Years from now, when historians look back at this decade, they will probably pinpoint it as America's turning point — from abundance to scarcity, from risk to caution, from false prosperity to real sacrifice.

In the final analysis, it is a healthy change.

But the transition is very painful: Large banks and brokerage firms fail, trapping millions of investors. Stocks and bonds plunge in value. Even many people who thought their money was "safe" suffer devastating losses.

This is a unique situation that demands unique measures. That's why Mike and I recently unveiled our "X" List of the nation's institutions most vulnerable to financial difficulties. That's why we held a 60-minute Q&A session on live Web TV. And that's why I am dedicating the two issues of Money and Markets to an edited transcript of the entire event.

In last Monday's issue, we published Part I, including the list of large U.S. banks we feel are most vulnerable. If you missed Part I, the first thing you should do is to read it by clicking here.

Now, here's Part II ...

The "X" List: The Next Big Failures
(Edited Transcript of Second Half of Program)

Announcer: We've been getting a large number of calls and emails from customers online right now who want to know the rating of their individual bank. Plus, we've gotten hundreds of similar questions in the last few days via email. For example, a couple of days ago, we got one from Gisela, who's asking for the rating of Park Cities Bank in Dallas, Texas, and for Regional Frost National Bank in San Antonio, Texas.

Martin Weiss: I saw that email and I went online to get the ratings for those two banks. So let me walk you through those steps, one by one.

Step #1. Go to www.TheStreet.com.

Step #2. In the menus, in the upper right, you'll see one called "PORTFOLIO & TOOLS." Pull down that menu and select "Banks & Thrifts Screener."

Step #3. This will take you to a new page, where you'll see a box on the left-hand side to fill in your bank information. To narrow the search, I typed in the state, Texas. Then, under "Bank Name," I naturally typed in your bank name, Park Cities Bank. Result: Nothing. The program could not find the institution.

That's when I remembered that this program does not like full names. It searches strictly for one key word. So I searched strictly for the first name — "Park." This time, it worked and gave me the result in a box immediately to the right: Park Cities Bank, Dallas, TX: C-, a rating which is a yellow flag.

The other bank you wanted was Regional Frost National Bank in San Antonio, Texas. So having learned my lesson from the previous one, I typed in strictly the word "Regional." Again no luck. But I didn't give up. I then entered another key word in the bank name — Frost. Sure enough, the program found it: Frost National, San Antonio, TX: A-, an excellent rating.

So this gives you a handy tool for finding the safety rating of your bank, and I'm very glad TheStreet.com is making this vital information available to everyone at no charge.

Mike Larson: We have a question from Gary, who asks:

Q. What are the best ways to store valuables such as jewelry, coins and small bars since bank deposit boxes no longer seem to be a safe option?

Martin: Wait a minute, Gary. We never said that bank safety deposit boxes were at risk. Back in the 1930s, my father, Irving Weiss, was an investment advisor, and he told his friends and customers to get their money out before the bank failures. But years later, he also told me this: During the bank holiday, what the banks closed was customers' access to withdraw money from their bank accounts. Safety deposits remained open and available.

Mike: That makes sense. When you have a safety deposit box, you're not entrusting your money to your bank. You're merely renting space in a box under the bank's auspices.

Ray Belcher: Ray here in customer service. We have a subscriber who is asking:

Q. What would be the impact on otherwise safe institutions just by virtue of the fact that this world is now so interconnected and highly leveraged through risky derivatives? Is any bank safe under the scenario of a domino derivate meltdown?

Martin: This is the scenario lurking in the minds of nearly virtually every central bank official and regulator in the world. This is what gives them sleepless nights. Can they, or we, or anyone sit here today and guarantee that a meltdown will not occur? No, we cannot. A meltdown could occur.

But as long as there's no World War III or some doomsday scenario of that nature, we have a nation with a solid, modern infrastructure, tremendous resources and great talents. We have a government, which despite all its faults — and all its debts — is still a healthy, vibrant democracy.

Therefore, despite glitches, perhaps some big glitches, any meltdown is likely to be relatively brief — frightening but brief — and our financial system should quickly get back on its feet.

We also know that not all banks and not all brokerage firms have taken the same risks or made the same mistakes and that many are still financially strong. That not only means you can personally trust them with your money, but it also means that we, as a nation, can count on them to play an important role in lending their strength to the financial system as a whole.

Q. I've been hearing Wachovia Bank is one of the banks that's not doing well these days. I have my retirement account being managed by Wachovia Securities. Are they one and the same? Should I be worried?

Mike: Please don't let financial difficulties with separate affiliates cloud your vision about your broker or your bank. By the same token, don't assume that financially strong affiliates will come to the rescue of their weaker sisters. For the most part, we prefer to evaluate each separate financial affiliate on its own merits, and we think you should do the same.

