Credit Default Swaps Still Wreaking Havoc

What did SEC Chairman Christopher Cox think? Doesn't he understand the game? You put $25 million in a credit default swap. Then you buy all the puts you can, then you jam the stock down through shorting, then you buy $25 million more in credit default swaps, then you alert the media, and the ratings agencies panic and downgrade, and you are done. The company is finished.

It is a remarkable moment, a total reallocation of capital from the longs to the shorts. Of course, if anyone knew how little it takes to move the credit default swaps -- $50 million can double or even triple the rates -- then the whole process would seem pretty silly. And the markets are unregulated because Christopher Cox did not want to get in the way of the free market.

So you can wreck XL Capital (XL - commentary - Cramer's Take) and Prudential (PRU - commentary - Cramer's Take) and Morgan Stanley (MS - commentary - Cramer's Take) and MetLife (MET - commentary - Cramer's Take) and KeyCorp (KEY - commentary - Cramer's Take) and Fifth Third (FITB - commentary - Cramer's Take) and Nat City (NCC - commentary - Cramer's Take) -- takeover, who are you kidding? -- in a matter of weeks.

Just wait until they go after Citigroup (C - commentary - Cramer's Take)!

This end-of-capitalism-as-we-know-it is extraordinary.

I think it is catastrophe that could be avoided with honest regulation, not shorting bans but uptick rules, and making credit default swaps public like Dan Dicker wants. But without it, we are simply going to be back in the kesselschlacht -- encirclement and attack.

I am picking all the way down in Morgan Stanley. It sure hasn't worked, even as it has oodles of capital and a great management team.

But no financial is immune to this process.

It is just too lucrative and unregulated to stop.

At the time of publication, Cramer was long Morgan Stanley.

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