And not just a bit irrational either.

But - this is why its possible to make money in the market! If the market actually priced in risk in an accurate fashion it would not be possible to make money, since the market would have accurately assessed both risk and reward and the price of everything would reflect that.

Of course that's nonsense, which is why you can make money in the market.

Case in point - LEND, which I blogged about last night.

Farallon closed their loan. But their auditor resigned; the company is currently delinquent in their regulatory filings (read: haven't filed quarterly reports on time) and you need an audit to be able to file that.

So what does the market do? Drive the stock up by 20% this morning. Huh?

Guys, what part of "the auditors quit" didn't you bother to read? Oh wait - you were focused on that credit line. Ok. Did you bother to read any of the released data when that was announced? Oh, like, for instance, the part about "no undisclosed material adverse events" occurring?

Now let me ask you a question - let's say you're a banker. And I come into your office and ask for a loan to buy, say, a house.

You ask me for some evidence that I can pay back the loan and request among other things my W2 and Tax Returns. I produce for you instead a hand-written scrawed note that says "I make $100,000 a year."

You look at me with a scrunched look and ask "uh, dude, where's the 1040 and W2?"

I reply "Well, my accountant quit. He said he wanted more information to finish my tax return and I didn't want to give him what he wanted, nor did I want to pay him for the extra work he said he had to do in order to finish the return. So he walked out. I'm sorry, I don't have my tax return - I didn't file it on time and I don't have anyone to finish it for me."

Are you going to loan me the money for the house?

So tell me folks - exactly how is the auditor quitting good news?

Obviously, its not. And obviously, no matter how much money you think you have, when one of the things you promised is that you'll provide accurate financial statements and then you fail to do so, you can expect that you're going to have somewhat serious problems in the near future. In my case, as a taxpayer, I'd expect that the IRS would be pounding on the door fairly soon.

How long before LEND's warehouse lenders come pounding on THEIR door? I'd say its going to happen pretty soon.... and when it does, its likely to be a rather violent event for them.

I've seen this time and time again......

BTW, there is one apparent "good guy" out there in the subprime financial space. That would be "WLT" - Walter Industries. They were absolutely pounded in December, and their balance sheet is somewhat "interesting". Nonetheless, there appears to be opportunity here - while they have been tarred as being a "subprime" lender, in fact nearly all of their loans - while in that space - are fixed-rate obligations. Fixed-rate mortgages have a much lower default risk than adjustables, because the borrower knows what the payments will be for the entire term of the loan up front.

For people on the margins who have shaky credit the fixed-rate mortgage is even more important, because they are the ones who need the ability to budget and plan for their expenses with a high degree of certainty.

In addition Walter is involved in the coal business - and coal, despite the screaming of environmentalists, is a core energy component in our economic picture.

For this reason I have done the contrary thing and recently taken a long position in this company.