What do you call it when the stock of the country’s fifth-largest investment bank trades at $50 on a Thursday and at $3 the following Monday? It’s been called the most dramatic fallout from the credit crisis, an epic stock analysts’ whiff, and one of Wall Street’s greatest collapses. All true. But I call it something else. I call it a bottom. Not just for the stock itself, which happens to be the venerable Bear Stearns, but for the whole stock market, and for the long-suffering housing market, too.
For the past eight months we’ve been in a terrible bear market in this country, with the Wall Street averages cascading down by double-digit percentages, and many banks and brokerages losing more than 50 percent of their value. Throughout the decline we’ve seen a complacent Federal Reserve and an indifferent Treasury Department that have seemed more worried about inflation than about deflation or losses, not just in stocks but in the most important assets for the vast majority of Americans: their homes. The Fed and Treasury wrote off their critics as alarmists and doomsayers, when, in fact, they had no idea of how bad things were. That changed the weekend Bear Stearns collapsed. The overnight demise of the bank, one that traded at $150 a year ago, finally woke up Hank “Rip Van Winkle” Paulson and the professor Ben Bernanke to the harsh reality: The whole darned banking system is drowning in a toxic sea of bad home mortgages.
Prior to Bear’s fall, neither man seemed to understand that the contagion of defaulting mortgages could not be contained by calm words or little salami-style rate cuts. They stuck by their laissez-faire approach of letting the market work its magic, even as it became clear that almost every bank and broker in this country, with the possible exceptions of Goldman Sachs and JPMorgan, was threatened with extinction. That they could sit back and let the mortgage-default problem, so obvious to millions of beleaguered homeowners, fester is beyond belief. In the end, it took the panic and failure of one of Paulson’s own (Paulson ran Bear competitor Goldman Sachs before he took over at the Treasury) to force him and his Washington colleagues to realize the ship was sinking and it was time to start some serious bailing. No matter that they used to speak about the moral hazard of saving the rich hedge funds; by guaranteeing Bear a buyer, the Fed eliminated the possibility that the fat cats who banked with Bear would lose their money or have it frozen, as would have been expected in a bankruptcy. Sure, they punished Bear’s shareholders, but they gave away the federal store to JPMorgan’s shareholders in a desperate bid to keep the world’s markets from crashing, something that would most certainly have happened if JPM hadn’t stepped up. And believe me, the only character who ever played more hardball with the government than the CEO of JPMorgan, Jamie Dimon, was Michael Corleone when he negotiated his casino deal with Senator Geary in Godfather II. Like Michael, Dimon basically told Treasury and the Fed, “My offer is this: nothing.” The Feds countered with $2; Jamie Dimon said, Throw in $30 billion in loan guarantees against Bear’s bad mortgage portfolio—the Corleone equivalent of Geary’s putting up the fee personally for the casino’s gaming license!—and you get your deal done in time to save the free world’s financial system. The government, which had been hoping to get $20 for Bear, a $10 haircut from Friday’s close, had no choice, and Dimon got his casino, with a billion-dollar headquarters thrown in.
And you know what? That $30 billion from the Fed will turn out to be a small price to pay for a bottom in the stock market after the beating we’ve taken over the past eight months. We’ve been through dozens of false bottoms, but this time, with the Fed and Treasury basically saying they will do anything it takes to save the system, you finally have a floor that can hold the weight of America’s savings. Mind you, I don’t think we’ll have a meaningful rally up from the current levels until we’re closer to the election (the uncertainty of an election almost always means we go nowhere). But now, at least, I feel the bear has been tamed, and the worst of the clawing is over.
For some parts of the economy, we’d already bottomed, courtesy of the pathetic weak-dollar policy that our president foreordained by spending billions in Iraq while cutting taxes. That meant companies that export and transport goods—steel concerns, railroads—were already hitting new highs even as the market had dropped 13 percent for the year.
But the JPMorgan-Bear deal eliminates the prospect of the mortgage crisis’s taking down any other institutions, because JPMorgan went up the equivalent of $15 billion right after it pants’d the Fed and Treasury. They are calling Dimon “Jamie Potter Dimon,” after the Lionel Barrymore character who tried to buy the Bailey Bros. Building & Loan for 50 cents on the dollar when that moron Uncle Billy left the deposits at Potter’s bank. Except in this version, to mix movie metaphors, Potter gets Bear for pennies on the dollar, give or take a few cents when the stunned Bear Stearns stockholders haggle, no doubt successfully, for a higher price. We know now, though, that once you can handle a panic for one bank, you will handle a panic for another and another still. I’m sure a host of solvent banks will be banging on Treasury’s door to get the same deal when the next domino falls. There are probably a dozen white knights who want to see their stocks rally when they fleece the Fed to save the market.
With the systemic risk taken off the table, you can even see a possible end to the housing crisis that got us into this soup. Mortgage rates are at last leveling off, because the federal government has begun to cooperate with Fannie Mae, rather than choke it to death because it leans Democratic at times. The bulk of the most crippling mortgage resets, the so-called 2 and 28 loans, is going to be done in the next six months. And given the big decline in the number of homes being built, oversupply won’t be the issue it was before the credit crisis started. I don’t know a soul who’s predicting an immediate end to the national decline in home prices. But I think that the upticks in the stock market, particularly in banks and home builders, are foretelling the truth: The worst will soon be over.
For some time, I’ve suggested owning only agriculture, infrastructure, and oil stocks, stocks buoyed by the strength of foreign economies. With the bailout of Bear and the implicit guarantee from Treasury that Paulson’s legacy will not be one of advising another Herbert Hoover to worry about inflation while a depression looms, pretty much everything else can at last join the party. I’d say one of the best buys, even after the post-Bear-acquisition bump, is the big winner of the Federal Reserve fire sale: Jamie Dimon and JPMorgan.
James J. Cramer is co-founder of TheStreet.com. He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions he takes may change at any time. At the time of this writing, he owned Goldman Sachs for his charitable trust. E-mail: [email protected]. To discuss or read previous columns, go to James J. Cramer’s page at nymag.com/cramer. Get all of James J. Cramer’s stock picks via e-mail, before he makes the trades, by subscribing to Action Alert Plus. A two-week trial subscription is available at thestreet .com/aaplus.