A report in Thursday's The Wall Street Journal [subscription required] reveals that American International Group (NYSE: AIG) is actually reaping the benefits of its risky bets in the credit-default swap market.

AIG was forced to shell out billions to Wall Street banks amid last year's credit crisis, as the assets backed by the credit-default swaps plummeted in value. However, the market's reversal of fortune means that banking heavyweights, such as Goldman Sachs Group (NYSE: GS), are now returning collateral to the infamous insurance giant.

Citigroup (NYSE: C) and American International Group (NYSE: AIG) have already taken about $496 billion in U.S. cash and guarantees to keep them from failing. This makes me wonder: Is there no way to allow them to simply fail without causing the entire global financial system to collapse? And if not, is there a limit to how much more taxpayer money we pour into them before we say "no more"? The answers: Maybe and Yes.

Citi looks to be a basket case after $345 billion in taxpayer bailouts. It has already gotten $45 billion in cash -- $25 billion of which was recently converted from preferred to common -- and $301 billion in guarantees of its toxic assets. The U.S. now owns 36% of the common stock of Citi -- which lost $27.7 billion in 2008 and has a market capitalization -- Citi common shares times price per share -- of $8.2 billion.

Citigroup, Inc. (NYSE: C) has gone below $5 a share which triggers the dreaded sell-off by institutional investors who are not allowed to own stocks that trade below that level. And rumors of Vikram Pandit's departure from the CEO role are beginning to accumulate.

Unfortunately, the Credit Default Swap (CDS) market is now also kicking in. When this happens, it generally means that a company needs to come up with lots of cash to continue to insure its bonds. And since Tuesday, the CDS premium for Citi bonds rose 55% -- the annual cost of protecting $10 million of Citi debt against default for five years rose to $410,000 on Wednesday from $265,000 on Tuesday.

Meanwhile, CNBC's Charlie Gasparino claims that "the market is betting that Vikram Pandit's days are over." And with Citi just announcing that it will move up its quarterly reporting date from the 22nd to the 16th, the bad news should be out soon. I am sorry to say that it looks like the value of Citi's equity is about to hit bottom and never recover.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and is the author of You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He owns Citi shares.

It looks like America has shut down until 2009. And that's probably a good idea because there were so many bad ones in 2008. Bad ideas are like vampires. They charm their way into the good graces of a host society and then they suck the blood right out of them.

Although they all didn't just pop into our lives in 2008, these eight ideas reached a peak of awfulness in 2008:

• Deregulation is good. The wave of deregulation that started in the early 1980s has created enormous problems for society. Sure there were some bad regulations on the books, but just one deregulated industry -- the $62 trillion credit default swaps (CDS) market -- has cost taxpayers hundreds of billions of dollars in the bailout of American International Group (NYSE: AIG).
• If you can lend against it, securitize it. Securitization -- the practice of buying, credit-rating, and bundling loans backed by assets like mortgages, credit card receivables, and leveraged buyout loans -- created the illusion that you could mix risky loans in with safer ones and you could earn above-average returns with no risk. Bad call -- securitization has spread toxic waste around the world from Iceland to Whitefish Bay, Wis.
• Home-ownership is good for everyone. The hungry maw of securitization created enormous demand for new mortgages. And that led mortgage originators to lend to people who couldn't afford to pay back the loans. The $1.3 trillion subprime mortgage market was born and it grew so big that its collapse refused to remain contained. In 2004 Bush bragged about home ownership reaching 69.2% -- three million foreclosures later it seems we should be careful what we wish for.
• Leverage up your balance sheet 30:1 or more. In 2004, the SEC gave financial institutions (FIs) discretion to borrow more money than they had ever borrowed before. Most banks and hedge funds borrowed as much as $35 for every $1 of equity. If they had used their $340 billion in equity to buy the $13 trillion worth of mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs), a 3% decline in the MBSs and CDOs value would have wiped out the FI's capital.

This post is part of our feature on Money Winners of 2008. See all 20.

Lots of people thought real estate was overpriced. Many worried that banks were giving out mortgages too cheap. But what did you do about it? (Either to help the situation or to make money.) Jeff Greene, a real estate mogul in California, actually found a way to bet against the subprime mortgage folly. He made $450 million -- at least that was the count earlier this year.

Well, he didn't just think of it on his own. He basically took the idea that his friend, hedge fund manager John Paulson, had. Paulson thought that, as an individual, Greene wouldn't be able to do this complex a transaction. According to the Wall Street Journal he even used special software so investors in a hedge fund Paulson created just to exploit the subprime crisis couldn't pass on his strategy.

