After Mattel (NYSE: MAT) announced its first huge lead-based paint recall spanning dozens of my children's favorite toys, from Diego to Elmo (how could you?), my initial response was something along the lines of: no more Chinese toys, ever! After the second recall, largely focused on Polly Pocket dolls (I have boys but still, Polly Pocket is hard to resist) and choking hazards, I went even further and darkly considered removing the plastics from my family's consumption altogether -- more than one friend made that decision, too, putting plastic toys and Tupperware in garbage bags and divesting entirely.

Late last night, Mattel announced yet another recall, this one not quite so big as the others and focused largely on small parts of Barbie accessories -- the dog from the Barbie Dream Puppy House; the cat from the Barbie Dream Kitty Condo; the dog and dinner plates from the table and chairs kitchen playset -- as well as a few toddler toys, two GeoTrax trains and the lid from a bongo drum in a Big, Big World playset. And I? Had almost no reaction. I didn't frantically root through my children's toy boxes, searching for toxic toys. I didn't email all my friends, using a subject line with several exclamation points. I didn't call my pediatrician's office to schedule a blood lead test (ok, so I've already done that). Mattel, I've decided, isn't the bad guy here; nor am I quite as angry at China (even though I'll admit to a greatly heightened blood pressure when I heard that a Chinese government official objected to lead limits in children's jewelry).

The thing is, while I've decided to severely limit my consumption of plastic children's toys, this isn't about them anymore.

Every time investors turn around, things get worse at Mattel (NYSE: MAT). The Wall Street Journal (subscription required) reports that the federal Consumer Product Safety Commission requires companies to "report all claims of potentially hazardous product defects within 24 hours." Mattel apparently has not been doing that. The company took several months to review data on the nearly 18 million play sets that it recalled last month.

The CPSC says that it has had about enough of Mattel's behavior. The commissions chairperson calls Mattel's approach "fallacious and wrongheaded."

Although the commission is fairly small and cannot handle all of the cases that it should, it is astonishing that Mattel would makes its position with consumers worse by adopting a stance that might be viewed as irresponsible.

Me. A mom. Presumably the sort of human being who'd be up in arms with outrage over this latest bit of recall news. Instead, I'm rolling my eyes and wondering what's really behind all this recall madness. Is it a slow news week? (not with all the fun we're having with world's credit market meltdown!). Terrorists out to kill our children via poisonous toys? Or is is just our hysteria over China eating our lunch. The lunch we happily sent over to them.

I think it's probably the latter. And that's not to say I have any doubt over whether China is turning out mountains of subpar crap for us. Standards are different over there, after all. And at the end of the day, everyone gets what they pay for, right, Mattel (NYSE: MAT)?

I'm just starting to find it suspect that every day brings new screaming headlines about more poisonous, sub-par products being sent to us from China. Toxic toothpaste! Poisoned pet food! Lead-coated toys! Now it's killer bibs!

In an effort to better understand the lead-in-toys scandal, I had a chance today to talk to an industry expert on the topic. Dr. Marcia Stone holds a Ph.D. in Organic Chemistry and is Founder/President of Hybrivet Systems, a manufacturer of lead-testing equipment for industry and home use. She has worked in the lead testing field for 15 years.

I asked Dr, Stone why manufacturers would use lead paint? She explained that "Lead in paint provides a hard, glossy, pretty finish, the reason it was once used extensively in expensive housing. Leaded paint is also easy to work with and inexpensive."

What lead-containing products have you found on American shelves that consumers should be concerned about?
"The scandal over lead in children's jewelry is not over; we continue to find these products for sale," said Stone. She told me manufacturers will use a core of lead in cheap jewelry and cover it with nickel plating or paint, or use a solder containing lead in its construction. Children often chew on their jewelry, and as little as three milligrams of lead, about the size of three grains of sugar, can kill a child. Since lead has a sweet taste, the propensity for children to ingest it is even greater.

It's been a few weeks since Mattel, Inc. (NYSE: MAT) announced a million-toy recall, and the dust is far from settled. The Chinese supplier that supplied paint for a huge collection of children's toys has seen its CEO commit suicide and parents are still under the gun on which exact toys to trust their kids with. The problem is lead-based paint, which can lead to health complications. Outside of the normal "small parts" recall fiascos that seem to happen every year, the lead paint issue is a big one. Young kids put everything in their mouths.

This week, Mattel has -- once again -- urged parents to withhold many of its toys from all those curious kids. When a toy manufacturer directly tells customers to not use its products, something is amiss, of course. With more than 19 million toys worldwide under scrutiny, how did this problem become so large before being detected?

Quality control in China -- with raw materials and product manufacturers -- has slid far, far downhill. Retailers carrying items from multiple Chinese-based recalls may be feeling the backlash, and the American consumer is probably going to demand better in the near future. In other words, if "low prices" means "horrible quality," where does that leave discounters like Wal-Mart Stores, Inc. (NYSE: WMT) and Target Corp. (NYSE: TGT)? With plummeting toy sales, most likely. Is that priced into the stock of either retailer? Probably not.

