Cramer's Black Hole Theory of the Market

There are black holes in this market that are striking fear into investors’ hearts, Cramer said during Thursday’s Mad Money. Don’t expect any relief until those holes are filled in.

Who are these black holes? Lehman Brothers , AIG and Washington Mutual , along with Citigroup , General Motors and Ford. On a smaller scale, there’s trouble in Downey Financial, Corus Bankshares and BankUnited Financial , too.

Europe seems to be haunting both Lehman and AIG, as overseas subprime loans and insurance for bad paper, respectively, drags on the companies. But lack of proper disclosure, thanks to a lax SEC, makes it hard to see just how back things are. Washington Mutual has too many losses to bear on its own. There are serious problems that needs to be solved here, and with a plan it’s very likely that Lehman, WaMu, and AIG could all go under.

Lack of action on the part of Washington is already creating problems, but things will get worse if we don’t do something now. Many the other financials will win out over the long run, but the failure of any one of the previously mentioned institutions would devastate the rest of the sector in the near term.

The market can’t move on until all of this is worked out. Cramer wants Goldman Sachs to takeover Lehman, Wells Fargo to absorb WaMu, AIG to be broken up, Citigroup to sell off some of its divisions and maybe find some big-money backers overseas. The government should give GM and Ford $50 billion in return for a pledge to build natural gas-fueled cars. It might cost as much at $1 trillion, on top of all the other losses we’ve seen so far, but Cramer thinks it’s a small price to pay to avoid another Great Depression.

Think about it: If these companies collapse, it isn’t just the CEOs and shareholders won’t be the only people punished. The rest of the industry will take a severe hit, too. So, too, might the 14 million people who took out mortgages between 2005 and 2007. That could lead to a disaster at least as bad as what we saw in the 1930s, Cramer said. So if you’re the type who’s saying that we should just let these companies go under, remember this: Herbert Hoover had the same attitude.

Strange then that our government has no plan to step in, has in no way, despite Bear Stearns, IndyMac, Fannie and Freddie , indicated that its actions are head of the curve. Cramer, of course, is, and during today’s show he offered up these ideas to get us back on track.

1. The Feds tell Lehman, WaMu, Citigroup, Downey Financial, Corus and BankUnited they have one month to raise capital. If they fail to raise enough, they get seized. The bad assets then get put into a Mortgage Resolution Trust and the good stuff gets sold to better-run banks.

2. Once that Mortgage Resolution Trust is set up, the government would have to restructure as many mortgages as possible. If the Federal Reserve made a bold move and cut rates by a full 1%, that would help immensely. Alan Greenspan did this in 2003, so it could be done again, especially considering the environment right now is dramatically worse now than it was then.

Until Cramer’s two ideas become policy, until the black holes are filled in, the financials will continue to suffer, he said. But Wall Street might be sensing a bottom in these names, so the end could be near. At least that’s what some of the market action said today.

Questions for Cramer?

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