Q. I am between a nightmare and heart attack. I recently told my broker to get us out of the stock market, and he's telling us that's a big mistake. I also want to know if ANY U.S. banks and brokers are safe. Or should we just pull out and invest everything overseas?

Martin: Mike, let me take this one. First and foremost, if rational concerns are prompting you to take protective action, that's a good thing. But if irrational fears are keeping you up at night or driving you to make rash decisions, that's not good. Step back and look at the big picture. Yes, we have very serious troubles. But this is not the end of the world. We've been through worse before and we survived it. We'll get through this as well.

I agree it's time to get out of most of your stocks. But that doesn't mean you should willy-nilly sell all your stocks across the board.

There are stocks that go up well despite bad times. There are some stocks — as well as ETFs — that go up because of bad times. Plus, there are ETFs that are designed to go up even faster when stocks fall. Provided you own some of those ETFs as a solid hedge against a falling market, you could hold on to some of the strongest companies in America or abroad and continue to earn the nice dividends that many of them pay.

I also don't think it's a good idea to pull all your money out of the United States. If you want to invest internationally, you can do so through a U.S. brokerage account with investments listed on U.S. exchanges. And we'll give you a list of strong brokers in a moment.

Q. Martin and Mike, in your Safe Money Report, you have recommended conservative investors keep a big portion of their money in T-bills or Treasury-only money market funds. Why don't you recommend Treasury Inflation-Protected Securities (TIPS)? Wouldn't they be just as safe and have a little higher return?

Mike: We have no fundamental objection to TIPS. But right now, we prefer straight, short-term Treasuries because we think that, sooner or later, interest rates are going up, and we believe they're going to go up faster than the inflation adjustments you get with TIPS. With short-term Treasuries or a Treasury-only money fund, you'll be better able to take advantage of the new, higher interest rates as they become available.

Now, we have a whole batch of questions from Francia:

Q. Thank you and God bless you and all of your team for the information, which I treasure each day for my survival for my old age. My questions are: Could this crisis be a deliberate draining of Americans funds to start the North American Union and dissolve the United States of America?

Martin: No. It's the natural consequence of human greed and human error.

Q. Where are all the missing or written-off billions of dollars? Who got them? Where did all the money go?

Martin: Much of the wealth was not there to begin with. It was a fantasy, a bubble with no substance. So the money didn't go anywhere. Rather, what we're seeing is a rude awakening to the fact that the assets are worth a lot less than they thought.

Q. Do you see yourself and your family still living in America after all this?

Martin: Yes. We spend about 10 or 11 months of the year here in Palm Beach Gardens, Florida. Plus, my wife's family also has a nice farm in the interior of the State of São Paulo, Brazil. Naturally, we always choose locations where we feel safe. But that's true no matter where you go in the world today, whether in the U.S. or any other country.

Q. Do you think gold will be confiscated from Americans?

Martin: No. I have an instant message here from Customer Care. Go ahead, please.

Q. Please discuss annuities and the rating which you feel would be safe for an annuity insurance company.

Martin: We want to save insurance companies for another Q&A session at another time. But let me give you a quick answer: If you have a variable annuity, your money is kept in separate account, much like a mutual fund. Even if your insurer fails, that money does not get tied up in the failure. If you have a fixed annuity, that's a different story. In either case, though, find your insurer's rating at TheStreet.com and follow the same steps I just outlined for bank ratings. Then, follow essentially the same guidelines we gave earlier for bank ratings. (Editor's note: The guidelines are clearly set forth in Part I of this transcript.)

Q. Money market funds, even Treasury-only funds, use banks for their custodial services. If such a bank fails, what happens to my money, which is in a Treasury money market fund? I find that none of the banks they use have an "A" rating.

Martin: The answer is similar to the one I gave earlier for safety deposit boxes. Custodial services are entirely separate from the bank's assets. Moreover, there are plenty of banks rated B or B+ that act as custodians, which is a good rating.

Q. My son has a business checking account with a major bank. And due to real estate transactions or big checks outstanding, he may at times have more than $100,000 in the account. What should he do?

Martin: This raises a very important point: On an active business checking account, even though your book balance is under the $100,000 insurance, your actual bank balance, including big uncashed checks, could be way over the $100,000 limit. So if your bank fails, that overage could be at risk. This just goes to show the importance of our earlier recommendation:

1. Keep your bank balances under $100,000. And at the same time ...

2. Seek to do business only with safer banks.

Or you can use a Treasury-only money fund for your business checking account. Like I said earlier, the Treasury securities they buy for you are guaranteed by the Treasury Department with no $100,000 limit. And they allow you to write as many checks on them as you like, at no cost or a very low cost.

