Cramer: How Financials Can Rebuild

This column from Jim Cramer originally appeared on RealMoney on Friday, June 27. It is being republished here as a bonus for readers of TheStreet.com.

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 Quote) 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 Quote) or Genesis Lease(GLS Quote) -- 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 Quote) or reinsurance from Ambac(ABK Quote) and MBIA(MBI Quote).

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."

I am not kidding.

Fannie(FNM Quote) and Freddie(FRE Quote) need similar forbearance. The regulators have to say, look guys, you are our way out of this mess, we will simply stop examining your books, or do so only for fraud, while we work our way out of this. They particularly need forbearance right now, as it seems like there is panic in the government sponsored enterprise market at the moment. Nothing new, but remember I said earlier in the week that these stocks had to take out their lows, and it looks like they are following my tune and will do so soon.

Bank of America(BAC Quote), Citigroup(C Quote), Wachovia(WB Quote) and Washington Mutual(WM Quote) need big-time forbearance. With the Fed not willing to cut short-term rates to 50 basis points so these banks could make 2 points of spread risk-free every day, they need the regulators to just go somewhere else until they rebuild capital.

Believe me, this can happen. You can have the top of the government reach down and say, "We are suspending all capital requirements while you rebuild."

That's an actual solution. It is a messy one and one that seems reckless, but coming from the most reckless hands-off laissez-faire government, it is a likely step to avoid a total calamity.

They never believed in regulation anyway.

1 What would best describe your stance heading into the coming week of trading? Bullish Bearish Neutral 2 Which of these sectors do you think is set to move up in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities 3 Which of these sectors do you think is set to move down in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities View the results without voting