Cramer Vs. SEC's Cox

Securities and Exchange Commission Chairman Christopher Cox doesn't know his own rule book, Cramer said during Wednesday's Stop Trading!.

The Mad Money host was reiterating the same sentiment he shared with viewers yesterday, that Cox's announcement that he's banning "naked short selling" on Fannie Mae and Freddie Mac for 30 days shows the chairman is "out of touch" because the practice is illegal no matter which stock is involved.

According to an SEC report Cramer held in his hand during Stop Trading!, "Selling stock short and failing to deliver shares at the time of settlement with the purpose of driving down the security price is illegal." The report was dated April 11, 2005.

"I don't know what these emergency powers are," Cramer said of Cox's special announcement, "nor do you have to stop [enforcing the naked short selling rule] 30 days from now."

"I think Commissioner Cox should go back over his Division of Market Regulation bulletin," Cramer continued, "and realize he's had this power to stop this all the time." But the SEC has "not cared the least bit about this."

Naked short selling is the practice of shorting a stock without first borrowing it. It's become common -- even though it's illegal -- for traders to sell stock short without first locating shares for the transaction. This gives power players such as hedge funds virtual free reign to bring down a company's share price.

"The regulators, frankly, are very naive about what really goes on," Cramer said.

Cramer also criticized the SEC's repeal of the uptick rule, which requires a trader to wait for an increase in a stock's share price, an uptick, before he can sell it short. Cox said he only implemented the rule after rigorous analysis, but Cramer questioned the validity of that study.

"It was done during the greatest bull market in history," Cramer said. "Perhaps we ought to reevaluate it in the greatest bear market in 25 years."

This "laissez–faire" approach to regulation allows hedge funds to create "a level of fear that you can create a panic" because they can sell short and damage a stock with impunity. And it wasn't until the near death of Fannie Mae and Freddie Mac that the Bush administration felt it necessary to step in.

"This government doesn't care," Cramer said.

The best way to handle the Fannie/Freddie bailout, he said, was to issue a special two-year note, since "this will probably be over in two years." (All the worst mortgages originated between 2005 and 2007.) Use that money to fund a mortgage resolution trust, which will buy all the bad loans, and keep the healthy banks free and clear of the damage.

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