TheStreet.com's Jim Cramer says the government needs to step in and take charge, and it needs to do it now. We all know it. All of us. We know that the subprime mortgages that Lehman (NYSE: LEH) (Cramer's Take) wrote in Europe have come back to haunt them. We know that AIG (NYSE: AIG) (Cramer's Take) insured a lot of bad paper over in Europe when it decided to "avoid" the U.S. Subprime financial insurance, if you can call its multi-billion-dollar exposure "avoidance."
We know that Washington Mutual (NYSE: WM) (Cramer's Take) can't absorb the losses itself.
We know that Downey (NYSE: DSL) (Cramer's Take) and Corus (NASDAQ: CORS) (Cramer's Take) and BankUnited (NASDAQ: BKUNA) (Cramer's Take) can't raise the money they need.
We know all of these things. I think the federal government does, too. We lived in an unregulated time where everyone acted badly and no one protected anyone, and now these institutions have to be dealt with in a way that is the least painful of all the painful ways.
Of course, though, this government has no desire to deal with things until guys like Bill Gross or the Chinese government say, "We are done buying your paper," when it came to Fannie Mae (NYSE: FNM) (Cramer's Take). I guess they want a run at the bank of Washington Mutual and they want customers to stop doing business with Lehman before that's sold for scrap, although I must say that the Bear deal worked pretty well for everybody except Bear shareholders.
Right now the government should be saying to Lehman, "Look, your plan doesn't cut it and you are too important, so we are taking away your common, guaranteeing the first $40 billion in losses and giving you to anyone who wants you." Alternatively, they should say, "You have a month, or we are pulling the plug." But this half-cocked plan doesn't do any good.
Washington Mutual? They should be saying to TPG, "We are bending the rules, it is yours," or it should be seized.
I don't even know how to unravel AIG, but it has to be sold, too.
We could Chapter 11 GM (NYSE: GM) (Cramer's Take) if we had to; seems better to give them the loan.
But the one thing we know: All of this will be done at the last minute with maximum pain before it happens.
Meanwhile, now that we have the great commodity collapse, the Fed could do what happened in previous crashes and take rates down to 1% and allow the banks to make a percent on the money they have on deposit, making something like Washington Mutual worth owning.
But the clock is ticking, and the moment Merrill Lynch (NYSE: MER) (Cramer's Take) goes through $22, it will be game over.
We can blame anyone we want -- there are so many bad actors here. But if all branches of government were to be working closely, here's what you would do:
1. Tell all the banks and brokers on this list they have a month to raise capital. If they can't:
2. The government will seize them and put their bad assets into a Resolution Mortgage Trust and sell their good assets to well-run banks, and
3. Restructure as many mortgages as they can, helped by a dramatic 1-point cut in the fed funds rate that makes deposits really valuable and can help the government refinance many of the bad housing loans.
Ever since we didn't cut rates when we could and instead took them up, thinking the issue was inflation -- it was all China! -- we have been tolling bigger and bigger losses. Remember the math: 7 million people took exotic mortgages between 2005 and 2006 (I am not even using 2007, where the first quarter was a nightmare). Call the average mortgage $300,000, which is a little higher but includes home equity.
It now looks like we might experience 100% default rate on those homes. Multiply 7 million by $300,000 and you see the $2 trillion problem. Obviously there is some worth to these homes. But that doesn't matter, because it doesn't flow back through the balance sheet in time.
The Fed can do the math. The FDIC can do the math. The Treasury can do the math.
By getting ahead of it with an official Resolution Mortgage Trust endowed with as much money as necessary, we will get through this.
But we'd better start eventually, or we will be seeing piecemeal, patchwork nonsense and all $2 trillion lost and home prices plummeting 25% between now and next year.
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RELATED LINKS:
Lehman Deal Light on Details
Financial Winners & Losers: Lehman
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Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. At the time of publication, Cramer had no positions in the stocks mentioned.
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Reader Comments (Page 1 of 1)
9-12-2008 @ 7:19AM
Adam said...
Jim, MER didn't just go through $22, it busted through like a car on fire busting through the prison gates. Good grief - is it viable that we could see 3 major banks go under in the next week?
9-11-2008 @ 11:28AM
kevin rowe said...
The Gov. bailouts has to stop. However if all of the idiots (a new term for crooks) that made them and those that packaged and bought the pretend mortgages loans return all of the compensation/bonus they received to the financial institutions from which they stole it I would be prepared to consider some form of Gov. assistance. If they do not have available funds let them beg, borrow or mortgage their futures. What they did was criminal and they should not get away with that kind of behavior.
9-11-2008 @ 11:46AM
Luis said...
What about taking back the billions that the inept (or worst) CEOs,COOs,CFOs,investment bankers, and so on, made out of the debacle?
10-02-2008 @ 9:03AM
John McAuliffe said...
THANK YOU JIM:
On your show last night you had the guts to tell the truth about what happen to the Irish in the great potato famine. You put the blame squarely on the insensitive callus and in my opinion the most brutal dictatorship that ever existed on the face of the earth. The English Empire used every means possible to eradicate any of its subjects at all times.
That being said, I would like to send you book of my family The McAuliffe's (quick read) that goes back to the eleven hundreds and the Vikings, through those struggles to struggles with the British Empire with Cromwell and the dictatorial Queens through the potato famine and into the United States. The book cronicals the stories of the great and not so great family menbers and their climb to their final positions of greatness to the tops of American Industry, the Military, and undefeated World Champions. No, The Democratic National Chairman Terry McAuliffe nor Christa McAuliffe are in the book, yet.
Triangle Industries, being a business historian you will love this story, not written yet, but will discuss with you if you like. This company in the 1980's embodied all of the greed, deceit, cunning, and financial manipulations that created astounding wealth and power for such characters as Ivan Boesky, Michael Milken, George Soros, Nelson Peltz, and Peter May. The continuation of the story will see the nation of France cemented in corruption to the highest levels of the politics ultimately ending in two suicides at the top levels of government. Soros got away with a $2 million dollar fine.
Fun times,
John McAuliffe