Cramer: Capital Crime, Capitol Punishment

This commentary from Jim Cramer taking issue with President Obama's proposal to rein in banks first appeared Monday on TheStreet's RealMoney.com.

Nobody had more to do with breaking the back of inflation in this country than former Fed Chairman Paul Volcker. Thirty years ago, he stopped it in its tracks with higher interest rates. He was on top of his game in a way that many argue ultimately produced the great bull market that ended in 2000.

However, just as there are instances where other finance seers (as opposed to financiers) subsequently lost their way, especially Bob Rubin, a once revered Treasury Secretary, now known as presiding over a bank one-third owned by the federal government because of actions he approved, the question to ask is whether Volcker, an icon 30 years ago, still has a keen understanding of what went wrong in this banking crisis.

To wit, I cannot recall a single instance where proprietary trading, internal hedge funds, or private equity played a role in creating the banking mess that President Obama has decided to focus on with his much-ballyhooed "Volcker Rule."

Almost 100% of the problems that caused TARP and the U.S. guarantees are directly related to poor lending decisions and a lax regulatory environment directly traceable to the state and federal governments. A Volcker Rule wouldn't have stopped any of it.

Take them case by case. First, there were two major financial institutions that literally saw runs on the bank, causing the FDIC to seek bank help and offer risky government guarantees to acquirers. The two that needed multi-billion dollar guarantees to be purchased were Washington Mutual and Wachovia(WB), both because of horrendous and injudicious lending directly by Washington Mutual and indirectly via Golden West, a terrible acquisition by Wachovia. Of those two, only Washington Mutual needed real government help as Wells Fargo(WFC) swept in and voided a government-guaranteed plan for Citigroup(C) to buy Wachovia. Washington Mutual and Wachovia were mortgage lenders, not prop traders or private equity investors. Neither had hedge funds.

Citigroup's need for federal intervention came from gigantic off-balance-sheet instruments made up chiefly of first and second mortgage loans, not prop trading, of which it did little, although it did have some private equity exposure. The latter's losses were totally manageable and did not even rise up to the level of material losses. Citigroup did not have an internal hedge fund.