Q. My brokerage accounts are at Merrill Lynch. I own mostly stocks, plus open and closed mutual funds, and have between $1 and $2 million at three different accounts. Are they safe or will Merrill Lynch also go belly-up? If so, do I risk losing everything?

Mike: There are no safety ratings for brokers. But we're ready to present today the facts we do have.

All brokers currently doing business must meet the SEC's minimum capital requirements. But the minimum capital requirements are merely a bare bones minimum — not nearly enough, especially given the uncertainty regarding the valuation of certain new securities like mortgage-backed securities and derivatives.

So when we look at a broker, we look for a capital cushion that is much larger than the minimum capital requirements. The question we ask is: For every dollar of capital that they're required to have, how many dollars in net capital do they actually have?

Martin: In other words, is it triple the required minimum? Is it four times more? Ten times more? And we're calling that number "the capital multiple." Here it is:

This list is a sampling of firms we've selected based on the questions we're getting and on some points we'd like to make.

The brokers listed at the top have the highest capital multiples. The brokers listed at the bottom have the lowest capital multiples. Bear in mind that there are other factors which can contribute to the strength or weakness of the firm. So this capital multiple alone is not enough to pan a particular firm. But it does give you something solid to hang your hat on.

At the top of the list, Edward Jones has almost 20 times the capital required by the regulators. Bank of New York Mellon, which includes Pershing, has almost 16 times the capital required. T. Rowe Price has nearly 14 times the capital required.

Mike: And that's considered a lot.

Martin: Yes. We can't pin down exactly how much is enough, but we'd like to see at least five or six times the required minimum.

Scottrade, for example, has almost 14 times. OptionsXpress, 12.6 times. Raymond James, almost 12 times. Merrill Lynch, 8.6 times. Fidelity, almost 8 times. Between the last two, we prefer Fidelity because it's far less involved in sophisticated and often risky transactions.

Overall, if you're shopping for a new brokerage relationship, all else being equal, favor firms that have higher capital multiples.

Mike: Here's a question from one of our readers that came in earlier:

Q. Once a brokerage firm fails, who steps in to take over operations? Can securities be traded with a failed brokerage company? How long does it generally take for the acquiring brokerage company to take over the assets of a failed brokerage company? Can stocks be sold during this process?

I think this question does a nice job of raising the key issues.

Martin: Yes, it certainly does. But unlike the banking history, which gives us, unfortunately, many examples of failures and how they were handled, in the brokerage industry, the experience with failures is sparse. That's a good thing and a testament to the industry's skill in avoiding failures. But it also means it's harder to know what to expect. Here's what we do know ...

First, the brokerage industry regulators will do everything possible to find another firm to take over the operations and the accounts. So that's the primary line of defense.

Second, if regulators cannot find a buyer and the firm fails, Securities Investor Protection Corporation (SIPC) covers individuals up to a ceiling of $500,000 per customer, including a maximum of up to $100,000 for cash claims.

So overall, we feel that the protections in place for the brokerage industry are relatively robust. However, consider these three facts — and you'll understand the critical risk:

Fact #1. SIPC does not bail out investors when the value of their stocks, bonds and other investments falls for any reason.

Fact #2. If your brokerage firm runs out of its own capital, if regulators cannot find a buyer, and if the Fed doesn't bail it out, your account could be frozen. You will still have your stocks, bonds and ETFs. They're not going away. But you may not be able to sell your securities when you want to.

Fact #3. In all likelihood, if brokerage firms are failing, it's going to be in a market environment in which most securities are more likely to be going down in value than up in value.

Mike: So you'll get all your stocks and bonds back. But what good is it if they're worth a lot less?

Martin: My point entirely. As I said a moment ago, SIPC will not cover losses in the value of your securities. Another subscriber is asking a similar question:

Q. What's the first thing I should do if my broker fails and I am denied access to my account?

Mike: The very first thing I would do is to open another account at a stronger firm to hedge against the risk of a decline in your stocks. And fortunately, there are numerous hedging vehicles readily available to individual investors for precisely that purpose, such as inverse ETFs or put options. You can buy inverse ETFs to hedge against financial stocks, real estate stocks, tech stocks, industrial stocks, specific stock sectors, foreign stocks, even bonds and commodities. If you use them wisely, you can reduce your risk dramatically. And if you use them as pure profit vehicles, you can turn this crisis into a major opportunity.

Q. My brokerage company is Fidelity. How do I know if it's a good place to have my accounts? In fact, I have five accounts at Fidelity, including IRAs and company 401ks. Are these accounts safe?

Martin: We believe the answer is yes. The company has nearly eight times the capital it's required to have. And it engages in virtually no complex, risky transactions.

Q. One of my IRAs has some funds in Fidelity's money market fund. But it seems that money market funds are not insured. What does that mean?