How Greene and Paulson made money involves two financial terms you've probably had to learn this year and never want to hear again. Collateralized debt obligations (CDOs) are the way mortgages are packaged and sold to investors in various slices of risk. Credit default swaps are the holders of those investments insured themselves -- by buying what was like unregulated insurance from one another. The credit default swaps are what got so many big companies in trouble -- they had to pay up on investments that went bad. So Paulson shorted CDOs and bought some credit default swaps.

Another "respected" American company looks to be in a bit of financial trouble. You'll recall that Goldman Sachs Group (NYSE: GS) recently received a $5 billion capital infusion from Warren Buffett. And today, the once-admired General Electric Company (NYSE: GE) accepted a $3 billion check from Buffett in exchange for preferred stock paying a 10% dividend and warrants to buy $3 billion common shares of GE at a strike price of $22.25 for five years.

This comes as the Credit Default Swap (CDS) market is charging GE a rapidly rising premium to insure its bonds. CDSs protecting against a default by GE Capital Corp. for five years climbed as much as 1.25 percentage points to 7.4% -- and last traded at 7%. This increase in perceived risk is happening as GE suspended its stock buyback, shifting capital to protect its dividend and AAA credit rating.

Will these moves be enough to protect GE's credit rating or is getting 40% of its pretax profit from financial services too risky? Who will be the next company to be stricken by this financial crisis? And which of these weak companies will pay this steep price for Warren Buffett's money?

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns GE shares and has no financial interest in Goldman shares..

Last weekend, the U.S. government decided that it would let Lehman Brothers Holdings Inc. (NYSE: LEH) fail -- leading to history's biggest bankruptcy -- valued at $639 billion. But that was fine because the government said that people knew Lehman was in trouble. Of course, people also knew since August 2007 that Bear Stearns was in trouble, but that didn't stop the government from forking over $29 billion of taxpayer money to bail it out. And people knew for years that Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) were in trouble -- but that did not stop the US from pledging between $200 billion and $800 billion to nationalize them.

But this morning, we discover that the government has crossed over the line in the sand it drew over the weekend -- it will loan $85 billion of taxpayer money -- at a variable interest rate starting at 14.5% -- Libor, which doubled yesterday from roughly 3% to 6%, plus 8.5% according to the Wall Street Journal [subscription required] -- to avoid what would have been the $1 trillion bankruptcy of American International Group (NYSE: AIG). In exchange for this two year loan, according to the New York Times, the Fed gets as collateral all the $1 trillion of AIG's assets plus warrants to purchase 80% of AIG stock.

The incompetence of this government is breathtaking. On Sunday, it could have loaned AIG $40 billion to keep its credit rating from getting downgraded. It refused to do so -- trying to force JPMorgan Chase (NYSE: JPM) and Goldman Sachs Group (NYSE: GS) to help raise private financing -- and credit agencies went ahead and downgraded AIG on Monday. Now, instead of a bridge loan which would have tided AIG over until it could sell some assets to raise capital, the government is making a two-year loan that is twice as big. And we, the taxpayers, are likely to own this pile of assets that may be worth far less than the $1 trillion stated on its books. If there's any good news, the stated collateral is more than 10 times the amount of the loan.

Bloomberg News reports that Moody's (NYSE: MCO) may downgrade municipal bond insurer MBIA (NYSE: MBI) after it reported deepening losses from the mortgage-market slump. MBIA's insurance financial strength rating may fall to the Aa range, although a drop to the A category is possible. MBIA's stock is down 91% since the end of May 2007.

That's when I first suggested that investors consider selling MBIA shares short. William Ackman had already shorted MBIA because he thought it lacked the capital needed to support its obligations. Back then, MBIA traded at $66.59 a share -- today it's down to $5.88. His bet proved prescient.

Meanwhile, investors are wagering that MBIA won't make it. Credit-default swaps tied to MBIA's insurance unit rose to a record as investors hedged against the risk the company's guarantees will sour. Sellers of five-year contracts demanded 23% upfront and 5% a year. That's up from 18.5% initially and 5% a year yesterday.

Only $5.88 more to go.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in MBIA securities.

It is shaping up to be another tough day for the market as traders continue to express concerns over a possible recession, disappointing earnings numbers, surging crude oil prices and persistent weakness for the U.S. dollar. However, not all the companies are joining the general market anxiety, and Swiss Re made strong gains, trading up 4.9% in the Zurich exchange, despite a plunge of 87% in its fourth-quarter net profit as investors were encouraged by its positive earnings outlook.

The world's largest reinsurer announced that its quarterly profit had dropped to 170 million Swiss francs ($161.7 million), dragged down by higher write-downs related to bad loans. Its profit numbers were down from 1.3 billion reported in the same period a year ago.