What would ultimately be the best thing to do is what Wachovia (WB Quote - Cramer on WB - Stock Picks) wants: Split into good and bad banks and have the government buy stakes in the bad banks.
Whatever happens, we need to get on with it. We cannot get bogged down, because the issue is the fire, and it must be put out before unemployment skyrockets and banks fail nationwide.
I am hoping that Warren Buffett, who totally gets the plan, is going to be listened to by Congress. I hope they listen to how important he knows it is and how we will revert to last Thursday's obliteration and destruction, which I believe could wipe out probably a fifth of the S&P 500.
Some underwriters were so bogus and some buyers so speculative that you have to wonder how in the heck we should buy those mortgages. The negative amortization, pick-and-pay type of loans, I think should not be bought until the very end. Those could be worthless. The banks that lent them are going to have to take a severe hit.
Other than those, though, I see no reason why an easy scale can't be made and the disposals be made orderly.
We should first be buying the mortgages that are 30-year-fixed where there are foreclosures, and we should buy them by the most hard-hit geographies where the pull down is endless -- Florida and California. We have to keep those people in their homes. Then I would do the teaser-type loans. And only then would I do pick-and-pay exotics.
FDIC plan to blanket money funds can keep that money flowing to the commercial paper market; that will stop the contagion from leaping to industry. The bailouts so far will keep the housing market from collapsing and will keep the nuclear option of derivatives gone haywire -- the ones insured by AIG (AIG Quote - Cramer on AIG - Stock Picks) -- from exploding. The people who are trying to wrest AIG from the government can only do it with the bridge loan from the government, so that should not be allowed to happen, as the company has always been undercapitalized and can't possibly pay for its obligations, so buying that security could be a big mistake.
But the biggest need is to find a way to get rid of these mortgages in a comprehensive fashion that frees up capital that is tied up financing this junk.
The plan is vital, and if it fails, we will have a string of bank failures. House price depreciation continues to crush the value of both the whole loans and the collection of home loans that are bundled into collateralized debt obligations.
Speaking of Warren Buffett, he is making it very clear that we are still on the precipice and will be right back to it if we do not approve the Paulson plan. That's the takeaway from his comments about the plan in print and on his excellent interview on CNBC this morning, which is a total must-view.
Originally published on Monday, Sept. 22, at 10:55 a.m. EDT
It's a fire. Not just a fire, it's a chemical fire. We have to throw everything at it. We need to throw a stimulus package at it to get people to spend, we need to fund the mortgage trust to buy mortgages -- more in a moment about the best ways to do it -- and we need rate cuts.
After the 1929 market crash, the government did everything wrong: rate increases, tripling of tax rates, money supply shrunk. We got bank closings galore and 30% unemployment. FDR came in and gave us the FDIC, Social Security, a big bank bailout through the Reconstruction Finance Corp. to buy stakes in banks.
It wasn't enough. The depression lingered. There are studies galore about whether the depression didn't end until the war. But the catastrophic employment/bank failures ended, and that kept us from facing a revolution or permanent depression or a Japan-style deflation that has wrecked their economy for years.
Now we are faced with the need to do everything. The FDIC plan to blanket money funds can keep that money flowing to the commercial paper market; that will stop the contagion from leaping to industry. The bailouts so far will keep the housing market from collapsing and will keep the nuclear option of derivatives gone haywire -- the ones insured by AIG (AIG Quote - Cramer on AIG - Stock Picks) -- from exploding. The people who are trying to wrest AIG from the government can only do it with the bridge loan from the government, so that should not be allowed to happen, as the company has always been undercapitalized and can't possibly pay for its obligations, so buying that security could be a big mistake.
But the biggest need is to find a way to get rid of these mortgages in a comprehensive fashion that frees up capital that is tied up financing this junk.
The plan is vital, and if it fails, we will have a string of bank failures. House price depreciation continues to crush the value of both the whole loans and the collection of home loans that are bundled into collateralized debt obligations. The CDOs are almost impossible to unwind, that's what we have learned from this last year. But there are plenty of whole loans that can be sold to the government. Everyone is worried about the hit to capital the banks will have to take -- and the hits that other banks that have not written down the loans to date will have to take.
There are three ways to approach this:
1. Put out a bid list of mortgages and make it so it is high enough to not wipe out the banks but low enough to make money for the government. You might want to bid 50 cents for 2006 vintage for some ZIP codes with good loan to value, or 60 cents for 2005 vintage with excellent loan to value. But regardless, that's detail we should not get lost in.
