The past 24 hours have swirled with talk of good and bad banks and President Obama’s plan to stabilize the financials. The government now is hoping to purchase banks’ toxic assets in an attempt to clear up balance sheets across the sector and get these institutions lending again. Stocks rallied as a result, even those that won’t necessarily benefit from the move, sending the Dow up 201 points, as Wall Street seemed to think a solution to the credit crisis had been found.
But Cramer doubts it’s as easy as that. He’s wondering if any company will be able to dump its ailing assets into this bad bank, such as MetLife’s commercial real estate holdings, State Street’s asset-backed paper or insurers’ annuities. And will Obama allow taxpayers to carry the burden of putting these companies back on their feet without any conditions at all?
Probably not. The new president has made clear that his priority is the average citizen and not major corporations. So in all likelihood Obama will extract some payment from the banks in exchange to buying up their toxic assets, whether it be taking part of a company’s common stock, eliminating its dividend or appropriating its earnings. The bottom line, though, is that we just don’t know enough about the plan’s details to react so positively.
Cramer thinks we’ll get something very similar to the Resolution Trust Corp. that was used during the savings and loan crisis of the late 1980s. In fact, this is exactly what the Mad Money host has been calling for all along. But if that’s how Obama’s plan works out, investors should know that the common stock of all participating institutions took a major hit. The initial rallies that followed the creation of the RTC, just like those we saw today, gave way to sell-offs.
The only companies that survived were those that didn’t need government help in the first place. And more than that, these banks thrived as they bought up the healthy parts of competitors who were failing. Cramer thinks JPMorgan Chase and Wells Fargo are the only two banks right now that fit into this category. Wells Fargo’s so strong that the company didn’t even want TARP money when it was offered, but then-Treasury Secretary Henry Paulson forced them to take it. So both JPM and WFC should be bought on any pullback, if President Obama uses an RTC approach to solving the banking problem.
Just to be clear: Cramer likes the good bank/bad bank idea. As we said, he’s been pushing for it. It will right the financials and take foreclosures off the market. He just wanted to emphasize that we don’t know the whole story yet. All we do know is that JPMorgan and Wells Fargo are the only banks worth buying.
Cramer's charitable trust owns Wells Fargo.
Questions for Cramer? firstname.lastname@example.org
Questions, comments, suggestions for the Mad Money website? email@example.com