“As recently as a month ago,” says Justice Litle in Taipan Daily, “Erin Callan was on top of the world.”

The WSJ did a glowing piece on her rise through the ranks. Condé Nast’s Portfolio magazine dubbed her the most powerful woman on Wall Street.

If you don’t recognize the name — and don’t worry, most won’t — Erin Callan is the chief financial officer of Lehman Brothers (LEH:NYSE).

Or was the CFO, rather, because Ms. Callan holds that title no more. She was ousted this morning, along with chief operating officer Joseph Gregory, as a result of Lehman’s nearly $3 billion loss. Someone had to take the fall. She and Mr. Gregory were offered up to the volcano.

Ten days or so ago, Taipan Daily tagged Lehman Brothers as a downside bellwether. (You can read it here.) Watch LEH and watch the Philly Bank index, we said. Now they are both in the tank — and the markets are, too.

“On Wall Street, after Bear Stearns fainted, the other financial firms took smelling salts,” says Bill Bonner in The Daily Reckoning.

But some of them are beginning to look a little woozy, nevertheless. Lehman Bros. is said to be looking for $3 to $4 billion in new capital. The company has nine times as much in level 2 and level 3 assets as it has in tangible equity. And it’s not the worst. Merrill Lynch’s level 2 and level 3 assets equal 2,565% of its tangible equity.

And dear readers, be aware: “There’s another Bear Stearns out there,” say our friends over at The Motley Fool. “You may already own it. And just as with Bear Stearns, chances are you won’t see the collapse coming until it’s too late.”

Colleague Dan Amoss, over at Strategic Short Report, has pinpointed the next Bear Stearns – and warns that there is another credit crisis ready to jam the pipeline.

“Right now,” he tells us, “this company is desperately scrambling to dump more of its weak, illiquid assets…while laying off employees by the thousands…in a desperate bid to ‘fix’ its Wall Street profile, keep its ’shameful secret’ under wraps, and protect its stock.”

But that won’t work, Dan continues. “Buried deep in this firm’s mysterious ‘Level 3′ assets, where banks have regularly hid their riskiest mortgage-backed securities, this one company already has one very large multibillion-dollar real-estate-based asset that – just by itself – could be worth nearly 30% less than it was when this firm bought it.

“When this firm is forced to beef up earnings by selling this one asset, you’re already looking at billions in write-down losses right there. And that’s just where the unraveling begins.”

“Don’t buy shares of financial service companies with ‘Level 3′ assets of more than their capital,” says Martin Hutchinson in Money Morning.

That’s all the “Big Four” investment banks including Goldman Sachs, Merrill Lynch & Co. Inc. (MER), Morgan Stanley (MS) and Lehman Bros. Holdings Inc. (LEH), and most of the big commercial banks, too. Those Level 3 assets are probably worth very little in a real downturn, because there is no market for the assets and everybody else will be trying to sell them too.

If you don’t recognize the name — and don’t worry, most won’t — Erin Callan is the chief financial officer of Lehman Brothers (LEH:NYSE).

Or was the CFO, rather, because Ms. Callan holds that title no more. She was ousted this morning, along with chief operating officer Joseph Gregory, as a result of Lehman’s nearly $3 billion loss. Someone had to take the fall. She and Mr. Gregory were offered up to the volcano.

Ten days or so ago, Taipan Daily tagged Lehman Brothers as a downside bellwether. (You can read it here.) Watch LEH and watch the Philly Bank index, we said. Now they are both in the tank — and the markets are, too.

Our own Adam Lass, the (rather outspoken) editor of WaveStrength Options Weekly, was on this beat long before anyone else. As I wrote to you this past Monday, Adam has been pounding the table with gusto on his bearish bank bets. WOW readers have been doing quite well in result.

He’s been cleaning up in the Dow Jones, too… on May 21, as part of his “Storm Warning” program, Adam asked WOW readers to buy September DIA puts. The max gains on that position (as of yesterday, I believe) were 67%. They are, no doubt, up more today, with the Dow swimming in red as I write.

Yesterday, I asked Adam to give the lay of the land from his perspective. He replied with an open letter from New York City. Prophetically enough, given this morning’s big news, the event on Adam’s mind was the big Bear-Lehman lacrosse game. He expounds on market conditions, too, of course. Read on to find out what our bank-beating, Dow-drubbing options guru has to say.

