The Black Hole
- When things get bad enough, a single company can bring down a sector or even the entire market. Cramer called this his “black hole” theory and said there are a bunch of black holes in the market.
- He singled out AIG, Washington Mutual, Citigroup and Lehman Brothers as the black holes in the financial sector, along with General Motors and Ford in the auto sector.
- “These stocks could simply vanish,” he warned. Cramer said the markets simply cannot have a meaningful advance until all of these black holes are filled. He then outlined his plan for fixing all the financials in one foul swoop, while acknowledging the plan could cost upwards of $1 trillion.
- Cramer said first the federal government must step in and give these companies 30 days to raise capital or be taken over. If the companies fail to do so, the bad loans get transferred to a resolution trust, while the good assets get sold to the highest bidder.
- Next, Cramer said the Federal Reserve must lower interest rates by 50%, a number which may seem unheard of now, but mirrors that of where rates were just 5 years ago.
- Finally, Cramer said the government must then take advantage of the low rates, along with the millions of loans it would own, and refinance and restructure as many as possible to save both homeowners and the economy.
We’re not too sure how this new ‘black hole’ theory sits with his earlier assurances that the market would not go below the July lows, but we have to admit that it’s an interesting solution which he proposes.