A Moratorium on New Financial Products?

Wall Street right now looks a lot like World War I.

Just as the “high-tech” weaponry of that era vastly outpaced people’s ability to handle it, Cramer said Thursday, we are virtually powerless against the damage caused by today’s financial products.

First we have double- and triple-leveraged exchange-traded funds, which hedge funds and other institutional investors used to pummel the banks during the financial crisis, nearly bringing down the entire system. And just last week a new group of ETFs, which will mimic hedge-fund investing strategies, hit the market. They are so potentially dangerous that legendary investor and Vanguard founder John Bolge said it was “insanity” that they even existed.

Then there’s high-frequency trading. Sure, proponents say it provides liquidity to the markets, but, as Cramer said, “they have turned the playing field into a war zone,” driving retail investors away from stocks.

And what happens when those overleveraged ETFs and high-frequency trading meet in the open market? A flash crash maybe? Because that’s part of what caused the Dow’s near 1,000-point drop back on May 6. The algorithmic programs of the high-frequency traders detected the big orders from some of these ETFs and then pulled out of the stocks.

So, just as the US government has stopped all drilling in the Gulf of Mexico until BP’s disastrous spill is brought under control, Cramer thinks the Securities and Exchange Commission should stop the introduction new financial products to the market. Too many people are getting hurt.

“We need to halt these innovations,” Cramer said, “until we reevaluate their consequences on the market, on the public.”

Especially the public. Cramer’s worried that retail investor in particular a bearing the brunt of the pain. The SEC is bringing charges against Goldman Sachs for doing business with a sophisticated German bank, he said, but at the same time does nothing to protect the average person against “rapacious products like the ultra ETFs.”

A big part of the problem, Cramer said, is that these products were, particularly those ETFs, tested during the greatest bull market in history, when the market was crowded with investors and the trading volume was high. But they haven’t stood up to the test of these past couple of years when the market was at its worst.

Cramer wants the SEC to pause in order to find out the actual worth of these products, what they add to the investing world. Because right now they remind him a lot of the “portfolio insurance” that was popular back in the mid to late 1980s. The insurance was supposed to protect institutions from downside but not only did it not do that, it actually caused the downside. That’s what today’s innovations are doing all over again.

“Portfolio insurance went away,” Cramer said. “These instruments should, too.”

When this story published, Cramer's charitable trust owned BP.

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