Mattel (NYSE: MAT) volatility Elevated at 39 into Voluntary recall. MAT announced the voluntary recall of 18 million products. BMO Capital Markets says, "We believe this recall will adversely affect consumer behavior, resulting in lower sales for the line. MAT closed at $23. MAT September option implied volatility of 36 is above its 26-week average of 26 according to Track Data, suggesting larger risk.

Moody's (NYSE: MCO) September implied volatility Elevated at 58. MCO, a provider of credit ratings, research and analysis covering fixed income securities closed at $49.98. The Wall Street Journal Online carried the headline "How rating firms' calls fueled Subprime Mess. Benign view of loans helped create bonds, led to more Lending." MCO September option implied volatility of 58 is above its 26-week average of 39 according to Track Data, suggesting larger fluctuations.

Mattel Inc. (NYSE: MAT) opened at $22.60. So far today the stock has hit a low of $22.10 and a high of $23.14. As of 10:40, MAT is trading at $22.73, down 0.84 (-3.6%).

After hitting a one year high of 29.71 in April, the stock has been sliding over the past few months. Shares are dipping more still today after the toymaker announced that it is recalling an additional 8.8 million Chinese-made toys on lead paint concerns. With trouble like this and potentially more on the way, its hard to imagine this stock going up by too much over the next few months. Technical indicators for MAT are bearish and steady, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.

For a bearish hedged play on this stock, I would consider a January bear-call credit spread above the $30 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk and leverage returns. For this particular trade, we will make a 4.2% return in just 5 months as long as MAT is below $30 at January expiration. MAT would have to rise by 31% before we would start to lose money. Learn more about trades like this one here.

MAJOR PAPERS:

• Mattel Inc (NYSE: MAT) is expected to soon announce another recall of toys made in China, reported the Wall Street Journal.
• Merck and Co. Inc (NYSE: MRK) CFO Judy Lewent sold 200K shares for $10.3M from July 26 through Aug. 7, at an average price of $51.31 per share, reported Barron's Online's "Inside Scoop" column.
• The Royal Bank of Scotland (OTC: RBSPY)-led consortium seeking to purchase Dutch bank ABN Amro Holdings NV (NYSE: ABN) raised its stake in ABN to more than 3% between Friday and Monday, reported the Financial Times.

OTHER PAPERS:

• The Independent reported that Barclays' (NYSE: BCS) bid for Dutch bank ABM Amro was approved by the Netherlands' Ministry of Finance yesterday.
• A highly publicized civilian nuclear deal with the U.S. still allows India to test nuclear weapons, according to Prime Minister Manmohan Singh, reported the Associated Press.

Main market news here: Before the bell: Futures advance on central banks' efforts

Top toymaker Mattel Inc. (NYSE: MAT) may initiate another recall after again finding excessive lead levels in some toys' paint. Mattel recalled some 1 million Fisher Price toys earlier this month.

Cell-phone maker Nokia Corp. (NYSE: NOK) is replacing 46 million batteries made by Matsushita Electric Industrial (NYSE: MC), saying the batteries are subject to overheating.

A consumer satisfaction survey out of the University of Michigan showed Yahoo! (NASDAQ: YHOO) rated higher than Google (NASDAQ: GOOG).

In the wake of a series of courtroom setbacks vs. rival Broadcom (NASDAQ: BRCM), chipmaker Qualcomm (NASDAQ: QCOM)'s head counsel has resigned.

In a saga that has everything from toys with lead to the suicide of a manager who ran a factory that allegedly made some of the tainted toys, add yet another recall. Mattel (NYSE: MAT) has already recalled about one million toys, and, according to (subscription required) The Wall Street Journal, it is about to recall several hundred thousand more. The Journal writes:: "One of the recalled items is a die-cast car that may contain lead paint."

Mattel said it would take a $30 million charge for the first recall.

Lost in much of this is what will happen to Mattel's business. The recall costs may be modest compared to the company's $5.7 billion in annual revenue. But, it took two or three years for the big toy company to turn around after a sharp fall in sales of it Barbie line flat lined the stock from 2002 to 2005.

In July 2006, Mattel's stock traded for $16. Improved financial results from a stronger product line took the shares to almost $30 this April But, the stock has moved down to the low $20s. Watch it fall further if the China toy problem gets any worse.

Douglas A. McIntyre is a partner at 24/7 Wall St.

Click here for Mattel toy recall coverage

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Go to leading toy designer, manufacturer and marketer Mattel Inc.'s (NYSE: MAT) website, and you're greeted with its slogan in bold letters: "The World's Mattel: Premier Toy Brands, Today and Tomorrow." With popular name brand toys ranging from Barbie and Hot Wheels to American Girl and Barney, that claim is no exaggeration.

But the behemoth brand has taken a hit this past week. If you've been reading headlines, you likely have seen the bad news for Mattel -- it is recalling 1.5 million of its Fisher-Price toys due to lead paint concerns. With this, Mattel joins a long list of big businesses being burnt by shoddy manufacturing and factory oversight problems in China.

Certainly, it isn't just a case of tainted toys, but now a tainted brand. If you're a parent, you pay special notice to
news like this, and it is not something you take lightly. As a parent myself, I know that with everything involving my child, I err on the side of safety and caution. Mattel knows this, and it has announced that it is immediately addressing the problem and will go overboard to ensure it doesn't happen again, but I still might think twice when I am at the toy store next time.