Deconstructing the Cramer Plan to Save the Economy

Hi there Jim,

First, thanks for allowing me to end last week feeling so prescient. I wrote an article that was posted here this past Wednesday, January 15, The Timeless Money Center/Government Dance, in which I imagined that within a few weeks the money centers and their lobbyists would mount their inevitable campaign to dump all of the bad debt onto the government.

I even visualized you, exasperated and with your now familiar over-the-top tormented delivery, pleading with us that a government bailout needs to be done "NOW."

So I did feel a bit of grim satisfaction when you unveiled your "plan" (see video) right after the President's pathetic offering, and only three days after my posting here.

My satisfaction was grim, Jim, because, in my opinion, your plan sucks. - at least for me, but perhaps not for your friends on Wall Street who are always telling you how bad it is "out there."

So can we deconstruct your "plan"?

You encourage the government to shut down several mortgage insurers and take over the debt they probably are not capable of guaranteeing any longer.

Then you, in a most generous flourish, would have the U.S government buy the debt for 50% of its face value. Let's stop here for a moment, Jim.

Why 50%? After all, the market rate for this mortgaged -backed debt was estimated as being worth 25-30 cents on the dollar by some observers several months ago… given some of the tracking indices and actual sales, including E*Trade's (ETFC) selling of its debt. (It may even by less now.)

So where did the 50% come from? I guess you are high balling the figure, the same way a t-shirt vendor in Acapulco does to a tourist, knowing that a price reduction request is inevitable.

In fact, I would suggest that you propose a 10 cent on the dollar offer for this hoped-for repurchase. That is the amount that collection agencies would pay for bad debt that they then try to collect from the deadbeats. Now isn't that a keen starting point for you to pitch your plan from, instead of the 50% for the "people who are (always) telling you….?"

That brings us to the phrase, the one that Wall Street learned to include in every bailout campaign, "the government will hold the debt until market conditions change and then sell it to private investors." (Not your quote, but rather boiler-plate for these bailout initiatives.)

Jim, the last two crises, both only 20 years ago, left the U.S taxpayer as bag holders. Conditions never seemed to have "changed." But time always works on the side of the banks, as the public has a short memory. You wouldn't want that to happen again, would you?

In fact, don't you find it curious that the most "advanced, sophisticated, reliable" financial system in the world can have three crises in a twenty year period, each of which could potentially "bring down the economy?" Each crisis was caused by bad loans by the same players, no risk management by any of them, and no government oversight. Each time "your people" spent millions of dollars to make sure that they could be at the table when the government bailouts were charted.

If I was to read of a succession of financial crises in the banking system of let's imagine, Uganda, I would not give it too much thought (that is why their debt has such a high premium). Similarly, if Argentina went belly-up once or twice a decade it would not cause too much of a ripple in the U.S. But don't you think that the same players on Wall Street have been working overtime to put the U.S on equal footing with these other nations?

Another amusing facet of your plan is your vastly underestimated cost to the U.S taxpayer. You glibly put out the number $250 billion and then you quickly add that, once the government guarantees the debt, presumably the capital market will "free up' and the government will step aside. Hence the cost will actually be much lower to the U.S taxpayer.

Can you cite us one instance in the Third World Debt Crisis or in the S&L Scam that the bill to the U.S taxpayer was not VASTLY underestimated?

In 1990, during the S&L scam, then Treasury Secretary Nicholas Brady increased official projections of the cost of the S&L bailout from $113 billion to between $143 and $183 billion. Even the new figures were considered by observers to be underestimates.

"It was an astounding deception of the American public," says banking scholar Dan Brombaugh of Stanford University, who claimed at the time that Brady knew that the bailout was going to be more expensive than he admitted.)

Presumably, Jim, you, and your confidants know very well, that the "in for a dime, in for a dollar" gambit always works. i.e. once the mark starts paying, he can then "be worked" indefinitely. It is the strategy for funding the Iraq War ("we can't just walk away now… can we?") It will surely work again in these coming days for still another "financial crisis."

Perhaps you disclosed your plan on Friday, as you were maybe aware that the following day, the British government was to announce that THEY were considering a guarantee of Northern Rock's (NHRKF.PK) bad debt. Maybe your friends at Goldman Sachs (GS), who were the consultants to the British government, kept you abreast of their deliberations? After all, your loyal citing of their stock as a strong buy throughout its recent fall should have endeared you to them.

What a great sales tool that will be for the selling of a U.S government bailout if Britain did it! It is, in fact, heaven sent if the British Bailout comes to pass.