Warm Regards,

JL

Wall Street Fiddles While America Burns

You can sit on the sidelines watching your money vanish… or you can gain 80% by summer’s end by Adam Lass, Editor, WaveStrength Options Weekly

Dear Justice,

I could write to you about oil today. It would be so easy… the headlines are chock full of crude gyrations. One moment they’re touting a pending drop as soaring prices cut into demand. The next thing you know, some wag at Gazprom is calling for $250 a barrel by this time next year. (I’m sure you’ll be addressing that soon.)

However, I’m fairly sure most of our readers are up to date on oil, and just how badly oil prices are choking off the U.S. economy. (One need do little more than open the latest gas card bill, and the pain becomes apparent.)

But… are they aware of how Bear Stearns recently rose from the dead to crush cross-town rival Lehman Brothers?

I am speaking, of course, of Tuesday night’s lacrosse game up in the 100-degree heat of Harlem’s Baker Field, where Bear’s doughty lads (and a few stand-ins from Bank of America) put the harsh realities of the Street behind them for a few hours. The Bear boys may have been down and out in the broader scheme of things. But for the course of this lacrosse game at least, they stood tall over their fellow white-collar athletes.

The final score: Bear Stearns, 11; Lehman Bros., 4.

Now, I know that this feat sounds small in the context of the huge sea changes happening to Wall Street these days. Quite frankly, though, it’s amazing that Bear’s walking zombie fate hasn’t spread to more players in the Gotham League.

Why, just the other day, the game’s big loser, Lehman Brothers, added its name to the ever-expanding roster of multibillion-dollar bleeders, upon reporting a $2.8 billion quarterly shortfall.

Judging by the ensuing plunge in LEH shares, this announcement actually surprised some investors, who were happily fantasizing that the financial sector’s troubles had somehow ended.

This is a damn shame, because there was a plethora of clues available to anyone with eyes to see. In the case of Lehman, one could simply have noted hedge fund manager David Einhorn’s very public PowerPoint presentation, where he deftly uncovered the cherry bombs lurking in LEH’s books.

Yes, yes, I know that LEH execs have complained that Einhorn was “talking his book” and supporting a big short position. Then again, Mr. Einhorn is the one who was right, while Lehman CEO Dick Fuld was utterly, awfully wrong when he claimed “the worst is behind us” back in April.

I will tell you right now that the worst is not behind LEH. Nor is the worst behind its fellow Gotham League players.

Pluck any name you want off Wall Street’s roster, and I am willing to bet you dollars to donuts that they are still sitting on a vast hoard of incendiary Level 3 assets.

If you’re not familiar with Level 3 assets, just close your eyes and think of toxic waste. These ticking time bombs are various financial devices wherein significant assumptions or inputs are used in the valuation technique, based upon inputs that are not observable in the market… thus requiring “internal information” to be used.

Street insiders describe Level 3 assets as “mystery meat.” And when you hear “internal information,” that’s a euphemism for “we dunno.” The traders are as clueless as the cafeteria lunch ladies when it comes to pricing this stuff. And yet the corporate shills try to tell folks like you and me that this “mystery meat” is really filet mignon.

Meanwhile, Wall Street’s best and brightest goof around, beating each other up with lacrosse sticks alongside the Hudson, while their sponsoring houses destroy shareholder wealth at a prodigous rate unseen since the “Great Falls” of Enron and Long-Term Capital Management.

The financial sector — as exemplified by such proxies as the Standard & Poor’s Financial Select Sector SPDR ETF (XLF:AMEX) – has given up some 41% over the past 12 months.

It is not done yet.

Since last May, my proprietary WaveStrength charting system has yielded clear sell signals against such supposedly reputable companies as Bank of America (BAC:NYSE), JP Morgan (JPM:NYSE) and Wells Fargo (WFC:NYSE). These signals allowed my readers to convert Wall Streets self-inflicted bleeding into 652% gains.

Here and now, that system indicates just as clearly that you should purchase XLF December 22 puts (XLF XV), available as I sit to write for $214 per contract and sporting a delta of 0.37. These contracts will earn you gains of 17% for every dollar Wall Street foolishly squanders this summer… playing games while America burns.

Yours truly,

Adam