Morgan Hotel Group (MHGC) “owns” several heavily mortgaged hotels, operates a few more, and is involved in several others as joint ventures. These properties are generally high end independent hotels, which is the single worst performing segment of the very weak lodging industry. In the most recent quarter, MHGC’s Revenue per Available Room plummeted 39.5%, by contrast for the overall hotel industry this metric was around -20%. MHGC’s hotels are suffering from severe double whammy: less overall travel and substitution from high-end to mid-priced and business class hotels.

MHGC, because of its heavy debt load and reckless bubble-era buying spree, has never made money, even during the boom. Its reported net loss was around $30 million in 2005, $14 million in 2006, $15 in 2007, and $57 million in 2008.

The most important GM bankruptcy news today is the new UAW agreement. The old proposal was UAW would get 39% of a post-restructuring GM, the USA 50%, bondholders 10%, old common shareholders 1%.

Now the UAW is agreeing to take only 17.5%, but in return for this smaller stake will be getting a variety of debt and warrants.

In my last Seeking Alpha column, I mentioned as a very speculative investment GM exchange traded or “retail” notes that trade on the NYSE. Thus far, this has not been a good investment. I mentioned XGM in particular, then trading at $4.90, and now trading at $1.56, with this loss partially cushioned by two dividend payments totaling 90 cents.

Despite these losses, I decided to not only hold, but buy in a little more around these prices. I certainly have been proven wrong in thinking that the Obama administration would not let GM file for bankruptcy, and this talk was mostly bluffing to get the bondholders to agree to concessions, which was the strategy with GMAC.

In 1931 John Maynard Keynes famously wrote:

A “sound” banker, alas! is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him.

Long Solar

President-Elect Obama and virtually all the Democrats who have won congressional races have promised to invest in clean energy. I have a somewhat perverse interest in watching out-of-state candidates’ campaign commercials. Something like 50% or more of Democrats’ ads feature these promises, together with pictures of windmills and gleaming solar panels on a sunny day. I expect that they will keep their word. It’s both good policy and good politics.

I am continually surprised that people are willing to hold, at any price, the common stock of regional Option-ARM mortgage disasters Downey Financial (DSL), BankUnited Financial Corporation (BKUNA), and FirstFed Financial (FED).  They are dead banks walking. The big investment banks, money center banks, insurance companies, and even the GSEs have been drastically writing down the value of their toxic mortgage portfolios. Some might argue they have not written them down enough, but clearly management is at least trying to estimate the value of their portfolio. These big institutions, like AIG (AIG), Citibank (C), and Lehman Bros (LEH), also may benefit from government bailouts and foreign fund white knights who want to buy their name brand to break into the US market.

None of these long-shot saviors exist for the three small banks that I like to call the Option Arm Triplets: Downey Financial; FirstFed Financial and BankUnited. These banks are all loaded to the gills with perhaps the most risky and insane mortgage product ever devised in the recent speculative bubble: The negative-amortization ARMs, more commonly referred to by the more cheerful industry euphemism “Option Arm” or “OA.” For some borrowers, even the risky interest only [IO] mortgages still provided for too high payments. So these mortgages provide them with, in theory, the “option” of making several different payments each month: the full 30-year payment rate, an interest only rate, and lowest of all a minimum payment that doesn’t even equal the loan’s interest. In fact, well over 70% choose to make the minimum payment each and every month, causing loan balances to grow even as property values decline.

So far I have written four “Short Ideas” for Seeking Alpha, and my track record has been stellar.

My article on Crystal River (CRZ) was submitted when the stock was around 3.5, and as I write it is now at 2.18, down nearly 40%. In it I predicted that the company would in Q2 write down its book value from $5.33 per share in Q1 to either 2.38 or 2.44 per share in Q2, depending on whether there was a second write down on a defaulted junior loan to a Portland condo development.

When evaluating short plays of financials with falling asset values, a very profitable strategy for me the past two years, I look for three things: ownership of the declining assets, short-term or callable financing, and a high degree of leverage.

In 2007 such companies were easy to find. I shorted Thornburg Mortgage (TMA), where all three of these factors were present to a high degree, in August 2007 when it traded at 23.75. Now the stock is down about 99%, trading at 27 cents.  There are still plenty of companies like this with declining assets and high leverage, and at least a modest degree of short-term or callable debt. These companies can still suffer dramatic declines as their leverage means declines in asset values are multiplied several times over. I’ve already written about three of them here on Seeking Alpha, and those who shorted the companies I wrote about have made handsome profits: RWT is down 30%, CRZ is down 29%, and FED is down 40% from the time I submitted my articles. (By the way, I think these stocks will continue their dramatic declines over the next 3-12 months).

SourceForge (LNUX) is a small internet company that had a wild beginning. At the height of the internet bubble, its stock, like fellow Linux stock Red Hat, soared to insanely high values, peaking at over 400 per share. But the company’s current price is too low, and opportunities abound.

The first thing you need to know about the company, now trading around $1.35, is that it is sitting on about a dollar a share in net cash and other hard assets, and has no long-term debt. The second thing is that it has turned a profit for 9 of the past 10 quarters. The third thing is that it owns a number of high-traffic websites, including Slashdot, Linux.com, Unix and Palm software site freshmeat.net, online retailer ThinkGeek.com, and SourceForge.Net, the home page for a large number of open source software projects.

"Too Big to Fail" ("TBF"), to give a working definition, is the term used to describe institutions with financial obligations guaranteed by the good faith and credit of a sovereign government.  Many such institutions have an explicit guarantee.

The variable of "TBF-ness" is a matter of degree, and not always a clear yes or a no.  When considering debt as an investment, TBF-ness will figure into the decision.  Investors who estimate this variable, if they do so with even minimal accuracy, will on average and over time achieve a better rate of return than those who don't.

[Editor: Following review, we are republishing this article with two editor's notes and one clarification to the author's positions in stocks mentioned. Readers with differing opinions on this topic are invited to submit an article for publication.]

Crystal River Capital, Inc. (CRZ) is a leveraged financial entity structured as a Real Estate Investment Trust. I think that the company - within two to six months - will be insolvent and its stock worthless (and trade like other worthless REITS such as Thornburg Mortgage (TMA) for under 30 cents a share for awhile as it awaits delisting).

Introduction: Heavy Mortgage Backed Securities Exposure Will Lead To Big Declines

Redwood Trust (RWT) is a REIT-structured entity that makes leveraged investments in financial instruments that themselves are highly leveraged. It’s my candidate for the financial midcap stock most likely to lose 80% of its value in the next six months. Its portfolio is broadly similar to other mortgage REITs that have fallen more than 99% from their peaks to now, such as New Century Financial (NEWCQ) and Thornburg Mortgage (TMA). What has allowed RWT to not collapse 99% as several other mortgage finance REITs is (1) RWT wisely did not rely on short-term debt and debt subject to margin calls, and instead funded its most unwise investments with securitized debt; (2) its portfolio of MBS is of somewhat older vintage than TMA’s and NEWCQ; (3) its exposure is more to jumbo, ALT-A, and Neg-Am mortgages rather than subprime.

FirstFed Financial (FED) is a medium-sized bank with operations entirely within California.