Cash for C Helps Us All

When Citigroup (C - commentary - Cramer's Take) got its infusion during the last go-round in 1990 from Prince Alwaleed, it was immediately pooh-poohed by all of the analysts who had gone negative and issued sells. They all dismissed it.

At the time, I was short Citi and I figured, "What the heck? Ring the register. Why let a great gain disappear?" I don't know a soul who covered on it besides me, and I did it only because I couldn't believe you could have something as positive as that capital infusion mean nothing; that seemed preposterous.

An early read of the analyst notes this morning after the latest cash infusion, this time from Abu Dhabi, seems like a rerun of 1990. People are saying that it is too little, too late and means nothing, that it is like the bailout of Countrywide (CFC - commentary - Cramer's Take) by Bank of America (BAC - commentary - Cramer's Take), that it won't matter.

That's just nonsense. First of all, Countrywide's in much worse shape than Citigroup. It has a small deposit base and a franchise built quickly from nothing. It would be bad if Countrywide failed, and it will fail if Sen. Chuck Schumer severs the lifeline to the Federal Home Loan Bank. That would be odd, because the loans Countrywide is making now are compliant and good. But Countrywide's backstop turned out to be weaker than we thought. Bank of America is capital-constrained if it doesn't sell its China holdings, and that means Countrywide isn't going to get much further help unless it goes bankrupt.

Citi, on the other hand, is relying on a backstop that has $800 billion and would think nothing of kicking in another $7.5 billion to save its investment, unlike Bank of America, which can't afford to. This might just be the ante, and there's tons more where it came from.

I have no illusions about just how bad the credit markets are -- and I thank Doug Kass every day for keeping us honest about how bad things are. But I don't want to stay as negative as I was before this infusion, because it comes under the category of "it isn't as bad today as it was yesterday," per what happened in 1990.

I still believe there needs to be a huge crunching of debt. But I also think that we can isolate the bad debt:

Second-home loans from 2004 to 2007? Worthless nationally.
First-lien homes from 2004 to 2007 made to people with low credit scores? Worthless nationally.
First-lien homes from 2004 to 2007 made to people with good credit scores from California, Florida, Arizona and Nevada? Worthless.

Insurance on any of these vintages? Worthless.

I still believe that there's $500 billion out there that needs to be crunched.

First-lien homes from 2004 to 2007 made to people with good credit, but we go into a recession and the insurance gets wiped out? Worthless.

But if it is:1) spread out over many institutions and 2) backstopped by Fannie Mae (FNM - commentary - Cramer's Take), which will have to be bailed out by Congress, we can keep it to $500 billion.

The system can absorb that loss.

We are down 10% from the highs. In 1990, we dropped 13%.

Seems reasonable to believe that we are nearer a bottom than a top.

Once the debt is crunched, the homebuilders almost all go under (though I believe Toll (TOL - commentary - Cramer's Take) can make it) and Washington Mutual (WM - commentary - Cramer's Take) and Countrywide go belly-up and the insurers get whacked similarly, we will get an emboldened Fed and a bottom. I suspect these will happen sooner, not later, so stay open-minded and focused as the pain rolls over and keep in mind that things are better than they were Monday by $7.5 billion, with more to come.

At the time of publication, Cramer was long Citigroup.

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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. Outside contributing columnists for TheStreet.com and RealMoney.com, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. To see his personal portfolio and find out what trades Cramer will make before he makes them, sign up for Action Alerts PLUS. Watch Cramer on "Mad Money" weeknights on CNBC. Click here to order Cramer's latest book, "Mad Money: Watch TV, Get Rich," click here to order his book, "Real Money: Sane Investing in an Insane World," click here to get his second book, "You Got Screwed!" and click here to order Cramer's autobiography, "Confessions of a Street Addict." While he cannot provide personalized investment advice or recommendations, he invites you to send comments on his column by clicking here.

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