Was anyone else surprised that news of a first quarter profit warning from M&T Bank (MTB) hardly had any effect on the market and received fairly little attention on Wall Street? One of the arguments we have heard from many Alt-A mortgage lenders is that the sub-prime mess is confined to that part of the spectrum, and Alt-A mortgages (given to home buyers with high credit scores but without verification of income, etc)are doing okay so far. M&T's warning directly contradicts that view.

For those of you that missed it, M&T Bank (a regional bank in the Mid-Atlantic) projected first quarter earnings of $1.50 to $1.60 last week, far below consensus estimates of $1.86 per share. The culprit: Alt-A mortgage loans, which make up 30% of the bank's mortgage portfolio. The company was forced to repurchase non-conforming loans and also decided to not sell some new loans due to inadequate pricing and a lack of bidders.

This news did hit MTB shares, which fell about 10 percent on the news, but very few others were affected. Other mortgages lenders heavy into Alt-A offerings such as IndyMac Bancorp (NDE) have come out publicly saying their mortgages are performing fine. The news from M&T, hardly an aggressive lender, show that the odds are good that Alt-A mortgages will become a problem for mortgage lenders as well as more diversified regional banks who make these types of loans.

This trend should continue to show up in first quarter earnings reports when they begin rolling in over the next month or so. As a result, playing the regional banks for a trade going into earnings season seems to be dangerous from the long side. Opportunities to get long may present themselves later, and companies highly levered to Alt-A may be good shorts heading into earnings, but I'd be cautious on the regionals heading into the upcoming reports. A good way to hedge existing positions would be to sell out-of-the-money calls to generate some additional income.

Full Disclosure: No position in MTB and short NDE at time of writing