5 Lies About Paulson’s Plan

Opinions abound when it comes to Treasury Secretary Henry Paulson’s proposed $700 billion bailout plan for U.S. banks. And a lot of them are negative. But Cramer’s a strong supporter, and he used part of Tuesday’s Mad Money to clarify what he sees as people’s misconceptions about the plan.

It doesn’t address the real problems of people losing their homes.

Wrong. Declining home prices are the reason owners are either walking away or being forced out. Paulson’s plan puts a stop to the root cause of this: foreclosures. Other housing-related problems, from making mortgage money available to shrinking inventories, are being solved. This plan takes care of the last one.

The plan costs too much.

Actually, it might not cost anything. Once Paulson’s plan is put in motion, home-price depreciation should stop. That means the mortgage-related paper the government will then hold would no longer be worthless. Plus, the government can work with owners in any way necessary to keep them in their homes. And it looks like Washington will be taking an equity stake in any company that takes part in the plan, which means there’s even a chance to make money rather than lose it.

Executives will be overpaid.

Cramer’s suggestion: Create an executive compensation board. Or make the executives waive their salaries for 2009 if they participate. They can afford, and they probably don’t want to end up like Lehman Brothers’ Dick Fuld.

Banks will be forced to take huge write-downs once we discover what the government’s paying for these troubled assets.

Banks like Wells Fargo, Bank of America and US Bancorp have already written the loans down. So this plan helps them; it doesn’t hurt them. And if there are weaker banks out there that can’t take the hit, then so be it. Let the FDIC sell off their deposits and then absorb their bad assets. This type of arrangement is perfect, actually, for Morgan Stanley and Goldman Sachs, Cramer said. Don’t listen to the naysayers who think the two former investment banks made a mistake by becoming bank holding companies. The new deposit base will increase their values.

There’s no rush here.

Last night, Washington Mutual’s debt was downgraded again. We need this legislation, Cramer said, to ensure that if the bank goes under that its deposits can be sold and mortgages put into a Resolution Mortgage Trust. Anything less could cause a 1930s-style run on all the banks.

Keep this in mind, too: There’s a good chance that all we need is for Congress to pass the legislation in order put a floor under this mess. Once that happens, Cramer thinks the private sector could jump in and the government won’t even have to buy any of these troubled assets. That’s how much confidence a Washington intervention could instill in this market.

Then again, there is the alternative.

“This plan must be passed and passed now,” Cramer said, “or I am giving you a prediction of a sequel to the Great Depression.”

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

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