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8:30 AM EST Thursday, June 19, 2008: There's only one theme today: Be ultra-wary of Wall Street "product". Simply, If they screw up managing their own money, how can they be trusted to manage yours? Keep reading.

The failure of "risk management." That's the big topic on Wall Street these days. An alien force has invaded, messing everything up. It wasn't our fault. It was The Force. Of course, it's all B.S. It WAS the peoples' fault. How should we view our personal risk management? Questions to ask:

1. What's the worst that can happen? Can we lose all our money? In a surprising number of psuedo-attractive investments, the answer is a resounding YES.

2. If things are going bad, how fast can we bail? The fastest bail are investments like insured savings accounts. The slowest are private equity funds. But right up there are troubled hedge funds and insider shares with lockup provisions. Little is more frustrating than watching your investment collapse day-by-day and being able to do anything about it.

3. Do we have control? Unless we are CEO and own the company, the answer is NO. Nobody listens. That's a general rule. But it's remarkably accurate. Trust me. They'll only listen to you when you agree with them. That's called flattery, not listening.

4. After taxes, how much will it pay? Earning 13% sounds great -- unless the income is "ordinary" and the taxes will kill you -- even if you do actually get paid.

5. Is the security really worth anything? Land out west has dropped 75% in value and can't be sold today, anyway. Personal guarantees are worthless if the guarantor's main assets are lands out west. You get the idea.

6. What do you know about what you're investing in and the inevitable gotchas? Everything has something untoward that happens. Amateur investors don't know the untowards, also called gotchas -- even if some are spelled out in the "Risks" part of the prospectus (if there is a prospectus) What "logic" says that Morgan Stanley knows anything about the price of electricity? Keep reading.

So, why didn't I sell Morgan Stanley short also? (Because I was playing tennis.) From today's Wall Street Journal :

Morgan Stanley's Gaffes, Bad Trades, Woes In Managing Risk Mar Latest Results
There are two ways that an investment bank can blow it: the Lehman way or, as seen Wednesday, the Morgan Stanley way.

While the woes afflicting Lehman Brothers Holdings are the result of a balance sheet weighed down by toxic assets, Morgan Stanley in its fiscal second quarter, ended May 31, was tripped up by bad trades, poor management and investments, as well as less-than-stellar risk management.

Without big gains related to the sales of assets, Morgan Stanley's net profit of about $1 billion would have been closer to break-even.

The firm did take some balance-sheet hits, on things like leveraged loans, commercial real estate and securities backed by troubled monoline insurers. But investors should perhaps be more worried by a bad bet on the direction of electricity prices and a $120 million loss due to a rogue trader.

Chief Financial Officer Colm Kelleher acknowledged that Morgan faced a tough quarter, both in terms of market conditions and trades failing to work as planned. But he added that "more often than not, we get those right" and that the firm "continues strengthening our capital and liquidity positions."

Morgan Stanley's stock rose Wednesday, suggesting investors were willing to shrug off the quarter. That might make a lot more sense if the company's shares were cheap. They aren't.

Despite taking a beating this year, the stock still trades at nearly 1.5 times tangible common equity of about $29.5 billion, which excludes junior subordinated debt that the firm includes in its own calculation of this figure.

Morgan Stanley clearly deserves a better valuation than Lehman, which trades at 0.7 times tangible common equity and is deservedly at a lower multiple than Goldman Sachs Group, which trades at about 2.15 times. Still, it is tough to justify Morgan Stanley's premium until the firm shows it has the basics under control and can prevent its traders from causing whiplash volatility.

Take a look at the performance of Morgan Stanley's fixed-income business in the second quarter. Revenue at this key business plunged to $414 million from $2.9 billion in the first quarter.

Even worse, it is almost impossible for outsiders to tell how the sharp decline came about. Morgan Stanley's commodities traders, for example, placed some bad bets on North American electricity prices, but the firm didn't disclose how much that contributed to the decline in fixed-income revenue.

While investors may be willing to give the commodities unit a pass this time, the market has no tolerance for sloppy risk-management -- and that is another factor that could weigh on Morgan Stanley's valuation.

The firm's record doesn't appear to be improving after a trading strategy went badly awry in the fourth quarter of fiscal 2007, leading to massive losses. In the second quarter, Morgan Stanley booked a $120 million loss after a now-suspended London trader improperly valued trades that apparently went undetected for at least a quarter.

Morgan Stanley can't fumble this way and hope to be spoken of in the same breath with Goldman.

The regional banks suffer. Fortunately I have warned again and again: Stay away from financials -- big national banks and little regional banks. Four banks have already failed this year. More will. Do not keep more than $100,000 in any one bank. The disaster in banking is unfolding faster than anyone imagined. Do not try and pick the bottom -- i.e. Do not try to catch a falling knife.

Today's New York Times has this gruesome chart.

And this gruesome story, which I've excerpted:

Fallout From Bad Loans Rocks Regional Bank by Eric Dash

In Ohio, the Panic of 1907 drove the Fifth National Bank into the arms of the Third National Bank, creating the singularly named Fifth Third Bank of Cincinnati.

But today Fifth Third and other regional banks across the nation are being shaken to the core by a 21st century financial crisis. For many of them, things are going from bad to worse.

Home mortgages and other loans that the banks made in good times are souring so fast that many of the lenders are scrambling to prop themselves up. If the pain worsens — and many analysts say it will — some of these banks, like Fifth Third’s predecessors, may eventually seek out suitors, most likely large national rivals.

For now, however, no one seems to want the regional banks. Stock market investors are deserting them en masse. On Wednesday, Fifth Third’s share price plunged 27 percent to $9.26, its lowest level in more than a decade, after the bank said it would cut its dividend and seek to raise $2 billion. Other financial stocks, particularly regional banks’ shares, also tumbled. The Standard & Poor’s 500 Regional Banks Index sank 6.8 percent.

“Everybody is trying to figure out where the bottom is,” said Jennifer Thompson, a regional bank analyst for Portales Partners in New York. “Every time a bank reports another capital raise or reports that things are worse than they anticipated, there is another round of selling.”

But Wednesday was just one more bad day in what has been a horrible year for small and midsize banks. Their descent in the stock market has been remorseless, reflecting the economic pain in their own backyards. Weakening housing and construction markets in regions like the Midwest, Southeast and Southwest have hit lenders in those areas hard.

For the banks’ shareholders, the numbers tell a sad story: Wednesday’s decline brought the loss for the S.& P. bank index to 39.3 percent so far this year. Fifth Third’s odd name almost seems like a bad joke. Fifth Third has lost two-thirds of its value this year. Shares of two other banks based in Ohio, the National City Corporation, of Cleveland, and Huntington Bancshares, of Columbus, have suffered similar declines.

Banks based in the Southeast are hurting, too. The Regions Financial Corporation, the biggest bank in Alabama, has lost half its value. Standard & Poor’s predicted this week that Regions would cut its dividend to conserve its capital in the face of rising losses on real estate loans. The share price of SunTrust Banks, which operates across the Southeast, has fallen almost 41 percent.

Small and midsize lenders are in far less danger than they were during the 1980s and early 1990s, when about 1,600 federally insured institutions failed during a savings and loan crisis. But the breadth and depth of the current troubles have caught bank executives by surprise. Federal regulators are particularly concerned about the exposure of smaller banks to the commercial real estate market, which has softened in some parts of the country.

But another worry is that raising money will become increasingly costly for banks that need capital. In a report issued this week, analysts at Goldman Sachs said banks might need as much as $65 billion on top of the $120 billion they have already raised.

But so far the vast majority of investors who bought into financial companies in the hope that the industry was out of the woods have lost, and lost big. As a result, many investors are reluctant to sink more money into regional banks, fearing their investments will be diluted if the banks sell even more stock. While many regional banks are trading far below their book values — at $4.83 on Wednesday, National City fetched just a fifth of its book value per share — many people are simply afraid to buy.

“You are in this death spiral of dilution,” said David Ellison, the chief investment officer of FBR Funds, a mutual fund company based in Arlington, Va. “It’s this toxic math.”

The need for new financing highlights the trouble many banks are having in selling assets like mortgages and home equity loans. They are trying to offload these assets to reduce amount of capital they are required to hold.

But more than anything, the problems confronting regional banks underscore the extent to which the housing crisis has spread throughout the country. In the Southeast, Regions and SunTrust are reeling from loosely underwritten mortgages now that real estate values are plummeting in the region.

In the West, Washington Mutual, the nation’s largest savings and loan, is being hurt by loans that it made to borrowers with shaky credit. Fremont General, the parent of a big subprime lender and a bank in California, filed for bankruptcy protection on Wednesday. Customers’ accounts, insured by the Federal Deposit Insurance Corporation, are safe.

A handful of tiny banks have failed in small towns in Arkansas, Minnesota and Missouri. Rust Belt banks like National City and Fifth Third, in the meantime, have been stung by losses not only on their home turf but also in Florida, where they expanded in recent years. Initially, the push into Florida helped the banks increase growth rates as their hometown economies worsened. Now, these lenders are challenged on two fronts.

Bankers, who tried to assign innings to the credit crisis only a few months ago, are now resigned to participating in an extra-inning game. Several analysts now think that industry losses will not peak until next year.

“We have gone from shock and awe to blocking and tackling,” Mr. Ellison said.

Deadline June 30 for Windows XP. But it's happening earlier. From Computerworld, "While Microsoft has set June 30 as the general end of availability for Windows XP, Dell will stop preinstalling most versions of the seven-year-old operating system today." Since XP works well and Vista doesn't, this is your last chance to get a new, fast PC with Windows XP installed, along with the correct drivers. If you're jack of Microsoft's continued idiocy (and continued unwillingness to listen), you should definitely consider an Apple Mac. The BIG key to using a Mac is an external mouse with two buttons and a scrollwheel -- like a Microsoft mouse. There's an irony for you -- Microsoft makes the mouse. Apple makes the PC.

Oil prices are at their peak. This neat chart from Forbes shows real oil prices and oil prices adjusted for inflation.

How to get their attention.
George opened the back door to go turn off the light but saw that there were people in the shed stealing things.

He phoned the police, who asked "Is someone in your house?" and he said "no". Then they said that all patrols were busy, and that he should simply lock his door and an officer would be along when available. George said, "Okay," hung up, counted to 30, and phoned the police again.

Hello, I just called you a few seconds ago because there were people stealing things from my shed. Well, you don't have to worry about them now because I've just shot them."

Then he hung up. Within five minutes three police cars, an Armed Response Unit, and an ambulance showed up at the Phillips' residence and caught the burglars red-handed.

One of the Policemen said to George: "I thought you said that you'd shot them!"

George said, "I thought you said nobody was available!"

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads on this site. Thus I cannot endorse, though some look interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Michael's business school tuition. Read more about Google AdSense, click here and here.

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