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Washington Fends Off Shorts, Banks Breathe Easy

Cramer’s tale of how short sellers have ravaged the financials virtually unrestricted would probably shock retail investors, who simply buy and sell stocks in hopes of a secure retirement. During Tuesday’s Mad Money, he explained in vivid detail how bank after bank was targeted and brought down for immense profit, wreaking havoc on the markets. Luckily, though, at least for everyone besides the short sellers, Washington’s most recent bailout plan should put an end to bear raids on the financials.

Watch the video for Cramer’s full explanation of how these shorts coordinated their attacks on banks and brokerages like State Street, Bank of New York, Morgan Stanley and Goldman Sachs. But the abridged version is that shorts used everything from credit-default swaps to put options to rumors to short selling to hammer down a stock, all the while making piles of cash in the process. It’s a story of how lack of regulation on Wall Street can cause such devastation that the problems spill over to Main Street.

But yesterday’s agreement between the federal government and key U.S. banks – Bank of America, Citigroup , JPMorgan Chase, Wells Fargo, Merrill Lynch, State Street, Bank of New York, Morgan and Goldman – has removed a key piece of the short sellers’ strategy. The government is now providing capital to and insuring the debt of these banks, so their solvency is no longer in question. With that variable erased, shorts no longer have a basis for attack. There’s no point then in buying credit default swaps on debt insured by the U.S. government. That’s a waste of short sellers’ money.

So it looks like it’s time for the shorts to cover their bets against financials, Cramer said. They’ll have to find another sector to raid.




Jim's charitable trust owns Goldman Sachs, Morgan Stanley and JPMorgan Chase.

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