Martin: You're referring to FDIC insurance. Unlike bank deposits, which are covered by the FDIC, money market mutual funds are not covered by the FDIC.

Mike: It's very rare — almost unheard of — for a money market fund to lose money. But it could happen, especially if it invests in commercial paper that is backed by shaky mortgages or other shaky loans.

Martin: That's why we favor Treasury-only money market funds. Our position is that the Treasury securities that the money fund buys for you are, themselves, guaranteed by the U.S. Treasury. So in my opinion, insurance is a moot point.

Mike: Nick in California asks:

Q. Why are financial stocks doing well over the last couple of days? Does that mean your warnings about banks are overblown? Or does it mean that Wall Street isn't savvy enough to know about the problems that are lurking?

Martin: Neither. Mike, you want to elaborate?

Mike: Sure. Stock markets don't move in a straight line, and short-term rallies in the stock market are always going to take place. So I wouldn't interpret them either way. Our warnings, which we have been issuing now for over two years, are far from overblown. And Wall Street is savvy enough to be aware of the problems. Trouble is, they often try to hide them from the average investor. So when you see a rally like we're having now, it's a selling opportunity — an opportunity to get out at a better price than you could have gotten by selling into a panic environment.

Martin: Pat is asking:

Q. Martin, if I own put options on "Sure-To-Fail Bank of Metropolis" with a strike price of $20 and it goes under, how do they figure out what the option is worth? Or are you just stuck in limbo?

Mike: The whole purpose of a put option is to profit from the decline in the stock, regardless of what causes the decline. And the options are traded on an exchange separate and apart from the company that issues the stock. Actually, the threat of bankruptcy is the one thing that can cause the sharpest, deepest decline in a stock and the most dramatic upsurge in the value of put options. So if investors own put options and the company goes bankrupt, that's when they can make the biggest fortunes.

Martin: Like WCI, the home builder. In our last conference, Mike, you panned WCI, and now, sure enough, just this week, it has filed for bankruptcy.

Mike: Right. In the case of this question, if the bank goes under, the stock would fall to zero and your put option would probably be worth about $20 per share. If you paid, say, $2 per share, you would have multiplied your money 10 times.

Martin: The way I see it, put options and inverse ETFs have two functions. You can use them to help shield your portfolio against stock price declines. Or you can use them as a pure speculative play. And provided your timing is right, they can work fabulously well for both purposes.

Q. With banks and brokers losing tons of money, the Dow has fallen. So with banks and brokers failing, what will happen to the Dow?

Mike: Failures are the final straw. That's when we think you'll see a massive sell-off in most stocks. And that's when we think you can implement a simple strategy not only to preserve your wealth, but also to actually grow your wealth rapidly.

Martin: When anyone talks about making money in bad times — be it deflation or inflation — I always remember Dad.

He's probably the only person who made a killing after the Crash of '29 and then lived to do it again in the Crash of '87. He told me that in 1929, he borrowed $500 from his mother, started shorting the market in April of 1930 and then, by the time the market reached rock bottom, had built that up to $100,000 (about $1.3 million in today's dollars). Bernard Baruch, who my dad met later, made even more money in the Crash.

But it wasn't smooth sailing all the way. When you sell short stocks, you're exposed to unlimited risk. And Dad said that he used to sweat bullets when the market turned against him. Today, you don't have to sweat bullets. If you buy options or inverse ETFs, you can never lose more than you invest. So if you keep, say, 90% of your money safe, you can use options and you can sleep nights — for two reasons: They give you a kind of insurance policy against this kind of crisis. And they never expose you to risk beyond the small amounts you invest in them.

Mike: And if your timing is right and you target the right ones, you can make many multiples of that investment.

Martin: Can you say a few words about the timing and about your prime targets?

Mike: Sure. Right now, the market has had a rally based on false hopes. So I believe that's the best time to start a bear strategy. And right now, I think the commercial real estate sector is toast, but a lot of stocks in that sector don't yet reflect it. So I think those are easy targets.

Plus, a bear market is not the only kind of crisis you need protection from. We're also confronting an inflation crisis ... and an interest rate crisis ... and a dollar crisis.

Martin: Mike, unfortunately, we've run out of time. Thank you, Mike. Thank you, everyone. Have a great day!

Editor's note:

• To view Martin Weiss and Mike Larson's complete 1-hour video, "'X' List: The Next Big Failures," turn up your computer speakers and click here.
  
  
• To download a free list of the nation's weakest and strongest banks, click here.

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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, Tony Sagami, and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Amber Dakar, Adam Shafer, Andrea Baumwald, Kristen Adams, Maryellen Murphy, Red Morgan, Jennifer Newman-Amos, Julie Trudeau, and Dinesh Kalera.

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