Oppenheimer analyst Meredith Whitney -- one of the handful of people to predict the current mess -- says that allowing banks to move "toxic" mortgages off their balance sheets is only part of the solution to the current mess.

Ms. Whitney told Fortune that a "bad bank" plan would help banks improve their balances sheets but that the more serious problems would still be there: The declining economy will cause an ever-increasing percentage of good assets to go bad while simultaneously killing demand for the other services banks offer.

Last month, I posted on 2008's eight worst ideas. At the top of my list was deregulation. Robert Rubin, who spent a decade as a director of Citigroup (NYSE: C) and is now retiring, is partly responsible for one very important act of deregulation -- the repeal of Glass-Steagall which separated investment and commercial banking. (It was former Citi CEO Sandy Weill's 1998 merger of his Travelers with Citi that spurred Glass-Steagall's repeal in the 1999 passage of the Gramm-Leach-Bliley Act which allowed commercial and investment banks to own each other.)

And by bringing down that barrier -- established in the wake of the stock market manipulations of the 1920s enabled by commercial banks that made margin loans to trade stocks -- the U.S. helped usher in the current financial catastrophe. Now the government is gradually reimposing Glass-Steagall -- in effect, if not in law.

Rubin was well rewarded for his decade of "service" to Citi -- taking in $126 million and being paid as an employee while claiming to be a mere advisor. But for that measly sum, Rubin's reputation -- which was at its zenith following his tenure as Treasury Secretary in the 1990s -- is shredded. It probably didn't help that since he joined Citi's board in October 1999, its stock has fallen 82% -- destroying $164 billion in stock market value. Meanwhile, the empire that Weill ushered in -- based on the idea that people wanted to buy all their financial services from one provider -- is being dismantled.

A strange piece of news made it out just as the market closed yesterday, Citigroup (NYSE: C) is considering a joint venture to put its brokerage unit, Smith Barney, together with the similar unit from Morgan Stanley (NYSE: MS).

According to The Wall Street Journal (subscription required), "Uniting the brokerage units of Citigroup and Morgan Stanley would represent another dramatic turn in the reshaping of Wall Street since the credit crisis erupted in 2007." Citi may be under pressure from the federal government to do a deal to monetize some of the bank's assets.

The possible deal raises two questions. The first is how does Citi benefit from the arrangement? The answer is that it may not benefit at all. One of the rumors related to the deal is that Morgan Stanley would pay Citi over a billion dollars to own the majority of the joint venture, but if that is true, why is Citi simply not selling the entire division?

The other relevant issue is why this action was not taken months ago, if not with Morgan Stanley then with another financial firm? The answer may be that Morgan was having trouble of its own, but there were banks in Japan and China that may well have been purchasers.

Vikram Pandit, Citi's CEO, has proven something about himself: he is remarkably slow to act. The value of Smith Barney has certain come down over the past year. He is getting cents on the dollar for a valuable asset.

Douglas A. McIntyre

Unemployment came in at a much worse 7.2% headline number, but the loss of non-farm payrolls came in right in line at -524,000 this morning. This and this alone set the tone for the market today and everything else was just a footnote. Here are today's unofficial closing bell levels:

Dow 8,599.18 -143.28 (-1.64%)
S&P 500 890.35 -19.38 (-2.13%)
Nasdaq 1,571.59 -45.42 (-2.81%)

Top Analyst Upgrades
Top Analyst Downgrades

Caterpillar Inc. (NYSE: CAT) was noted somewhat positively by Jim Cramer as one of his DJIA picks on CNBC's MAD MONEY last night. Be advised that he only wants people to buy on pullbacks rather than at the market. Shares pulled back and were down over 1% at the close.

Chevron Corp. (NYSE: CVX) was down only about 1% late in teh day at $73.25. That is surprising since it said results would be significantly lower than its prior quarter.

Coach Inc. (NYSE: COH) was another doozy today with shares down more than 12% at $18.28 late in the day. This was after an earnings warning and a zero-visibility implication when it said it would not offer forward guidance.

Citigroup Inc. (NYSE: C) was the subject of more news than usual. It has about $2 billion in direct exposure to Lyondell Basell Industries in that bankruptcy issue. Then came late-day reports that Bob Rubin was out of the board of directors. And to add even more fuel to the fire, a report from CNBC's David Faber called Citi close to putting Smith Barney out of the company and into a joint venture with Morgan Stanley.

Palm Inc. (NASDAQ: PALM) shares were up almost another 40% at $6.18 on exponential volume late in the day.

This post is part of AOL Money & Finance's Best & Worst in Money 2008 feature.

There have been big hopes for all the nominees in this category at one time or another, but they've also suffered from questionable management moves of various sorts. So what's to root for in any of these companies?

Circuit City was founded in 1949; back then it was known as Wards Company. The big-box format and Circuit City name came as the result of a series of retail experiments, and became official in 1984. The company was listed on the New York Stock Exchange in the same year. In 1991, the company established a bank to operate its private-label credit card, and later offered a co-branded Visa. Big-box used car retailer CarMax (NYSE: KMX) was also owned by Circuit City at one point. In 2005, the company's board rejected a buyout offer; the company was worth a reported $1 billion then. The next year, Philip J. Schoonover became chairman, and ... well, the rest is history. Circuit City is now in Chapter 11.

Citigroup (NYSE: C) was formed in 1998 from one of the largest mergers in history: banking giant Citicorp and financial conglomerate Travelers Group. The company holds over 200 million customer accounts in more than 100 countries, and includes the investment services brands Smith Barney and Primerica. The company owns prominent, renowned buildings in Manhattan and Chicago, and also won naming rights to the new ball park of the New York Mets. But it was the subprime mortgage crisis that was Citigroup's undoing, resulting in the need for the recent federal bailout.

The Independent reports that Citigroup's (NYSE: C) Smith Barney took the $100,000 entrusted to it by a 76-year old mother and put it in now-illiquid Auction Rate Securities (ARS) -- bonds whose interest rates are supposed to reset in weekly auctions -- without her understanding. After she died earlier this year, her son discovered that what she had told him was "in an easy-to-sell money market fund" was in fact frozen in ARSs.

Since February, when I first posted on the $330 billion ARS market, a forum has gathered with 3,924 comments from people who have much of their savings frozen. This widow, like many of the people who comment there, had their money moved into ARSs without their knowledge or with the assurance that the money would be safe and would offer a higher than average return. One key question: Did ARS purchasers receive prospectuses or know of their risks?

But last year, an accounting rule change caused demand for ARSs to evaporate since companies could no longer account for them on their balance sheets as "cash equivalents." So the banks started to bid on the auctions themselves to keep the market going. But thanks to the credit crunch, banks no longer had sufficient capital to prop up the market. So the auctions failed and thousands of people, like this widow, have found that they can't get their money.

With Citigroup's (NYSE: C) quarterly report, many investors hoped that the bank had gotten most of its bad news out. It wrote off a great deal of its mortgaged-backed inventory and LBO-debt. The firm also said it would fire 9,000 people. That number will likely rise. Citi has pledged that it will cut nearly 20% of its total operating costs.

Some of the gloom around the stock lifted. It traded over $25. It was as low as $17.99 recently.

But, many still view the future of Citi as grim. In an odd way, the quarterly report showed the bank as weaker than investors thought. According to Bloomberg, "The writedowns burned through much of the $30 billion of capital Citigroup has raised since late last year, leaving it vulnerable to further charges and loan-loss provisions." In other words, the bank may have to raise more money, or sell one of its successful divisions. Smith Barney often comes up in that conversation.

Or, if matters get worse quickly and there is not ready capital to bail out the bank, it could still be dismantled in a fire sale. Whether the Fed would turn to JP Morgan (NYSE: JPM) or Goldman Sachs (NYSE: GS) to buy Citi and handle the decisions of which parts must go or whether the firm's board would do it, the alternatives would ruin one of the world's largest financial companies. But, it did get into the mess all on its own.

Douglas A. McIntyre is an editor at 247wallst.com.

Research in Motion (NASDAQ: RIMM) closed at $104.30 Thursday.

RIMM will report Q3 EPS on December 20, 2007. Smith Barney says: "RIMM continues to be our top North American handset pick." International CES will be held January 7-10 in Las Vegas. RIMM December 103 straddle is priced at $12.35. RIMM January option implied volatility of 78 is above its 26-week average of 53 according to Track Data, suggesting larger risk.

Options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

Honeywell (NYSE: HON) is hosting its 2008 guidance announcement on December 13. Alex Brown says, "We expect a bullish outlook from HON." HON overall option implied volatility of 28 is near its 26-week average of 27 according to Track Data, suggesting non-directional risk.

United Technologies (NYSE: UTX) is hosting its 2008 outlook meeting on Thursday, December 13. Smith Barney says, "Buy UTX; Sell BA – Use any strength in BA's stock to switch to UTX." UTX overall option implied volatility of 24 is near its 26-week average according to Track Data, suggesting non-directional risk.

Daily Options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

Dell (NASDAQ: DELL) is expected to announce Q3 EPS of 35c on November 29 according to Thomson First Call.

Smith Barney says: "Reiterate Buy – we continue to believe that CY08 consensus EPS underestimates that positive impact of retail expansion, headcount reductions and share repurchase."

DELL December option implied volatility of 45 is above its 26-week average of 28 according to Track Data, indicating larger price fluctuations.

