucky and I know it.

Submitted by frank on September 4, 2006 - 10:31am.

If you want to look at another Short idea in the mortgage industry look at FirstFed (NYSE: FED).

These guys have 96% of their loan portfolio in adjustable negative amortizations loans. They grew from a $3 billion company to $10 Billion with the majority of thier loans put on in 2004 and 2005.

FED's negative amortizaion unpaid interest in the last quarter was $39 million. The company earned $63 million for the quarter. So almost 2/3's of their income did not really come in the door.

Look at their loan portfolio only 20% of their loans were with Verified Income and Verified Assets. The other 80% were either Stated Income, Stated Asset or No income or asset.

Unlike WAMU these loans are all in California. And over 57% of these loans made were greater than 75% LTV. Add in the negative amortization that these loans accrued and the lack of underwriting done FED is the completely reliant on the RE market continuing to appreciate.

When these loan do reset and become fully amortized the defaults will erupt.

FED is very highly leveraged and pays incredibly high savings rate and borrows billons from the FHLB so their cost of funds has gone up tremendously.

The bailout for FED and all negative amortization borrowers is that they refinace out to a new loan. The problem with this theory is that refinanace appraissals are generally lower/tighter than purchases. And if the borrower put on a HELOC it makes it even more difficult in a flat to declining market. Throw in the higher payment given the reset, it pushes down the FICO score. All of this makes refinancing even more difficult.

I am not of the school that the RE market is crashing at the speed of light. However, for these borrowers who did over leverage at the top of the market they are going to be facing incredibly difficult times.

I beleive that Real Estate like all markets are cyclical and we are in the down leg of the cycle. Unfortunately, some homeowners will get hurt. However, I feel no sorrow for lenders who willingly and intentionally made loans ignoring prudent business judgment.

Submitted by HereWeGo on September 4, 2006 - 12:48pm.

FED seems like it could be in for trouble, but on the other hand, the short interest is around 30% of float. That's awfully high.

By comparison, the WaMu short interest is less than 2% of float.

Submitted by Chris Johnston on September 4, 2006 - 3:28pm.

Chris Johnston

I feel compelled to chime in here aside from not getting pre-approval from my nemesis anx. The mixed comments about this WAMU short discussion from dave makes me curious as to exactly what you do dave. If you are truly an experienced trader you would know that when the majority of the wall street analysts are on one side of something, that is a very nice opportunity to do the opposite. This is why people analyze sentiment indicators, to fade them. This is a component of my trading system for entries. Kevin Haggerty, Larry Williams, Paul Tudor Jones ( the one of these three that I do not know personally ) to name a few thrive on doing exactly that. With all of your experience you have to know this. Those who support analysts are normally shills for the brokerage firms.

We also know that the majority of mutual funds do not beat the S&P 500, and this has been the case for years on end. So to claim that the analysts are not recommending something is absolutely no reason at all to do or not to do it. History shows quite clearly most of them were bullish on internet stocks in 2000, and some have actually gone to jail due to conflicts of interest.

There is no reason to study a stock for months upon end before taking a position, that is absolutely the last thing I would ever do. That opens the door to far too many subjective evaluations of different pieces of information. Maybe you are capable of doing it, but the average person cannot get caught up in "the story." There is far too much BS in it, and why many execs get themselves into trouble. Further, there are very intelligent people in this blog, and there is no reason that they have to hand there money over to a professional just for the sake of doing it. I talked personally with a few at our get together and their knowledge of trading stocks was impressive.

Keeping things simple is what the majority of great traders that I know would tell the average person to do in making their decisions. If most analysts were capable of being traders they would be, the pay is much higher. Many of them would not even know how to place an order to buy or to short. You have to know this so that leads me to the question of what exactly is the point of your input here?

I do agree that shorting this stock right here is not something I would do. However, there is a solid downtrend in place, and the last 12 months earnings are declining so shorting a pullback in this stock of a 10 day high or so would be a reasonable short term trade to make. I would not chase it right here due to it being pretty far extended downward already.

Submitted by lewman on September 4, 2006 - 6:18pm.

Powayseller, you said:

If WaMu keeps recording $200 mil/quarter of unearned option ARM income, by the end of 2006 they would have close to $1 bil of neg-am income, and I wonder if that entire amount has a chance to disappear.

Why would there be unearned income from option ARMs ? Could you elaborate ?

Thanks. Lewis

Submitted by powayseller on September 4, 2006 - 9:51pm.

I meant to say "negative amortization income", which is income booked but not received from option ARM loans. I'm wondering how much of those unpaid interest payments will ever be made; you've got option ARM borrowers making the minimum, partial-interest payment. Once the loan resets, not only will they have to pay the higher loan balance (original mortgage + unpaid interest tacked onto the mortgage) over the shorter amortized period, i.e. 27 years if it was a 3/1 ARM, they'll also face a higher interest rate. I think most of those option ARM borrowers will default. WaMu's losses will become apparent sometime in 2007 or 2008.

