Jim Cramer's Best Blogs

But the biggest need is to find a way to get rid of these mortgages in a comprehensive fashion that frees up capital that is tied up financing this junk.

The plan is vital, and if it fails, we will have a string of bank failures. House price depreciation continues to crush the value of both the whole loans and the collection of home loans that are bundled into collateralized debt obligations.

The CDOs are almost impossible to unwind, that's what we have learned from this last year. But there are plenty of whole loans that can be sold to the government. Everyone is worried about the hit to capital the banks will have to take -- and the hits that other banks that have not written down the loans to date will have to take.

There are three ways to approach this:

1. Put out a bid list of mortgages and make it so it is high enough to not wipe out the banks but low enough to make money for the government. You might want to bid 50 cents for 2006 vintage for some ZIP codes with good loan to value, or 60 cents for 2005 vintage with excellent loan to value. But regardless, that's detail we should not get lost in.

2. The government can take equity stakes in the banks or just pay them outright for the money. I am indifferent, but the equity stakes allow the government to profit from the automatic increase in value the banks should have if they have already written down the portfolios. Banks that haven't taken the hit will have to, because the banks with similar assets will have to mark them down unless we suspend the ridiculous mark-to-market stranglehold and we allow losses to be taken over time. That's why we need a rate cut, because the banks will be able to rebuild capital against the losses very quickly through the net interest margin increases.

Either way we will have bank failures anyway, and we can then have a formula where the feds just seize the bad loans, dump them into the program to get them off the market and sell the deposits to the Wells Fargos (WFC Quote) or the Goldmans (GS Quote) of the world.