Cramer: Banks Could Go the Way of the Home Lenders

Is it time to think about the unthinkable? Is it time to think about major bank failures?

Let me give you a thought. A year ago, I posted a list of the Mortgage Dirty Dozen on this site and I predicted the unthinkable: that they would all be obliterated in the coming year.

Let's see how 10 of them have done from one year ago:

• IndyMac(IMB Quote): $29 then; $4 now.
• Centerline(CHC Quote): $19 then; $4 now.
• Friedman Billings(FBR Quote): $5 then; $2 now.
• Fremont General(FMT Quote): $7.40 then; now, pretty much nothing.
• Redwood Trust(RWT Quote): $54 then; $30.75 now (good one!).
• Newcastle Investment(NCT Quote): $27 then; $8 now.
• Gramercy(GKK Quote): $30 then; $16 now.
• RAIT Financial(RAS Quote): $29 then; $5 now. Accredited-purchased-incredible, and well done!
• Thornburg(TMA Quote): $23 then; $1.54 now.
• CapitalSource(CSE Quote): $24 then, $14 now.

I think the declines aren't over. I think there is more downside. Or you could consider the Gang of Four, the four horsemen of the financial apocalypse:

• Ambac(ABK Quote): $90 then; $7 now.
• MBIA(MBI Quote): $67 then: $11 now.
• PMI(PMI Quote): $45 Then; $5 now.
• MGIC(MTG Quote): $61 then; $13 now.

Which brings me to the banks. I am beginning to believe that we are going to see some major bank failures, and we have to consider similar declines from the following stocks: Washington Mutual(WM Quote), Wachovia Bank(WB Quote), Capital One(COF Quote), National City(NCC Quote), Huntington Bancshares(HBAN Quote), Downey Financial(DSL Quote), BankUnited Financial(BKUNA Quote) and Corus(CORS Quote).

I think every one of these could fall like that dozen, which, by the way, were already way down and didn't seem like they could go lower!

Now, I know this is an unforgivable thought that any of these banks can just disappear, but it can no longer be taken off the table. The lower rates alone aren't going to save these guys. All of these banks need a multipart fix:

1. Cut rates to levels through the two-year so banks have a chance to borrow short and invest a little longer to make some money.
2. Give the Fed the authority to buy a ton of AAA paper that everyone says is worth a lot but is logjamming the desks of every major bank in the country. The Fed can make money on this stuff. (I think it has it already, but some might think it needs authority from Congress.)
3. Have the Federal Housing Administration guarantee mortgages once they have been refinanced, which they can be at the shorter rates. (I don't like the principal reduction stuff -- way too confiscatory.
4. Treasury takes warrants from the monolines in return for the vast majority of the equity stakes.
5. The Treasury makes the implicit guarantees for agencies more than just implicit.

Without these changes, I simply have to believe the banks are going the way of the monolines and the REITs.

Maybe it would cause the Fed to recognize the gravity of the situation.

Maybe it would even motivate the Treasury to be proactive beyond instilling a nice volunteering system that, of course, is totally meaningless.

Without it, though, I believe that as outrageous as it might have sounded last year with the REITS, it is no more outrageous now to suggest that these banks could have a similar path or go to zero.

It is that bad out there.

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