A Hands-Off Policy Could Help Financials Rebuild

We've got one of those moments where neither the Fed nor the Treasury is relevant. The Fed thought it had done its job with the rate cuts, but mortgage rates are rallying, and the fed funds rate is not low enough for the banks to build capital.

The irrelevance of the Fed makes everything a private solution, and there is no real private solution other than everyone losing money in the credit business. I was gratified to read that the Fed is changing the rules so that private equity can get involved in the financials. That's good news -- there's a lot of capital out there. But it needs to be put to work where things are transparent, and there isn't much transparency out there.

Let's take AIG (AIG - commentary - Cramer's Take) as a good example. We had thought that most of AIG's obligations that it is now taking gigantic charges for were of very short duration and were rolling off before they hurt them. We thought this because they told us that. The fact that they either didn't know or dissembled has made the common stock totally uninvestable.

The article today about its aircraft leasing business is more dissembling or lack of knowledge. If that business is at all like its publicly traded analogues -- Aircastle (AYR - commentary - Cramer's Take) or Genesis Lease (GLS - commentary - Cramer's Take) -- then it is look out below. Have you seen those declines? Default specter alert. When AIG talked about its exposure to potential losses, it made sure to tell us that they were about $1 billion in everything if everything went wrong. They were off by $37 billion. Probably impossibly hedged positions a la Lehman (LEH - commentary - Cramer's Take) or reinsurance from Ambac (ABK - commentary - Cramer's Take) and MBIA (MBI - commentary - Cramer's Take).

What does AIG need? Forbearance. It needs the regulators to look the other way and simply allow AIG to lose a lot of money without having to raise it. No more ratings and cash on hand; they need to just say "OK, get it together; we will take a look at you next year."

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