The government is buying Fannie Mae debt, sending down mortgages rates and driving up much-needed refinancings. Asset-backed bonds, an investment class all but shunned over the past 18 months, are being guaranteed. Most important of all, though, is the investment in Citigroup.
Rather than wiping out shareholders, investors in what was once the U.S.’s largest bank could possibly see upside in their stock. Twenty billion is being injected into Citi, and over $300 billion will backstop troubled assets. Plus, management’s been given the chance to turn the company around. It’s a much softer approach from Hank Paulson, Ben Bernanke and Tim Geithner than we’d seen with Bear Stearns, Fannie and Freddie Mac, and especially Lehman Brothers.
That’s why Cramer rejected the idea that Washington’s been in the bailout business this year. A bailout is money given to companies that taxpayers won’t see again. And Paulson and his cohort have been so sensitive to letting Wall Street off the hook that they’ve actually been much harder on the Fannies and Freddies and than you might think.
After all, Fannie and Freddie saw their preferred stock wiped out, a devastating move since this is how financial institutions raise capital; Lehman was left to fail outright; and Washington Mutual and Wachovia were pressured to sell (but Wells Fargo actually was able to buy the latter without government help). None of these situations smack of a bailout. In fact, Cramer’s confident that the government – and taxpayers – will see returns from money given to these companies.
The closest we’ve come to a bailout so far was AIG. And we’ll get even closer, Cramer said, if and when we start dishing out cash to GM and Ford. But in the meantime, moves like that with Citigroup have restored some semblance of faith in Washington’s decision-making. The investment in that bank was the first legitimate attempt to focus on reducing the systemic risk we’ve been facing rather than punish Wall Street for its excess. And this is why Cramer thinks certain stocks can be bought once the Dow dips below 8,000.
Which stocks? Cramer still likes defensive recession plays, in addition to the accidental high-yielders he’s been discussing for the past month or so.
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