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Cramer: Geithner Deserves Better

Stock quotes in this article: JPM, C, AIG, WFC, GS

NEW YORK (Real Money) -- The insanity revolving around the critiques of Tim Geithner's Stress Test shows precisely why there will not be a resolution any time soon about the bank stocks and their detractors.

The near-universal condemnation of Geithner stems from his perceived "coddling" of the bankers, with that word probably being the single-most overused term when it comes to Stress Test.

This judgment is infuriating to those of us who watched the chaos unfold because it presumes that once the systemic weaknesses were revealed, Geithner swung into action to protect the very people who caused the near collapse of the American financial system. They blame Geithner for all sorts of sins. These observations are so often off the mark that you can see the agenda seeping into the critiques, the agenda being that the bankers and the system wasn't worth propping up and was only done so because Geithner either wanted to buddy up or was buddies with those in the system we most abhor.

As someone who was so critical of Geithner during the early days of the chaos, someone whom Geithner freely admits was right to call him out at the very beginning with my "they know nothing" rant, I find all of this criticism rankling and largely uninformed.

First, Geithner says repeatedly that he got it wrong from the get-go. Neither he, nor the staff of the New York Fed, saw the subprime crisis developing because he, along with pretty much everyone else in government and business, didn't believe we could have a sustained multiyear downturn in the price of housing because it had only happened once in the Great Depression and that was directly related to the collapse in the banking system before federal deposit insurance. Geithner does absolutely nothing to defend himself for this lack of clairvoyance and simply kicks himself for getting it wrong. His only real alibi, if you will, comes because there was so much banking outside the banking system, chiefly mortgage mills long since disappeared, which also relied on the same set of statistics. Was that Geithner's fault? Hardly. Not only that, but the regulators for the worst actors in the system, the thrifts such as Washington Mutual, were totally clueless, especially the captured Office of Thrift Supervision.

How about the constant charges that once the problems were discerned he did nothing to stop them? Because of his own lack of insight and lack of insight of many others, almost every action came as a firefighter, not as a preventer of fires.

Like unhappy families, each fire was dysfunctional in its own way. Bear Stearns had based all of its models entirely on housing having no more than a two-year downturn. It had been packaging mortgages for eager hedge funds believing that the 2005 and 2006 "vintages" were the only real problem and that there were enough mortgages in each bond that investors would be protected. The investors, for the most part, were initially sophisticated hedge funds reaching for yielding by borrowing huge amounts from Bear in the short-term paper market and then failing to come up with the capital needed to maintain their positions when the bonds started sinking. You can easily blame Bear for being really stupid, as even its own in-house managers failed to see any of this coming. But when the Justice Department brought a case against these managers and failed to convict, it ended the possibility of accountability in the system and set up a free-for-all where salespeople felt free to jam unsophisticated clients with paper that they had no idea was filled with failing mortgages and felt protected anyway because of mortgage insurance.

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