Jim:     When I walk around town these days, I get asked about stocks pretty much all the time, pretty much everywhere I go...  Sometimes I get shouted at about stocks...

The other day, I was going by a bunch of outdoor smokers - a species of dubious character - and one of them says, "Hey Cramer, I am buying Washington Mutual (WM)... it's going to get a takeover bid!"...  I kept walking.  I didn't want to be accosted...

I waved the guy off, with a smug, "yeah, yeah... sure, sure"... but the guy would not be denied...  He chased after me... he was running after me...   He says, "Cramer, look, it's a done deal... I bought some Washington Mutual at $3.  This is going to be a great one."   At that point I stopped.  I knew then that I was in the presence of a true investing idiot... a real moron.  And I was determined to teach this guy that he was speculating badly...  a lesson that I will repeat for you now, as today is Speculation Friday, so you don't repeat this clown's mistakes...

Now, back to the story...

I asked him plaintively...  "What do you know about Washington Mutual?"...  a standard question...  something anyone, who buys a stock and does homework, should be able to answer... perhaps even at great length...

The guy replies, "the largest savings bank in the country."  No!  I said... "What do you know about what will be bought... the stock or the actual bank... because, in seizures, the bank's stock gets crushed."  

He said, "No, the stock's going to be bought"...  I said, "Well, how much?"... knowing that it was ticking at $3.13 at that moment...

He says, "$4.00 from J.P. Morgan"...   I told him, "You're wrong, you're dead wrong..."   I told him the risk/reward, even if he were right, was $1 up and $3 down... but he was definitely wrong...

And then he says, "Jim, there are multiple bidders..."

At that point, I just put the PC down, to avoid throwing it in this guy's face, the way I used to throw computers and computer parts around at my old hedge fund... where the Q and the W and the E and the R always got stuck in people's hair...

And I asked him, "Have you seen the multiple downgrades by the ratings agencies?..."

Does he say, "no, I missed that"?...  Does he tell me, "why does it matter?"...   No, what he says is much worse... he says, "that's where the opportunity comes in"...

Yeah, you heard that right...  He thought the downgrades by the ratings agencies, which has been the death Nell for every other bank or investment bank that's failed so far, created the opportunity...

Now I'm really close to losing it.  I can barely contain myself...

I go back to him and I say, listen pal, you've bothered me enough.  Here's the deal...  Washington Mutual (WM) is worthless.  There is billions of dollars of debt that will have to be bought... not just the common stock...  In fact, the common stock is just a tease...

I asked him if he had ever heard of the "bond bullies"...  I talk about that in Real Money, the book... who will be in control.  Or that they may even lose control and the FDIC might just seize the whole thing and the common stock will cease to exist...  be obliterated...

Usually, when a company goes under, the bondholders get first dibs but, with a bank failure, the government comes first... and then the bondholders... and, only after that, does anything go to the people who hold the common stock...  meaning "nothing"...

Not only that, I said that, when you speculate on single-digit stocks like Lehman Brothers, after its share price fell below $10, or AIG, same position... or Fannie or Freddie... and the debt is overwhelming, as it was with all these companies... you're making a sucker's bet.  The same goes with Ford (F) right now... a sucker's bet...

Why?...

Because, if you own the common stock when a company like this fails, and companies with single-digit stocks and lots of debt are the ones most likely to fail, particularly in this environment... there's an ocean of debt holders - the bond bullies - between you and your money...

In these cases, even the bond bullies might not see their money back, because the U.S. government gets first dibs...

I made the same mistake with my charitable trust, where I bought Charter Communications at $4...  Again, betting on a takeover...  Again, the bonds overwhelmed the company and the stock...

That's why I have rules...  One in Real Money, the book... saying don't speculate on takeovers where the fundamentals are not sound... and another in Stay Mad For Life, saying speculative, single-digit names like Charter can cause you big losses...

Like Charter, Memorex, Washington Mutual, they were all brought down by too much debt.

The man I was talking to - the stalker... he now realizes that he gave himself a 100% loss.  How much can you lose?...  100%, by buying Washington Mutual, simply because he couldn't understand the balance sheet...  The company was worthless, because it couldn't raise enough capital in the debt market to stay afloat.

Here's the bottom line...

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