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Memo to the FDIC: Watch your back. The

SEC

just flipped its allegiance to the bad guys, the guys who want to break not just certain banks, but

your

bank! That's right, with the scrapping of the emergency rule that eliminated naked shorting, where you don't have to find the stock, and with the end of the vigilance against bear raiding, the SEC may have just caused a run at the FDIC.

I had hoped that the SEC would see that these financials have been manipulated to unreasonable levels, making the confidence in all institutions so low that nobody wanted to give them money. The rule change -- which when you think of it, wasn't much of a rule change as much as an enforcement of the way things are supposed to be, where you actually have to find the stock you sold short first so you don't fail to deliver -- worked!

It gave the system some breathing room. I think the rule change might have saved

Merrill Lynch

( MER) from being shorted into oblivion so it couldn't have done its deal.

Lehman

( LEH) didn't do a deal, those bad boys be back on the griddle now for unknown European exposure.

AIG

(AIG) - Get American International Group, Inc. Report

wasn't protected in the first place and I believe will need to raise $10 billion to $15 billion in the teens to cover its European exposure. Now there's little hope at all for

TheStreet Recommends

Fannie

( FNM) or

Freddie

( FRE), as their stocks will be blitzed into oblivion and Hank Paulson will have to start the planning of cash infusions as opposed to what he said last Sunday -- why did he say that, for heaven's sake? Maybe he's too close to John "We don't need capital" Thain from their

Goldman

(GS) - Get Goldman Sachs Group, Inc. Report

days.

But forget all that, let's talk about reality, let's talk about what could happen now, now that it is clear that not only is the SEC not extending these rules to other financials, as I had hoped, but is letting them expire.

Let's talk

Downey Financial

(DSL) - Get DoubleLine Income Solutions Fund Report

. Everyone knows this savings and loan is on life support. The headlines are just awful, the losses staggering, the deposits are running the wrong way, and it looks like another

IndyMac

is in the works.

Now, consider that more than 60% of the float of this bank is short, so it is virtually

inconceivable

you can get a borrow, so you shouldn't be able to short it, but naked shorting's allowed now, so you don't have to worry about a buy-in. Second, no upticks, so what's the point of waiting here?

You can only guess what the hedge funds will do now, right? The stock was down 25% yesterday. Why not just mash the stock to zero, the way IndyMac's was? I think that will happen today and tomorrow and Friday. By that point, the depositors will freak out -- I don't think they hedge funds will hire actors to stand in line, but there sure are enough of them unemployed in L.A. that it wouldn't be too hard to get 'em to hang out at 5 a.m. Just provide them coffee. (I wonder if the union would get angry?)

Anyway, with naked shorting and no upticking, the prospect of pinning Downey at 20 cents or 30 cents seems pretty likely to me.

Then the bank has to be seized. When it does, the FDIC's pressure hoard of insurance capital disappears quickly: Remember, it doesn't have any IndyMac takers yet because there is no mortgage resolution trust to dump bad loans to.

And voila, three days after the rules go away we have a bank panic all over again.

That's what I think will happen now. It just seems so obvious to me -- how can it not seem obvious to the SEC or the FDIC? Is it because, like the Ben Bernanke

Fed

, there are only academics and laissez-faire theoreticians running the joint with a handful of pols mixed in? Do you think they even know how the operation against Downey is going to work? Do they even know about this stuff?

I don't even think so or they would have extended the rule and broadened it.

I have seen the power of the rules in their ability to save even the worst of institutions that could be saved.

When the rubber hit the road in 1990 and I was shorting all of those failing bank stocks, the one thing that kept nagging at me was whether I could get a "borrow" on some of the worst ones, because everyone else was shorting them, too. In

Confessions of a Street Addict

, I documented how I got crushed on a

Rutherford Savings Bank

short I had when my broker could not find any more stock to lend me so I could stay short. I got bought in at a ludicrous price -- the broker just came in and bought the stock back well above the market -- and my quarter was almost lost.

That would never happen now, ever. Because the SEC doesn't care. Why? I don't know. My friend Mario Gabelli told me yesterday that he thought it was just because the academics sold them a book of goods that this stuff didn't matter. He could be very right. I think they are just over their heads.

I thought they may have figured all of this out after the July 15 bottom, but it turns out they really didn't understand that a return to the rules the way they were for 70 years was a good idea, as opposed to the laissez-faire garbage they believe in now.

Downey could have been Rutherford. It could have had a chance.

But not with this market. Not with this SEC.

Look out for this. It's Saturday's headline.

Be ready for it.

Oh, and I forgot something else: There are four or five Downeys out there right now that we all know about.

They will probably all meet the same fate in the same time frame now that the geniuses at the SEC have said all is well and good and the problems have gone away.

At the time of publication, Cramer was long Goldman Sachs.

Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. Outside contributing columnists for TheStreet.com and RealMoney.com, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. To see his personal portfolio and find out what trades Cramer will make before he makes them, sign up for

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