The word “contagion” has littered virtually every major business news story for the past couple of months. Economists, investors and government officials alike have feared that the debt troubles of one European country, probably Greece, would fall domino style to the next, causing a rash of defaults across the continent.
This contagion has given rise to constant chatter about how European banks are “teetering on the insolvency,” as Cramer described it Thursday. The idea is that they will have a hard time accessing credit because other banks won’t want to lend to them, the same situation the US was in during the height of our financial crisis. For today’s Mad Money, Cramer wanted to focus one of the banks at the heart of this mess, Banco Santander , and offer his six-point plan to help remove that contagion threat.
“You fix Santander,” Cramer said, and “you eliminate a major problem.”
Why Santander alone? Cramer wasn’t saying this was the worst of the worst Spanish banks. Far from it, in fact. But it is too big to fail. It’s an international institution like Citigroup with broad holdings across the globe and a major domestic franchise that’s hobbled by bad loans and holdings. And no one yet knows how bad things are going to get, so both governments and banks must prepare for a worst-case scenario.
Cramer’s plan then is to find ways for Santander to raise much-needed defensive capital. Here is what he recommends:
First, slash the dividend. If JPMorgan Chase can do it, so can Santander. The bank paid out paid out 4.9 billion euros to shareholders in 2009. That translates into $5.9 billion dollars worth of savings.
Second, immediately to a secondary offering that raises $5 billion, again, just like JPMorgan did in June 2009 as a response to Treasury Secretary Geithner’s bank stress tests.
Third, sell Sovereign, Santander’s US business. Cramer thinks PNC Financial would be willing to pay as much as 1.5 times tangible book value, which would raise another $8.5 billion. There are also the bank’s holdings in Latin America, either in Chile or Brazil. Banco Santander Chile alone is worth $8.8 billion, while BS Brazil is valued at $32.9 billion. At least a part of that could be sold, Cramer said. And Santander needs to do it, as raising capital right now is more important than the company’s stellar emerging-markets exposure.
Fourth, Spain’s government should invest in Santander TARP style like the US did with banks here. Just give the government preferred shares with smaller interest rates than those offered in the States but warrants that are bigger.
Lastly, Santander and other European banks should have their Spanish bond portfolio guaranteed by the European Union. So far the EU has put together a bailout plan worth nearly $1 trillion, but Cramer wants a guarantee.
“Do these five things,” the Mad Money host said, “and, voila, we have just saved Banco Santander and made it again one of the strongest banks in Europe.”
When this story published, Cramer’s charitable trust owned JPMorgan Chase.
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