Jim Cramer's three-part post which follows, on President Obama's proposal to rein in banks, first appeared Monday on RealMoney. Click here for a free trial, and enjoy incisive commentary all day, every day.
Be sure to read part 1 and part 2 of this piece.
The disingenuous discussion of
problems by Congress has led to an ill-informed populism and backlash, based on a decision by the government not to seize the firm, but let it operate as a basically government-owned institution that paid bonuses to retain people from the non-London offices, just to keep the losses more manageable. The inability of anyone to explain this satisfactorily has led to the public outcry. And the fact that one of the insured institutions that got a make-good was
is the crux of the current problem.
Which leaves us with, alas, Goldman Sachs, which did have prop trading, did have hedge funds and did have private equity under its roof. The lunacy of the Volcker Rule is well evidenced by Goldman Sachs itself. The reason why Goldman did not fail involves risk management and a lack of concentration on one product: It was diversified to the point that nothing could bring it under. One could argue, cogently and sardonically, that unless firms adopt the Goldman business model, they should be closed, and that if they had, we would not have been in this predicament. This is why the outrage is so great. Goldman was also saved by credit default swaps, which insulated it from client losses on counterparty risk. It also was able to short real estate when others sought the risk of it to boost returns. Another issue of where it would run afoul of the Volcker Rule, another issue that saved it.
Two other instances must be addressed on this topic:
Bank of America
. The former, because it was most similar to the Goldman model, was able to provide the assistance the government needed to prevent further major bank failures. The diversified nature of the business -- because of the anti-Volcker Rule model -- kept that company from failing. Plain and simple. That and, like Goldman, appropriate risk management. Ironic, isn't it, that Volcker's Rule might have made JPMorgan look a lot more like Wachovia or Washington Mutual, the two banks that experienced runs.
Bank of America's problems, until it bought Merrill, stemmed from reckless mortgage lending, chiefly from Countrywide. I thought that the government should not have allowed this deal, because it gave BAC too great a share of the mortgage market. I felt the same way about
Wachovia buy. But the GOP-led government didn't care. Now the Democrat-led government does. It certainly has the right to turn around and try to break up BAC, but such a move after the encouragement of the deal seems pretty outrageous.
The Merrill fiasco was a bad business judgment by BAC, as the now defrocked Ken Lewis took on way too much risk with the deal. When he tried to back out, the feds made him keep his promise. He then needed assistance because of this acquisition. Merrill's business model was similar to Goldman's, with one exception: the heavy issuance of reckless mortgages courtesy of a wrong-headed approach of pre-Thain management. Its prop trading, hedge fund and private equity businesses mitigated the losses, but were not enough to offset reckless lending.
Again, the diversification that the Volcker Rule prohibits helped for certain, but the bad mortgages, which, in some case, were unsold and buried into inventory, while others flowed back from hedge funds, destroyed Merrill. Again, ironically, considering the Volcker Rule, prop trading could have offset these losses, as could have the prudent use of credit default swaps. But Thain simply played by a rule that didn't exist yet and which the president now favors.
So, why Volcker Rule? Couple of reasons: One, it directly affects Goldman Sachs and Goldman Sachs only -- and that's the firm that had the biggest bonuses. The thought there is that because Goldman filed to be a bank, it needs to be regulated so it can't fail, and these businesses, despite their demonstrable impact of
Goldman Sachs, could make it fail.
I cannot see any other justification for this rule, as only Goldman Sachs had enough invested in these lines of business to be material.
So, why does all of this matter? Because it is pure intervention, aimed at grabbing the populist issue in a way that singles out the firm that made the most money. It takes advantage of the maximum headline moment.
There is no other reason for it.
Which is why it is so despicable in the eyes, not of Wall Street, but of the sophisticated observers of Wall Street who know better.
You know what is really brilliant about it, though? If you speak against it, you are speaking against an icon of great rectitude, Paul Volcker, and you are speaking for the right of Lloyd Blankfein and Gary Cohn to make tons of money. At this sad moment in America, the notion of supporting Blankfein and Cohn, two New York money men, is the equivalent of political or journalistic suicide.
So, call me suicidal.
At the time of publication, Cramer was long Bank of America, Goldman Sachs and JPMorgan Chase.
Jim Cramer, co-founder and chairman of TheStreet.com, writes daily market commentary for TheStreet.com's RealMoney and runs the charitable trust portfolio,
. He also participates in video segments on TheStreet.com TV and serves as host of CNBC's "Mad Money" television program.
Mr. Cramer graduated magna cum laude from Harvard College, where he was president of The Harvard Crimson. He worked as a journalist at the Tallahassee Democrat and the Los Angeles Herald Examiner, covering everything from sports to homicide before moving to New York to help start American Lawyer magazine. After a three-year stint, Mr. Cramer entered Harvard Law School and received his J.D. in 1984. Instead of practicing law, however, he joined Goldman Sachs, where he worked in sales and trading. In 1987, he left Goldman to start his own hedge fund. While he worked at his fund, Mr. Cramer helped start Smart Money for Dow Jones and then, in 1996, he co-founded TheStreet.com, of which he is chairman and where he has served as a columnist and contributor since. In 2000, Mr. Cramer retired from active money management to embrace media full time, including radio and television.
Mr. Cramer is the author of "
," "You Got Screwed," "Jim Cramer's Real Money," "Jim Cramer's Mad Money," "Jim Cramer's Stay Mad for Life" and, most recently, "Jim Cramer's Getting Back to Even." He has written for Time magazine and New York magazine and has been featured on CBS' 60 Minutes, NBC's Nightly News with Brian Williams, Meet the Press, Today, The Tonight Show, Late Night and MSNBC's Morning Joe.