First they were for it, then they weren’t. Word started emerging Thursday 09/25/08 afternoon, that the rescue plan which looked like it was just about a done deal, was hitting major snags, as republicans started balking.

As a result, stocks, which had surged on Thursday, started indicating a lower open on Friday evening in after hours trading, as it was basically confirmed that there were major obstacles to the plan. With the failure of Washington Mutual (WM) and the disappointing earnings from Research In Motion (RIMM) late Thursday, we could definitely see a major drop in the stock market on Friday.

However, we do feel that a rescue plan of some sort for the financial industry, will emerge soon and the largest bank failure in U.S. history should only help spur that along. As much as our politicians might want to play politics, the economic situation on main street continues to worsen and to do so fast. They have no choice, but to act.

Even though Washington Mutual was already on life support, with a stock that was down 87.5% for the year as of the close of the stock market on Thursday, and Standard and Poor’s cutting it’s rating earlier this week, the failure will be seen as a major shock on Friday and that should light a fire under our politicians.

We’ve recommended that subscribers to our Options Capitalist trading advisory service buy calls on the Proshares Ultra Financials (UYG) in anticipation of a rescue plan. We recommended the October 22 calls on UYG. Until the rescue plan is official, there will be ups and downs in the Proshares Ultra Financials (UYG) so be prepared for a bumpy ride. However, we should see a plan announced very soon.

A trading plan would be to wait to see what stocks do early Friday 09/25/08, since we are expecting a lower open, then at some point in the afternoon, enter into the trade.

Wall Street could use some good news and once a rescue plan is approved by congress, if Wall Street likes the details of the plan, we should see a very nice financials led rally that traders will not want to miss. Of course with the underlying economy in dire straits, we won’t expect the rally to last so if we do get the rally. Take early profits.

Tags: Bailout Plan  Washington Mutual  Research In Motion

In what just became the largest U.S bank failure in history and the world for that matter, the Office of Thrift Supervision late Thursday 09/25/08, seized Washington Mutual (WM) and transferred control to the Federal Deposit Insurance Corporation, which then immediately sold Washington Mutual’s (WM) assets to JP Morgan Chase (JPM).

The FDIC ranks bank failures by the size of the assets of the failed banks, and Washington Mutual (WM) had $310 billion in assets. Prior to Washington Mutual (WM), the largest U.S. bank failure was Continental Illinois National Bank, which failed in 1984, with assets of $40 billion. Second in line was IndyMac, which was shut down in July of this year, with $32 billion in assets.

In a failure this size, a major concern would have been whether this would deplete the FDIC’s insurance fund, which makes whole, depositors with accounts of $100,000 or less in a failed federally regulated bank.

The fund currently has $45 billion and had it had to cover Washington Mutual’s (WM) depositors, there is a good chance that the fund would have been depleted. With JP Morgan (JPM) stepping up and taking over, that disaster was avoided, for now.

Considering the current economic environment, this won’t be the last bank failure over the next twelve months.

The bank’s problems heightened this week and it became clear that failure was inevitable. It had put itself up for auction last weekend, but was having problems finding a buyer.

Then earlier this week, Standard & Poor’s downgraded its ratings, which made a bad situation worse. The head of the FDIC, Sheila Blair, summed up the situation today when she stated that Washington Mutual (WM) “was under severe liquidity pressure.”

Customers of Washington Mutual (WM) will not incur any losses and as far as depositors are concerned, the FDIC is terming this “a combination of two banks, and that depositors can expect business as usual on Friday morning.” If anything, they’ve just been moved over to a more secure bank.

Shareholders however, will most likely be completely wiped out. Already, Washington Mutual’s shares have fallen 87.5% so this year (09/25/08 closing price) and the shares which closed at $1.69 on Thursday, are down $1.24 or 73.37% in after hours trading.

Washington Mutual  Bank Failure  Continental Illinois  WAMU

With no major economic or earnings news expected today, the focus of investors will be on the continuing melt down of the financial industry and its aftermath. We got news Sunday night, that Goldman Sachs (GS) and Morgan Stanley (MS), which now operate as investment banks, will become bank holding companies.

While both already have subsidiaries that will speed their entry into their new status, it probably is also very likely that they will be looking to purchase existing banks, especially now that those banks can be had for cheap.

Traders should look for which bank stocks, especially the regionals, are showing very heavy volume on Monday and possibly take positions. Washington Mutual (WM) was already being mentioned as an acquisition candidate over the past week and Morgan Stanley (MS) was in merger discussions with Wachovia (WB), although this might end with Morgan Stanley’s (MS) new status. So we might see some bullish actions in those stocks although with the incredible rebound in stocks from last week’s lows, we could see some profit taking today.

Tags: Goldman Sachs  Morgan Stanley  Washington Mutual  Wachovia

While financials will continue to be the focus of the investment community today, we will also be getting Initial Jobless Claims numbers for the week ending 09/13/08. This piece of economic news has the potential to rattle the markets today. If more filers than the 440,000 that forecasters are expecting, applied for benefits, stocks could take a beating.

And considering the state of the economy, if the number of filers is less than expected by a significant amount, the stock market will get a significant boost that is if the overhang on the market does not dominate the trading day.

The numbers will be reported at 8:30 AM, which will give Wall Street time to digest the news and maybe move on to concentrating on the crisis going on in the financial sector.

Something else that Wall Street will have to focus on, is that Wachovia (WB) is reportedly in merger talks with Morgan Stanley, while Wachovia has put itself up for auction and also pursuing other capital raising opportunities.

We may see a bounce in stocks over the next few days and weeks, but these will be nothing but bear market rallies, and traders should look to profit by shorting the market. A good way to do so will be by buying puts on the Ultra S&P 500 Proshares (SSO).

Word of caution, the October 50 puts have an ask price of $4.90, while the bid is only $4.10. This is a very wide spread and the underlying index will have to move a bit to cover this spread. Those looking to purchase the options can put in a lower bid, say $4.50, but if you believe the stock market is headed much lower, then bite the bullet and enter into the trade if placing a lower bid does not work.

Morgan Stanley  Wachovia  Lehman  S&P 500  Options  Puts

Washington Mutual (WM) on Sunday, announced that it is replacing its CEO Kerry Killinger with Alan Fishman. Alan Fishman is currently the Chairman of commercial mortgage broker Meridian Capital Group. He was also the President and CEO of Sovereign Bank up until 2007.

Washington Mutual (WM) lost $3.6 billion in the quarter that ended June 30 and the bank expects that its mortgage related losses could run between $12 billion and $19 billion in 2008.

Washington Mutual (WM) is another victim of the credit crisis. Its stock which is currently trading at $4.27, has lost 68% this year and as foreclosures keep increasing nationwide, the company’s losses keep mounting.

Tags: WAMU  Washington Mutual