Daily Options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

Charles Schwab (NASDAQ: SCHW) has a market cap of more than $27 billion. Merrill Lynch's (NYSE: MER) is only $48 billion. That does not put much value on all of the Merrill businesses beyond its individual investor brokerage network. Because of metrics like that, there is speculation that both Merrill and Citigroup (NYSE: C), which owns Smith Barney, might do partial IPOs of their brokerage operations. It could do something for the shareholders of the companies. The institutional trading units of the big financial houses are dragging their value down. The mortgage-backed securities problems could keep it that way for some time.

"It is an obvious thing for them to do. The shares in the brokerage business would be much more highly rated than the parent's stock," one banker told the Financial Times.

The move could also give brokers who work at the private client groups a reason to stay. Any stock options they might get in their parents are probably not worth much. Offering a cut of a new public company could be a strong magnet for holding brokers.

The other benefit of such a move, especially at Merrill, is that the senior management of the brokerage unit feel that it is under-represented in the executive suite where most of the top brass come from trading and banking. Giving them a chance to run their own public company might fix that.

Douglas A. McIntyre is an editor at 247wallst.com.

Citigroup Inc. (NYSE: C) volatility at nine-year highs on chatter of potential spin-offs:

Investor unhappiness with Citigroup's recent sell off has resulted in a larger chorus for Citigroup to consider spin-off options. Citigroup's Smith Barney unit has been frequently mentioned as a potential spin-off. Telegraph.co.uk said "banks including JPMorgan Chase & Co. (NYSE: JPM), HSBC Holdings plc (ADR) (NYSE: HBC), and Morgan Stanley (NYSE: MS) are being touted as possible buyers if Citigroup's management decides to offload assets." Citigroup was recently up 15 cents to $33.03. Citigroup call option volume of 135,047 contracts compares to put volume of 101,613 contracts. Citigroup November 32.5 straddle is priced at $2.55. Citigroup December option implied volatility of 56 is above its 26-week average of 29 according to Track Data, suggesting larger price risks.

International Business Machines Corp (NYSE: IBM) volatility elevated after Sharp two-day sell off after Cisco Systems, Inc. (NASDAQ: CSCO) outlook:

IBM was recently down $4.83 to $101.27. IBM call option volume of 20,665 contracts compared to put volume of 25,200 contracts. IBM November 100 straddle was priced at $4.90. IBM December option implied volatility of 33 was above its 26-week average of 24 according to Track Data, suggesting larger price risk.

Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.

BEA Systems (NYSE: BEAS), received a proposal on 10/12/07 from Oracle (NYSE: ORCL) to be acquired for $17 a share in cash. ORCL announced on 10/23, "ORCL has no interest in a long, drawn-out process to acquire BEAS. BEAS said on 10/26, ORCL $17 per share proposal is unacceptable. Carl Icahn, the largest shareholder of BEAS, holding over 58 million BEAS shares and equivalents, said on 10/26 BEAS should allow its shareholders to decide the fate of BEAS by conducting an auction process and BEAS should not agree to dilute voting by issuing stock, entrench management of derail a sale of BEAS. BEAS said today, 10/29, we are not opposed to an acquisition of the company. In fact, we are currently exploring ways to maximize shareholder value, including the possible sale of the company. Smith Barney says, "We continue to think the likelihood of BEAS being acquired remains high, although the process and the timeframe are unclear a point." BEAS call option volume of 33,577 contracts compares to put volume of 8,064 contracts. BEAS December & January option implied volatility of 38 is near its 26-week average of 39 according to Track Data, suggesting non-directional risk.

Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.

AIG (NYSE: AIG) is recently down $0.56 to $63.28. Smith Barney says, "AIG has yet to provide investors with an earnings release date for 3Q '07 results. In the wake of the subprime meltdown, investors are eager to asses the fate of AIG's $29 billion of subprime mortgage exposure and its credit guaranty business." AIG call option volume of 13,468 contracts compares to put volume of 36,042 contracts. AIG November option implied volatility of 44 is above a level of 33 from last night and above its 26-week average of 22 according to Track Data, suggest larger near term risk.

Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.

National City (NYSE: NCC) volatility Elevated; NCC sells off on EPS & loan exposure. NCC reported 3rd quarter 2007 net income of $106 million, or 18 cents per diluted share. Goldman Sachs says "turning NCC around is going to take time. Mortgage contributions are likely to remain depressed, while credit will remain an issue." NCC has a current dividend yield of 7.34%. NCC November option implied volatility of 45 is above its 26-week average of 31 according to Track Data, suggesting larger price fluctuations.

Fifth Third Bancorp (NASDAQ: FITB) volatility Elevated as FITB near 10-year low. FITB, headquartered in Cincinnati, is recently down $0.99 to $28.99. Smith Barney says "while FITB was going through its regulatory issues, it tried to offset by taking on more rate risk. One of our concerns has been that it was also taking more credit risk." FITB November option implied volatility of 38 is above its 26-week average of 27 according to Track Data, suggesting larger price risks.

Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.