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Cramer: What This Government Must Do

Jim Cramer

Confidence matters. But no one has confidence in anyone. Or anything.

I know that we on Wall Street are deeply cynical and untrusting. I also know that the president of the United States doesn't command the moral or political authority that the office needs.

Still, I find myself asking, where is the president? Why wasn't President Bush on television last night explaining, in plain English, that we will see our way through this financial crisis, and that the money Treasury has spent is well spent. Or that your money is safe at your bank, nothing's changed. Or that the problems of Wall Street will be sorted out and the Treasury, the Fed and the regulators, who are well aware of the problems. Why is that so hard? Why not try to calm people? Perhaps the president thinks that Lehman (LEHMQ.PK) or AIG (AIG Quote) don't matter? Maybe he thinks that the Fannie (FNM Quote) and Freddie (FRE Quote) thing is too abstruse to talk about? Whatever he's doing, it isn't enough.

What else can be done? We need to have a break in the action here. We need to have the Treasury and the Fed on television saying that they will issue $300 billion in one-year paper that will be used to finance the purchase of distressed assets that do not have home equity loans attachments at 30 cents on the dollar for those who want to sell them. This matters, because right now we have no idea what anything in the mortgage market is worth. Nothing. So the tendency is to either value them at zero or overstate them (as Lehman did, thereby wrecking their credibility).

Why 30 cents on the dollar? Because given the underlying default rates, that's going to be a bargain if the government just sits with it. The 30-cent floor would also bring out real buyers who might pay a little more, knowing they have a place to go if they need it. There is no moral hazard here. If institutions didn't have to mark to market -- and there is no market -- we wouldn't be in this jam. I know that the accounting standards are being changed right now to loosen up, but it won't matter if there are no buyers.

We also need, as I have been calling for endlessly, a Home Mortgage Resolution Trust that can buy distressed mortgages from banks and brokers and then work them out over time turning absurd exotic mortgages into 30-year fixed mortgages that would keep hardworking people from being thrown out of their homes. Congress needs to be engaged.

What else?

OK, we immediately need to change the rules on these credit default swaps. This is a market -- not unlike the old options markets, or stocks before federal regulations were created -- where there is no regulation whatsoever. I believe this market needs to have sunlight shining on it to disinfect it. I believe that institutions should not be allowed to take this insurance if they don't have an economic stake. That just should not be allowed. These transactions should be closed out and from now on, all trades must be posted on an exchange for scrutiny, an exchange like the New York Stock Exchange. Any non-disclosed contract should be cancelled going forward.

These rules should be made immediate going forward. That way, these insurance contracts cannot be used to destroy the underlying security or company. Right now, this stuff us like taking a life insurance policy out on someone you hate, and it is legal to murder them. That's not sound policy. Obviously these contracts, even if there is an economic interest, need a regulatory body, an SEC of their own.

The SEC should immediately bring back the uptick rule and extend it to ETFs. All this would do, like the rule against naked shorting, is bring things back to the '90s, where there was nothing wrong with the functioning of the market. The uptick rule was destroyed by firms like Lehman Brothers because it made them less money. There was no other real reason. The academic studies were all done by people who were not sophisticated enough to understand how the lack of a rule could be used by bigger hedge funds to destroy smaller financials. Things have gotten so nutty that several billion-dollar hedge funds with the same game plan have helped destroy firms like Lehman, Bear or AIG.

The SEC should ask for equal disclosure for long and shorts, and the difference is just plain silly. Many, many short-sellers have asked how I can possibly think that this is good. To them I say, if we can nationalize Fannie and Freddie and AIG and Bear and let Lehman go, we can certainly ask for disclosure of the short side's plans and a return to rules put in after the Great Depression to protect investors. It is absurd not to do this stuff.

Finally, the Federal Reserve needs to temporarily cut the fed funds rate on an emergency basis to 1% as it was in 2003 even though things were not nearly as bad then as they are now. That's just stupid not to do, even if there would be a huge loss of face. It should be coordinated with other cuts around the world and can be justified for the moment as part of a worldwide effort.

We need these things done, and we need them done now. Not to save this market -- it can't be saved. It is too late; the time to act was August of 2007. This market has to be triaged. The next market must be protected for investors who no longer trust the market and think it is one big fraud, a rigged game, not as honest as wagering with a bookie at a local bar or newsstand.

Random musings: It was great that the SEC actually extended the naked short rule to the brokers, as they are horrible abusers because they want the commissions so bad they will knock down any stock to sell puts. Glad that era's over.

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