Without a Favorable Yield Curve, We're Sunk

Forget what the Fed is saying right now. Forget what Treasury is saying. Forget Congress. Remember the facts: Banks and brokers can rebuild capital in three ways. They can get new investors, they can sell assets or they can invest their deposits in short-term treasury notes and work an arbitrage.

Last week, for example, Citigroup (C - commentary - Cramer's Take) sold a profitable German business for almost 5 billion euros. Merrill's (MER - commentary - Cramer's Take) trying to sell Bloomberg. That's great, but most banks don't have a lot of assets to sell. Merrill's Bloomberg has been a good but noncore asset. Citigroup, in true bad hedge-fund fashion -- as it is run by a true bad hedge fund manager now -- sells off a profitable asset to fund crummy mortgages.

Finding investors was once easy. But the losses have been so staggering for everyone who has tried -- whether it be private investors in Washington Mutual (WM - commentary - Cramer's Take) or Nat City (NCC - commentary - Cramer's Take) or all of those darned sovereign funds in Citi and Merrill -- that it might not even work any more. Too much obliteration.

Which leaves us with the yield curve. Unlike the Fed, which thinks things got better a couple of months ago so it is ready to tighten, the rest of Wall Street knows that the banking system's falling apart. If the Fed were to announce that it was cutting rates by 200 basis points this week -- dollar be damned, because that's more of a budget deficit issue despite multiple press reports otherwise -- then banks could use their bountiful deposit bases to invest in two-year paper and make money every day. (Obviously given Bernanke's comments this morning, he's still trying to think about tightening, which is going to send all of the banks -- the major ones -- into single digits. He should be more worried about runs than about inflation right now.)

If the Fed did this in conjunction with a trillion-dollar fund to buy mortgages for small change, we could get out of this mess very quickly. Where is the trillion going to come from? I don't even care anymore. We have punted on so many opportunities and been surprised -- as a government, not as stockholders -- so many times that it will now be about a trillion that is needed unless we simply don't care. Without it, though, the FDIC will be stuck running dozens of major regionals and Citigroup without many buyers, because who has the capital to fund those bad loans?

Of course, no one thinks this will happen or even that it needs to. It will. We are about to have runs on banks across the country. Why not? It's frightening as all get out.

So, the Fed must act. Treasury must act. Congress must act.

None of them will, in part because FDIC's list of problem banks doesn't include any of the ones on your screen that are obviously going under or are out of capital, which is why in six months I believe we will have a half-dozen banks without this relief.

Hmm, maybe that will be better in two years.

For the here and now, it is an utter disaster.

Random musings: State Street (STT - commentary - Cramer's Take) and U.S. Bancorp (USB - commentary - Cramer's Take) -- not bad. Surviving bank USB is an important linchpin to the takeover of bad banks. Any run on USB makes no sense, as those nonperformers as a percent of loans are really, really low and impressive. Obviously no one cares right now. ... Trying to figure out whether Pepsi (PEP - commentary - Cramer's Take) and Coke (KO - commentary - Cramer's Take) are as safe as they seem. I know they are cheaper than they were, but that may not be enough after what we see a miss does with Kimberly-Clark (KMB - commentary - Cramer's Take) or even potentially with Clorox (CLX - commentary - Cramer's Take).

At the time of publication, Cramer had no positions in the stocks mentioned.

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