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If you break the cycle of short-and-no-cover, you can win.
I know that wasn't the purpose of the Anglo-French plan that we were dragged into, but it will be the effect, and the effect will be electric.
Let's just take an obvious example:
State Street (STT Quote - Cramer on STT - Stock Picks). This is a longtime conservative trust bank that is an important custodian for life savings and for mutual funds. For a year now it has been under assault as an institution that has too much leverage in hard-to-value asset-backed instruments. The idea that a custodian could fall apart is something that shakes every money manager to his core and causes him to take his money out of cash and put it in T-bills. That's been going on for ages now, and I know money managers who are scared to death to keep their money "in the system," which is State Street, something that instills panic across the board.
When you hear that and you are a short-seller you know what to do: You plunk down $25 million to buy credit default swaps to wager against the firm's debt, then you buy position limit puts and then you short the stock along with all of the other like-minded souls you talk to every day. You get the stock rolling downhill, then you buy a second set of swaps, paying double the price -- doesn't matter what the vig is when you know you are going to win -- and then you call the media and you tell them that everyone's pulling their money out of State Street and the credit default swaps are spiking huge and then the media goes out and reports on it. The company is helpless to refute it as the problem is being
caused by the sellers because it is pretty much business as usual in a very tough time, and the stock gets hit again. Other hedge funds get wind, they short it down further, longs panic and then the credit agencies put the company on notice because where there is smoke there must be fire. Then the clients pull as much money out as possible and voila, the end of State Street.
We have seen this run several times. Frankly, I don't know how State Street stayed in business.
Until this morning, the only policy that had been put in place to stop this destruction of capital by the shorts -- and I fully concede that State Street may have made mistakes, but I will not concede that those mistakes should have made it be wiped out -- was an out-and-out short-selling ban. That was ludicrous, but what do you expect from this
SEC that eliminated the uptick rule right in the teeth of the greatest bull market and allowed naked shorting to go on illegally?
Now what happens? You can buy all the credit default swaps you want on State Street, the nefarious plan won't work because the debt you are targeting is insured by the U.S. government, so why would anyone then pay up after you to spike the debt? What's the point? You can't take out insurance against a company's debt when it is backed up by the full faith and credit of the U.S. government. By the way, the exact same trade was being put on against
Bank of New York (BK Quote - Cramer on BK - Stock Picks) -- that will end the targeting of that institution too.
Jim Cramer
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