If you break the cycle of short-and-no-cover, you can win.
I know that wasn't the purpose of the Anglo-French plan that we were dragged into, but it will be the effect, and the effect will be electric.
Let's just take an obvious example: State Street (NYSE:STT). This is a longtime conservative trust bank that is an important custodian for life savings and for mutual funds. For a year now it has been under assault as an institution that has too much leverage in hard-to-value asset-backed instruments. The idea that a custodian could fall apart is something that shakes every money manager to his core and causes him to take his money out of cash and put it in T-bills. That's been going on for ages now, and I know money managers who are scared to death to keep their money "in the system," which is State Street, something that instills panic across the board.
When you hear that and you are a short-seller you know what to do: You plunk down $25 million to buy credit default swaps to wager against the firm's debt, then you buy position limit puts and then you short the stock along with all of the other like-minded souls you talk to every day. You get the stock rolling downhill, then you buy a second set of swaps, paying double the price -- doesn't matter what the vig is when you know you are going to win -- and then you call the media and you tell them that everyone's pulling their money out of State Street and the credit default swaps are spiking huge and then the media goes out and reports on it. The company is helpless to refute it as the problem is being caused by the sellers because it is pretty much business as usual in a very tough time, and the stock gets hit again. Other hedge funds get wind, they short it down further, longs panic and then the credit agencies put the company on notice because where there is smoke there must be fire. Then the clients pull as much money out as possible and voila, the end of State Street.
We have seen this run several times. Frankly, I don't know how State Street stayed in business.
Until this morning, the only policy that had been put in place to stop this destruction of capital by the shorts -- and I fully concede that State Street may have made mistakes, but I will not concede that those mistakes should have made it be wiped out -- was an out-and-out short-selling ban. That was ludicrous, but what do you expect from this SEC that eliminated the uptick rule right in the teeth of the greatest bull market and allowed naked shorting to go on illegally?
Now what happens? You can buy all the credit default swaps you want on State Street, the nefarious plan won't work because the debt you are targeting is insured by the U.S. government, so why would anyone then pay up after you to spike the debt? What's the point? You can't take out insurance against a company's debt when it is backed up by the full faith and credit of the U.S. government. By the way, the exact same trade was being put on against Bank of New York (NYSE: BK). That will end the targeting of that institution too.
This plan takes away the shorts as the primary allocator of capital in the system and returns it to the longs.
Citigroup (NYSE:C) ) had been a major target of the shorts but now it can raise all of the capital it wants. We no longer have to believe that Goldman Sachs can be destroyed overnight by hedge funds buying swaps and then pulling their money out and telling the media about a prime brokerage panic. That can't make much money either.
Of course this is a radical solution, just gigantic, and it smacks of everything that the federal government under President Bush must have hated doing, as it is radically interventionist. It is the work of European countries that don't have the capitalist affinity we do. Some would say we communized the banks with these stakes.
I say what we did was what the government did with Lockheed (NYSE: LMT) and Chrysler years ago, successful investments that turned a profit for the U.S. These investments also anoint the banks so that can buy other banks, and they make it clear to the banks that got the money that they'd better lend it. This more than anything is directed on the strong side at JPMorgan (NYSE: JPM) which has a lot of capital to lend but hasn't wanted to, and on the weak side at Citigroup, which needs capital to survive, so it can go raise more capital -- and it will.
All of our Geithner/Bernanke plans with their dainty "collateral to Fed" nonsense and the troubled-asset plan from Paulson either took too much time or didn't inject any money. This is the new capital, the sovereign fund capital, that the system needs.
I think it takes us out of the abyss. No, not a reason to buy Caterpillar (CAT) or Dow Chemical (NYSE: DOW) but a great reason to stop shorting the financials.
At the time of publication, Cramer was long Goldman Sachs and JPMorgan.
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.
RELATED LINKS:
U.S. to Unveil Bank-Investing Plans: Report
Cramer: I Was Right -- and They Can't Stand It
<I>Editor's note: Jim Cramer will present his 2009 stock outlook for the first time at TheStreet.com Investment Conference on Saturday, Oct. 25.Click for details
Hewlett-Packard reports growth in profit and operating margin in Q4
Before the bell: Stocks futures steady ahead of GDP, housing data
Google's plan for netbook PCs moves higher into the clouds
Reader Comments (Page 1 of 1)
10-14-2008 @ 1:17PM
CreditTrader said...
While I can understand the need to push blame from equities (god bless 'em) to those scary derivatives things, Jim's comments here are in the case of State Street are simply wrong.
There are NO CDS on State Street - it does not trade, there is no liquidity and has never been in SST's CDS.
How about old-fashioned fundamentals on this one - SST dropped coz there were more sellers than buyers in equity land due to the uncertainty of the bespoke CDOs that they were so heavily involved in.
Sorry to burst the bubble, but anyone who understands CDS knows that the margins and collateralization of being short CDS aggressively into a wave of buying (no matter whether you 'know' the stock is going to drop, is a pukefest - not even the great Jim Cramer could withstand the volatility in Lehman's CDS prior to its failure as it swing 500bps up-down-up as investors bet for/against a bailout...
Sorry to go on - but dont blame the CDS market - what about good old fashioned put buying - how is that different? It provides insurance, does not require an underlying exposure, is paid by a leveraged premium, requires a modest margin. Ony difference is on exchange - which i think would be great for CDS BUT would not solve any of this silly CDS->Equity->Puts->CDS death spiral betting that is claime to be responsible for the sell-off in financials!
NOTE - this is also the cases with BofNY! No CDS trading! oh well - that really messes up Cramer's view on this one.
10-14-2008 @ 1:48PM
beachpaul said...
State street"may have made mistakes"? How about "on purpose"? Like in,"I did it on purpose."; " I had a chance to increase earnings"; " I can increase my bonus"; " If I just juice the leverage, I can make this work". Or, " this could be risky"; "It could make us vulnerable". Or, "Everyones doing it!"; "Life is risk!". No one put a gun to the "custodians" head. They made a decision, a near life and death one. They broke the law of the jungle. A pack of hyenas jumped on them. And you want to call a time out? But, you want us to know that you hate that you have to do it? Pretty good, Comrade Cramer, you should be the investment bankers union steward.
10-14-2008 @ 2:54PM
Kelly said...
Cramers Blog went so over my head its scary. is there anyone out there who can explain...in English.... Credit Default swaps Position Limit Puts???
10-15-2008 @ 2:35AM
ynot said...
They banned the short sellers and the market still tanked and now Cramer wants to blame them again. You are a joke Cramer. Who are you going to blame when the banks start failing this time. Put the blame where it belongs you freakin' crook. Your criminal friends on wall street caused their own problems and Paulson is on the take. Can you say conflict of interest.
10-15-2008 @ 2:57AM
ynot said...
Has your broker ever told you this: If you have $100,000 in your 401-k and you lose 50% in the market you now have $50,000. How much does the market have to go up to break even? Answer 100%. Now, if you pulled your money when the market dropped the first 10%, you would have $90,000. Then, if you missed calling the bottom, and waited for the market to come up say 25% and then put your money back in and the market went up 75% more you would now have $157,500. While the suckers who listen to brokers stayed put for the long term are now back at $100,000. Don't believe me, then do the math yourself. These guys are crooks that want you to keep your money in, so they can cash out. Welcome to the world of Cramer, better known as Wall Street. Oh yeah, booyah.
10-15-2008 @ 7:59PM
robert tihlarik said...
thanks cramer for letting the public that the short sellers have been killing the market for over two years and that pigs should die.