Submitted by lewman on September 4, 2006 - 10:53pm.

Thanks powayseller. I understand that there is unpaid interest payments for negative amortization loans, but do you mean banks are actually permitted to book these unpaid interest payments as revenue even though they haven't been received ?

I was under the impression that banks just book the portion received and the principal amount increases and if the key is handed back to them they have to write off a bigger loan than the original loan balance.

Submitted by powayseller on September 5, 2006 - 9:34am.

GAAP rules allow unpaid neg-am income to be reported as income. Fifteen percent of WaMu's income is neg-am, that is it is earned but not yet received. Probably most of it will never be received.
I knew about the neg-am income reported as profit, and posted about that in the spring, but had no idea how much it was.

Business Week's Nightmare Mortgages covers this topic quite well.

Submitted by rseiser on September 5, 2006 - 11:25am.

Poway, thanks for digging this up, as it is another nugget I didn't know about at all. I suppose, one would have to be intimately familiar with the banks' practices to paint a full picture of what is going on in their balance sheets. All these little things together might absolutely be capable of putting the nail in some of the banks' coffins. I heard another thing on an older Jim Puplava show, that I don't know if it has been discussed before. Despite selling off their mortgages as packaged instruments on wall-street, the guest claimed that banks end up buying these back as a way of investing their reserves. According to him 60% of some banks' reserves are sitting in these mortgage backed securities. As discussed on another thread, these MBS could be in some mid-range of risk, e.g. A or AA, but that hardly makes them bullet proof. The guest also claimed that the worse slices were still held by the banks, since they couldn't be sold off so easily.

Submitted by davelj on September 5, 2006 - 11:52am.

[I'm going to try to answer some of the various questions posted to me here.]

Poway, you wrote: "So what is your take on shorting WaMu? Please, instead of writing about me, which is very boring to everyone, could you add something tangible to the discussion?"

I already answered this question above: "Having said all that, do I think WAMU's stock will be lower at some point over the next two years than it is today? Yes. But it's not a bet I'm willing to take." Since that wasn't clear enough: No, I don't think it's a good idea.

(By the way, Frank is right. If you're really worried about option ARMs/neg am loans FED is a better short. But, personally, I wouldn't short FED either - trading isn't my business and I religiously stick to those very few areas where I have a large competitive advantage.)

A quick note on trading in large cap stocks. I'll use WAMU as an example. I could pick up the phone right now and find two equally smart, well-informed analysts/traders who have taken opposite positions in WAMU, one long and one short. They could each wax poetically and convincingly on all the reasons they are on the "right" side of the trade and why the other side of the trade is wrong. After hanging up the phone, I might be swayed more by one than the other based on my preconceptions, but it would be a tough decision. My point is that as an individual you're making a decision based on 1% of the information and analysis that these guys have, and as a GROUP they're STILL conflicted. What's the takeaway? Your odds of a successful trade in WAMU are the same odds as a coin flip. There are many reasons that WAMU's stock could rally despite the fact that it has a lot of these toxic loans on the balance sheet (and it's stock may ultimately fall): market perceptions that the Fed will lower interest rates faster than previously believed, WAMU discovers some exotic way of hedging their loss exposure to the ARMs on its balance sheet, the company sells a subsidiary for a huge premium that the market believes will offset any losses from ARMs... I could go on and on and on. My point: your success or failure here will likely be random. That's the nature of large-cap stock trading unless you have an informational/analytical advantage. And I'm biased about all this as an investor - I don't do any trading and really don't do much with publicly-traded stocks. (Finally, if you invest on the belief that the other market participants are stupid and that the people that run these companies are stupid, you'll be disabused of that notion eventually. They're not stupid - but they are impatient, and that's your arbitrage opportunity, as I've explained previously.)

Poway also wrote: "I think most of those option ARM borrowers will default."

This is precisely the sort of baseless outlandish prediction that delegitimizes otherwise legitimate claims you might make. What you're saying here is that 51% or more of all option ARMs are going to default. I have an extraordinarily bearish friend who's hoping that 20% default (that's by far the highest informed prediction I've heard). My understanding is that, in very rough terms, about a third of all option ARM users have very good credit and won't have any problems at all; another third have decent credit and a small percentage will hit the wall; the other third will feel the pain, but even a lot of those people at the bottom will find a way to stay solvent - they always do. If you would like to take a $100,000 (or more) position in betting that 51% or more of option ARM borrowers will default over some specified period, I will be happy to have my legal counsel structure a product so that I can take the other side of that deal. We can definitely do business. Just let me know.

HereWeGo, if you want to lend your shares to Poway you can draw up a simple legal agreement and give her your stock certificates. The premium you should expect for the loan is dependent on your estimation of Poway's credit. Also, you'd want her to replace your dividends. Broker's Call Rate is typically a few points above LIBOR, which is the price most retail investors pay for borrowing on margin. Obviously, stocks with big dividend yields are very expensive shorts once you factor in the dividends and interest.

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