2. The government can take equity stakes in the banks or just pay them outright for the money. I am indifferent, but the equity stakes allow the government to profit from the automatic increase in value the banks should have if they have already written down the portfolios. Banks that haven't taken the hit will have to, because the banks with similar assets will have to mark them down unless we suspend the ridiculous mark-to-market stranglehold and we allow losses to be taken over time. That's why we need a rate cut, because the banks will be able to rebuild capital against the losses very quickly through the net interest margin increases.
Either way we will have bank failures anyway, and we can then have a formula where the feds just seize the bad loans, dump them into the program to get them off the market and sell the deposits to the Wells Fargos (WFC Quote - Cramer on WFC - Stock Picks) or the Goldmans (GS Quote - Cramer on GS - Stock Picks) of the world.
The problem is that these details must not be allowed to derail the plan, because the depression is what we are trying to stop. If the regulators simply look the other way for now, house price depreciation can subside and many banks won't have to do anything at all.
3. Further, we are in a position where if the government sets a floor and we have different prices for different geographies, vintages, FICO scores and the like, then the private sector might want to buy them.
What would ultimately be the best thing to do is what Wachovia (WB Quote - Cramer on WB - Stock Picks) wants: Split into good and bad banks and have the government buy stakes in the bad banks.
Whatever happens, we need to get on with it. We cannot get bogged down, because the issue is the fire, and it must be put out before unemployment skyrockets and banks fail nationwide.
At the time of publication, Cramer was long Goldman Sachs
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Ignorant Resistance to the Plan Is Baffling
Originally published on Wednesday, Sept. 24, at 9:27 a.m. EDT
Speaking of Warren Buffett, he is making it very clear that we are still on the precipice and will be right back to it if we do not approve the Paulson plan. That's the takeaway from his comments about the plan in print and on his excellent interview on CNBC this morning, which is a total must-view.
The resistance to this plan is amazing to me. It is a testament to how hard it is to explain that people are up in arms about it and the money that could be
What people do not understand is that the number of firms that could have gone under last week pretty much included everything but the food and drug stocks.
The world revolves on credit and confidence. Both disappeared last week, and the reason behind that is simple: foreclosures.
Let's go over the nexus again. Banks can't lend and are fearful to lend. Why? So much money is tied up in failing mortgages throughout the system that the banks don't have the capital even if they want to lend.
I have said for two years now -- two years! -- that we need a market for this stuff, by ZIP code, by vintage, by loan-to-value, by geography. The SEC refused to insist on this, the bank examiner won't give it to us, so Treasury has to give it to us.
The presumption is that these mortgages are worthless. Chris Matthews said the same thing last night.
That's just not true. If you wrote even the worst mortgages down, if you were to value them at, say, 50%, think of it. You buy a house for 100% loan-to-value for $300,000, roughly the average price of a home in California in 2006. The average house price has fallen 25% from when that house was built. Let's say that it is 33%, factoring in the last month and the skyrocketing foreclosures. Now the house is worth $200,000. The mortgage is for $300,000. You bid 50% for that mortgage, $150,000, then you have a mortgage that's realistic.
You want to get that mortgage current, so you renegotiate the terms. I don't like principal adjustments, but I do like interest rate adjustments. Let's say for the next year, we say, "You are forgiven" for a year, maybe even two, and then you go low-interest for the next five years. That keeps the person in the house. That means that a foreclosure is averted, one less home on the market You multiply that over and over again -- and keep in mind that a 100% loan-to-value California house is about the worst other than the piggyback loans that were made with home equity that went to 120%, but I believe in the last two years those people have already been foreclosed -- and you get a firmer market. A firmer market means house price depreciation ends. If house price depreciation ends, then if the home is sold, the mortgage gets paid back and then some. That's where the profit comes in for the government.
Now, you don't have to write these down to 50% to make this work, as you see from the math. You could do it higher.
The thing you need to know is that banks holding these mortgages are either valuing them much lower -- as in Merrill's (MER Quote - Cramer on MER - Stock Picks) pricing to Lone Star, or the writedowns that Bank of America (BAC Quote - Cramer on BAC - Stock Picks) has taken and that Wells Fargo (WFC Quote - Cramer on WFC - Stock Picks) is taking -- or too high, a la Washington Mutual (WM Quote - Cramer on WM - Stock Picks). Either way you could either price these so it is in the interest of an acquirer to buy WM and write the mortgages down and then sell them to the government, or have Bank of America sell them and write them up to build earnings.
Either way, the banks can loan more and get the economy's oil flowing again. They can't unless they have a market for these mortgages.
That's why this is so important.
