Cramer: European Banks Revisit 2008

This column by Jim Cramer originally appeared on RealMoney earlier Thursday. For a free trial to RealMoney, follow this link.

NEW YORK ( RealMoney) -- You would think after 2008 we would figure out a way to make it so you couldn't just take bank stocks down to zero and profit from the decline. You would think that we would have some of safeguards or ammo or defenses that would stop the madness where a fairly solid bank can stem the crash, and yes, it is a crash, of both the confidence and the stock price.

But you can't. For a variety of reasons.

Let's take this Societe Generale. First, I have no idea of how SocGen is really doing. It's a French bank. They are pretty opaque. They might be sitting on gigantic losses. They may have all sorts of sovereign debt. They are a global player which has now become a code word meaning "we have lots of derivatives everywhere so look out."

But I don't have to worry about how well they are doing because there is enough scandalous chatter and commentary including emails that have hit my desk titled "Brink of Disaster" that include SocGen and another bank that everyone tells me is a teeterer -- Unicredit of Italy, probably the next big raid, I figure --that I don't have to bother to check out the facts. Those who are short it and those who hate it -- at some points that seems like the majority -- have already told me.

Does it matter if it is right?

What we learned in 2008 is that things have a way of becoming self-fulfilling with banks. Once the confidence erodes, there's not that much there. It makes it so when the CEO of SocGen comes on air you listen and you say, "Wow, what a futile set of denials," even as he is probably telling the truth.

You would think that the amount of capital on hand could stem the decline. Our banks went through a real rigorous stress test. Everyone laughed at the time, but Tim Geithner forced gigantic capital raises and they have stuck. They worked. No more big failures here. But in Europe, they didn't. So you can bet that this is a fill in the blank situation: as soon as SocGen's knocked down enough it will be some other major European bank's time on the cross.

Why not? It's so easy. You can say it has huge exposure to sovereign debt and to company debt that will be annihilated by the coming slowdown and doesn't have enough capital. That fits the description of every European bank.

In our country it is a little different. They have raised the capital. They aren't that exposed to "global" risk any more. The survivors are more prudent.

But:

1. We have a slow-growth economy and you don't buy banks when there is slow growth.

2. The Fed has done everything it can for them to recapitalize but it can't print money for them. They need loan demand. There isn't much and confidence is real low.

3. They have had their normal way of making up for bank losses, fees, chopped by Obama and the anti-bank brigade.

4. They have meager dividends and it is all too fresh that they cut them. Most companies didn't have to.

5. They trade together and the government, in its moronic lack of wisdom, made them a free fire zone by creating instruments that allows you to use a little bit of capital to double and triple short them. Leveraged shorting for the little guy! Whooopee!

The good news in America is that most of the banks have "fathomable" losses and are making pretty good profits. They just don't have any growth. You buy stocks because of growth. That's what matters. Unless you want fixed income and these companies can't give you either, although the bank preferreds can.

The only exception to all of this is Bank of America ( BAC). BAC is unique because it has not been able to prove to people that its losses are fathomable. That's because of the fraudulence within the Countrywide portfolio and the open-ended lawsuits involving mortgages packaged by the entities within BAC.

Until those can be quantified we will constantly question the need for more capital.

Management's credibility has been on the line because it told us too many times not to worry about its mortgage exposure or its capital. Had it simply raised $10 billion when it could have and earmarked it for mortgage losses it would be higher, probably much higher.

Once again, I don't think this is 2008 here. I do think it is 2008 there, in Europe, but that they will be able to deal with it better having lived through our 2008. That said, the ease with which the stocks of European banks have been able to be destroyed simply by getting short, buying credit default swaps and then sending out emails and planting articles about "Brink of Disaster" tells me that we will be dealing these issues for months to come and that, at some point, the denials will mean nothing, and the bears will win with this remarkably horrible group, even as the fallout in the rest of the markets should be less pronounced.

The sad thing? It's not "they know nothing," over there. It is "they learned nothing."

They are learning now.

At the time of publication, Cramer was long Bank of America.

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