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How to Survive the Banking Meltdown

Washington’s rush to save Fannie Mae and Freddie Mac is great for mortgage seekers, Cramer said, but don’t expect it to help the banking industry.

Banks trade on earnings and dividends. And with millions of home loans in default, banks aren’t getting any of the former, so they’re slashing the latter. Therefore, these stocks cannot be owned.

Of course, that doesn’t mean you run out and withdraw your money in a panic. In fact, Cramer said bank deposits should be safe. But bank stocks are another story – one with the potential for a very bad ending.

Cramer’s expecting the IndyMac scenario to repeat itself. And even bigger giants could take a fall next time around. So here’s how you steer clear of a potential mess: Avoid bank stocks that trade under $5. Once they hit that mark, Cramer said, they’re a candidate for government takeover.

A stock that’s sunk that low has all but had its equity destroyed. So most likely there’s no chance of a turnaround. Actually, at that point Fannie or Freddie will probably take over the bank’s bad loans. Anything valuable that’s left over would go to the few banks in position to buy, maybe Wells Fargo, JPMorgan Chase or US Bancorp.

Who are these bad banks of which Cramer speaks? He broke them up into two tiers:

The Worst: Downey, Corus , FirstFed Financial and BankUnited.

Almost as Bad as the Worst: National City, Washington Mutual and First Horizon.

Citigroup, Wachovia and Bank of America shouldn’t be owned either, Cramer said.

In a market environment such as this one, you have to focus on preserving capital. Avoiding these banks is a good first step.

Questions for Cramer? madmoney@cnbc.com

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  • Jim Cramer

    Jim Cramer is host of CNBC's "Mad Money" and co-anchor of the 9 a.m. ET hour of CNBC's "Squawk on the Street."

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