What I find rather humorous is, as I noted before, the money center banks have always eagerly spent millions of dollars to have their lobbyists teach the wisdom of government bailouts to elected officials. Now perhaps for the first time a government is actually paying a money center bank to consult on a solution created by the banks themselves! The amusing advice given to the UK government is that they should guarantee the banks' bad loans.

This must have resulted in a good laugh amongst the Boys on Wall Street. It got a good laugh from me! What would the British government expect GS's conclusion to be…except "get our friends off the hook. We shorted sub-prime, and they are dummies, but we are all buddies."

(Of course the UK landscape is not yet littered with foreclosure signs as are many places in the U.S. You might even consider leaving your neighborhood to see these reminders of the fallout of the Mortgage Scam. You will then understand that a government bailout of the banks, and not of the borrowers, will be a harder sell to the American public. But I, for one, have confidence that a good publicity team will "work-through" this obstacle to an eventual bailout.)

There are also two other potential time bombs making your "50% solution" less attractive than would be a US Treasury purchasing of Bangladesh distressed bonds.

One is the Ohio Federal Court Decision in October 31, 2006 dismissing 14 foreclosure suits brought by Deutsche Bank. The judge ruled that the bank had not proven that they own the properties which they were attempting to seize. Apparently the chain of ownership in these transactions is lengthy and documentation is not always readily available. How this will impact other foreclosure cases is still undetermined.

The second "time bomb" may emerge when, possibly in lawsuits involving other issues, it is determined that shards of the same mortgages are now embedded in securities in the portfolios of different banks. The "sell this stuff to the Greater Fool" orgy may have resulted in over-zealous loan packagers shipping off the same mortgage to several different hapless investors.

You wouldn't want the U.S taxpayer to be the bag holder of these securities, would you Jim? Would you buy them for your charitable trust?

I would like to conclude my letter on an optimistic note, Jimmy. I quoted, in my short history of the Third World Debt crisis, National Review's observation that the public campaign for a government bailout at that time was in effect for nine months before the Reagan Administration grudgingly relented and gave $9.8 billion to the IMF. Of course that was just a small fraction of the total US bailout that was chiseled out by "your people on the Street" over the next several years.

So keep at it! Consider the Cramer Plan unveiling on Friday as Day One of a long campaign. You gentlemen have the will and expertise, and will probably be made whole again.

Thanks for your attention,

Alan

Disclosure: Short GS,C,SRS,CTX

Comments

[A.S.D.:]

Thank you Alan.

2008 Jan 22 11:57 AM

[jmmx:]

WOW - Great comeback!

Why is it that these financial bailouts always occur under the republicans?

We should call this the Republican Recession.

(Hey - I thought they were supposed to be against big deficits?)

2008 Jan 22 01:43 PM

[VirtualOptics:]

Jim Cramer has become a pop star among the new investors who are entering the stock arena. I can imagine his tyrants about the Fed: "They don't know what they are doing!" would enrage Bernacki and company, but secretly they're saying "Sticks and stones will break my bones, but names will never hurt me." Meanwhile, the loyal viewers of Mad Money are cheering Jim on. Your analysis here was a good comment for the other side, one I found educating in itself. Meanwhile, as the market falls in panic as the Wall Street sheep look for a safe haven, the underlying demands of the world go on: oil stocks are in greater demand and lesser supply. Food costs are being impacted by energy alternatives. Chinese markets will continue their momentum since they are the world's principal producer of goods. So why should I care if some of the greedy big banks of the world have to reorganize, except for the effect it will have on their loyal employees.

2008 Jan 22 01:54 PM

[ed jones:]

Let the market place determine the fate of these insurers. If they fail,so be it. Yuriman

2008 Jan 22 03:07 PM

[Yael Pipano:]

well said!

2008 Jan 22 07:57 PM

[Yael Pipano:]

and yes, the public does have a SHORT memory and gets taken advantage of. I cannot understand why Bank of America would be interested in taking over Countrywide, especially after their dismal earnings report.

2008 Jan 22 07:59 PM

[bill stenner:]

i completely agree. when will the time come that the banks and other scumbag ripoff artists who continually design these ponzi schemes are brought to account for their actions. Read another great article today in the Globe and Mail regarding Greenspans extolling these mortgage options for people. What is even more criminal is that the government is now using your tax dollars to further prop the market for awhile..when it naturally needs to deflate.

2008 Jan 23 06:07 AM