This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Cramer: How to Get Ready for Lehman II

Please enjoy this free sample of our premium content featuring Jim Cramer. To get all of Cramer's premium content free for a limited time, please register here.

NEW YORK ( RealMoney) -- What makes a Lehman? What makes it so it's not Citigroup (C - Get Report), which could be saved by capital infusion, or Wachovia, which could be saved by merger, or Washington Mutual, where some securities are saved and others aren't?

The answer? The brokerage business. The way a brokerage business works.

Which brings me to SocGen. We have heard endless denials that anything is wrong with SocGen. Yet it keeps going down.

What does that mean?

I think it means something is wrong. I do not think it means something is right and people don't want it to be right. I do not think it means that the shorts are just spoiling for a fight to take it down. I think there are fundamental problems having to do with SocGen that are sui generis -- meaning the other guys don't have them, as it is isolated to SocGen. And, like Lehman, I am not sure that the people running SocGen really get the gravity of the situation.

Let me explain. Most banks here borrow money from depositors or borrow money in the markets and from each other and lever it. Many banks in Europe do the same, but they also buy sovereign debt and lever that. If you are buying U.S. debt and borrowing against that, then you don't have too much to worry about. Maybe some interest rate risk. Not default risk.

Many banks in Europe bought sovereign debt from EU members. They levered against that. Now, just substitute "subprime debt" for "sovereign debt" and you can see the problem with levering against it. As long as the stuff's at par, you have no problem with capital. When the stuff falls like subprime, then it is dangerous to lever against. Europe's very loose with the rules about how much you can lever up on sovereign debt.

Our rules are tougher; our regulators are tougher. We have to presume that many banks there, particularly French banks, are valuing subprime sovereign debt as par so they are vastly overlevered. Left to their own devices, these banks are all Citigroup, meaning that they need to have capital injected and equity watered down. If it is really bad, then you have an RBS situation on your hands, a real dilution that makes it basically a government-owned bank.
1 of 4

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
C $53.28 0.00%
AAPL $113.29 0.00%
FB $91.01 0.00%
GOOG $630.38 0.00%
TSLA $248.48 0.00%

Markets

Chart of I:DJI
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 +1.21 0.06%
NASDAQ 4,828.3250 +15.6170 0.32%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs