Previous Columns
9:00 AM EST, Tuesday, November 25, 2008: When you've got to save the world's largest bank, you know you've got some big problems. Mr. Market responded to the government Citigroup largesse with a nice rally. I don't see the rally lasting. But dumber things have happened. The sidelines remain a good place to sit in cash, with a few new shorts, e.g. Best Buy (BBY) and Barnes and Noble (BKS).

Much speculation and much ignorance abounds. Too much for my taste. Martin Weiss writes yesterday,

"It pains me deeply to announce that, despite the massive government rescue, yesterday’s collapse of Citigroup could ultimately lead to a shutdown of the global banking system...

this past August, we devoted a full hour to this question in our “X” List video, naming the most likely candidates for bankruptcy. So let me review its primary conclusions and then take this discussion to the next level.

Most prominent on our August “X” List was Citigroup, America’s second largest banking conglomerate with over $2 trillion in total assets. The bank was already suffering crushing losses in mortgages. But at mid-year, it still had close to $200 billion in other mortgages on its books, denoting the strong possibility of many more to come.

In addition, Citigroup had a massive portfolio of credit cards — 185 million accounts worldwide — that we felt could be the final nail in its coffin. Even before the most recent episode of the global financial crisis, Citigroup’s losses on bad credit cards had surged by 67% from a year earlier. Worse, the number of credit cards 90 days past due was going through the roof, foreshadowing more large losses on the way. All of these weaknesses were detailed in Citigroup’s financial statements. Not detailed, however, was …

The Highly Dangerous Derivatives

Derivatives are bets made mostly with borrowed money. They are bets on interest rates, bets on foreign currencies, bets on stocks, bets on corporate failures, even bets on bets. The bets are placed by banks with each other, banks with brokerage firms, brokers with hedge funds, hedge funds with banks, and more.

They are often high risk. And they are huge. According to the U.S. Comptroller of the Currency (OCC), on June 30, 2008, U.S. commercial banks held $182.1 trillion in notional value (face value) derivatives.1 And, according to the Bank of International Settlements (BIS), which produced a tally six months earlier for the entire world, the global pile-up of derivatives, including institutions in the U.S., Europe and Asia, was more than three times larger — $596 trillion.2

That was ten times the gross domestic product of the entire planet … more than 40 times the total amount of mortgages outstanding in the United States … nearly 60 times greater than the already-huge U.S. national debt.

Defenders of derivatives claim that these giant numbers overstate the risk. They argue that most players hedge their bets and don’t have nearly that much money at stake. True. But that isn’t the primary risk these players are taking.

To better understand how all this works, consider a gambler who goes to Las Vegas. He wants to try his luck on the roulette wheel, but he also wants to play it safe. So instead of betting on a few random numbers, he places some bets on the red, some on the black; or some on the even and some on the odd. He rarely wins more than a fraction of what he’s betting, but he rarely loses more than a fraction either. That’s similar to what banks like Citigroup do with derivatives, except for a couple of key differences:

Difference #1. They don’t bet against the house. In fact, there is no house to bet against. Instead, they bet against the equivalent of other players around the table.

Difference #2. Although they do balance their bets, they do not necessarily do so with the same player. So back to the roulette metaphor, if Citigroup bets on the red against one player, it may bet on the black against another player. Overall, its bets are balanced and hedged. But with each individual player, they’re not balanced at all.

Difference #3. As I said, the amounts are huge — millions of times larger than all of the casinos of the world put together.

Now, here are the urgent questions that, as of today, remain largely unanswered:

Question #1. What happens if there is an unexpected collapse?

Question #2. What happens if that collapse is so severe it drives some of the key players into bankruptcy?

Question #3. Most important, what happens if these players can’t pay up on their gambling debts?

This is the question I have asked here in Money and Markets month after month. Almost everyone said it was far-fetched, that I was overstating the risk. Yet, each of the hypothetical events I cited in the above three questions have now taken place in 2008.

First, we witnessed the unexpected collapse of the largest credit market in the world’s largest economy — the U.S. mortgage market.

Second, we witnessed the bankruptcy or near-bankruptcy of three key players in the derivatives market — Bear Stearns, Lehman Brothers and Wachovia Bank.

Third, we also got the first answers to the last question: We saw the threat of a major, systemic meltdown in the entire global banking system.

You can read his full post at Martin Weiss's Money and Markets.

Check out solar panels for your house. Under the recent bailout plan's terms, homeowners qualify for a federal tax credit that equals 30 percent of a photovoltaic system's cost beginning January 1. The current cap of $2,000 is removed. Also, business owners will no longer trigger payment of an alternative minimum tax by claiming the credit. According to George Villec, owner of Geo Innovation in Arizona, the 30 percent federal credit, combined with utility company rebates and state tax credits, will make it possible to buy a system for a third of its actual cost. Your state may vary.

Don't give gift cards for Christmas. Every retailer is closing stores. Some are closing altogether. And some are going bankrupt. You'll need a government bailout to get your gift cards redeemed for real stuff you don't need.

Don't buy anything -- unless it's on sale. Everything is. Always question the price. Everything is on sale. Or there's a cents-off coupon somewhere. Clothing. Jewelry. Hotels. Computers. Electronics. Apartments. Buildings. Always offer a ridiculously low price and be prepared to walk. Cash works even better. Timing is key. "Call me when you need my money." Don't get emotionally involved. In today's world, there's always a better deal.

Dumb. Dumb. Dumb. Verizon Wireless has admitted that some of its employees viewed Obama's cellphone records without authorization. My takeaway:

Cellphone records, voice mails and emails are easily monitored. Your laptop is easily hacked, despite your "erasing" stuff. Do not use electronic communications if you're doing something you don't want others to know about. Skip all electronics. Speak to them in person.

Cut your grass to four inches, not two. Four inch cut grass grows longer roots. This useful advice comes from our local grass expert who experimented with growing different heights of grass in a plastic ant farm, of all things. Finally, you've learned something useful from this column.

Do it now. Inspire urgency. Kotter is a Harvard Business School professor. He's found that 70% of the time corporations do big things -- like implement new growth strategies, put in new IT systems, reorganize to cut expenses -- they fail. He writes in his new book, "If a sense of urgency is not high enough .., everything else becomes so much more difficult. The difficulties add up to produce failure, pain, disapointment and that distressing 70%."

You can read the book in an hour. I did last night. It's got some useful ideas. In my old management days, we used to believe in "Just doing it, not analyzing it endlessly. If we analyzed we'd lose the oppoortunity. ." Nice t-shirt,

But Nike make it only in boys sizes.

Nice teacher stuff.
TEACHER: Maria, go to the map and find North America.
MARIA: Here it is.
TEACHER: Correct. Now class, who discovered America?
CLASS: Maria.

TEACHER: Glenn, how do you spell 'crocodile?'
GLENN: K-R-O-K-O-D-I-A-L'
TEACHER: No, that's wrong
GLENN: Maybe it is wrong, but you asked me how I spell it.

TEACHER: Winnie, name one important thing we have today that we didn't have ten years ago.
WINNIE: Me!

TEACHER: George Washington not only chopped down his father's cherry tree, but also admitted it. Now, Louie, do you know why his father didn't punish him?LOUIS: Because George still had the axe in his hand.

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads on this site. Thus I cannot endorse, though some look interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Michael's business school tuition. Read more about Google AdSense, click here and here.