Now, there are certainly issues. How do you keep BAC from making so much money off you and me? We can craft some sort of equity stake that the taxpayer can take. The executives' benefit? We tax it or regulate it. We need to worry about the winners later; let's worry about the loser now, which is the U.S. economy.
Oh, and let's not forget what else goes right if the plan is approved. We get a real boost to the damaged portfolios of Fannie (FNM Quote - Cramer on FNM - Stock Picks) and Freddie (FRE Quote - Cramer on FRE - Stock Picks), which we own now. The values could go up big, the foreclosures on those properties go down, and these two go profitable off their guarantee fees, which are gigantic.
Or how about the bank owners of CDOs, impossible-to-value instruments that have to be worth more if housing simply stops depreciating or even starts increasing. That takes the pressure off all of the insurance that AIG (AIG Quote - Cramer on AIG - Stock Picks) wrote on these, which gives the U.S. government still one more windfall. All of these occur if this plan succeeds.
I am hoping that Warren Buffett, who totally gets the plan, is going to be listened to by Congress. I hope they listen to how important he knows it is and how we will revert to last Thursday's obliteration and destruction, which I believe could wipe out probably a fifth of the S&P 500.
The math is pretty simple. The fact that there will be some winners who shouldn't win is a price we have to pay. Until this plan, everything that Ben Bernanke tried was piecemeal and designed to avoid any scrutiny. Until this plan, the government has simply been reactive to the damage, damage done in part because of a philosophy that pervades this administration, that a market unregulated is a market that is perfect.
This is the first plan that might cost us nothing and solves the problem, and yet this is the plan that gets the most resistance.
If this plan fails, I want nothing to do with this market except for the foodbank stocks. Sounds like Warren Buffett doesn't, either.
I am worried about the plan. It cannot be nickel and dimed. We cannot let Washington Mutual, the next Lehman, fail. We see what happens -- the unintended consequences of Lehman are still roiling us. We cannot have the largest savings and loan go down.
We also cannot have the commercial paper market go away, which is what the major industrial companies live by. All of these will happen in this country if the plan fails.
I have become convinced that we have been hurtling toward Great Depression Two without a resolution of the mortgage crisis.
This is the best way to stop that Great Depression. It would be shocking to me if we went into a Great Depression with foreclosures spiking, home prices plummeting, deflation rampant and unemployment doubling or even tripling, all because we worried about what institutions will make money. The ones who make money are the good ones, as I demonstrated with the math. The bad ones get swallowed up and management booted. What more can you ask for?
At the time of publication, Cramer had no positions in the stocks mentioned.
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The Plan Isn't So Hard
Originally published on Thursday, Sept. 25, at 11:07 a.m. EDT
We will make money on the plan. It is almost impossible not to, if the pricing is right. From the very beginning, we have lacked a ladder, a scale, that tells us what kind of mortgages are worth what. From the very beginning, the absolutely outrageous SEC demanded no disclosure of mortgage vintage, geography, FICO score and loan-to-value.
There simply aren't that many other variables. You can produce models. You can figure out what this stuff is worth.
The only real variable is which loans should not be bought no matter what. Some underwriters were so bogus and some buyers so speculative that you have to wonder how in the heck we should buy those mortgages. The negative amortization, pick-and-pay type of loans, I think should not be bought until the very end. Those could be worthless. The banks that lent them are going to have to take a severe hit.
Other than those, though, I see no reason why an easy scale can't be made and the disposals be made orderly.
I know the CDOs are complicated. But I think the feds should be able to break them up by loan. They should not buy them whole, because without unwinding them, the government is going to get killed.
We should first be buying the mortgages that are 30-year-fixed where there are foreclosures, and we should buy them by the most hard-hit geographies where the pull down is endless -- Florida and California. We have to keep those people in their homes. Then I would do the teaser-type loans. And only then would I do pick-and-pay exotics.
I would put more effort into getting certain ZIP codes to bottom so that we can stop the reeling in major metropolitan areas. That's where the issue is, because 60% of these loans are in just a couple of places.
Why do I think this deal will make us money? Because those areas represent great value already, but we can't bring the values out as long as the foreclosures never end.
There are only certain kinds of mortgages and certain kinds of vintages and certain ZIP codes and certain geographies. The notion that this is "too difficult" to do, too hard to value, and too confusing is nonsense. But the feds must be able to bust the CDOs and unwind the tranches, or they will be scalded. NO HELOC!
Random musings: The Fannie (FNM Quote - Cramer on FNM - Stock Picks) and Freddie (FRE Quote - Cramer on FRE - Stock Picks) trade continues as a way to play the improvement of the portfolios of the two of them.
At the time of publication, Cramer had no positions in the stocks mentioned.
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