Friday, January 25, 2008

Jim Cramer: Dow Could Drop 2000 points

Jim Cramer: Dow Could Drop 2000 points

Yesterday Chris Matthews interviewed Mad Money's Jim Cramer.

About 2 minutes, 50 seconds into the interview Jim Cramer says the following:

"The stimulus package doesn’t do anything. … But there is an element – there is something I would urge all our candidates to think about and our Treasury Secretary. Which is that there are a group of insurance companies that insure all these bad mortgages. And I think they’re all about to go belly up and that will cause the Dow Jones to decline 2,000 points. They’ve got to be shut down and the insurance given to a new resolution trust. This is going to happen in maybe two, three weeks. It’s going to be in the front of every paper and no one in Washington is even willing to admit it. … This is MBIA and Ambac. … Remember Merrill wrote down a lot of stuff the other day and Citigroup. All these companies are relying on insurance to save them. The insurers don’t have enough money. There is also personal mortgage insurance – PMI is a company that does it – MGIC. … If these companies do not have the capital to make good, when they do fall - and I believe it is when – if the government does not have a plan in action you will not be able to open the stock market when they collapse. … No one is even talking about it, other than the New York State’s Superintendent of Insurance. … I have not heard a single politician mention the fact that these major insurers, who have insured $450B of mortgages, are all about to go under."

Supporting Jim Cramer was an article in yesterday's Wall Street Journal - Default Fears Unnerve Markets By SUSAN PULLIAM and SERENA NG. They describe how these "insurance companies" work:

"At the center of these concerns is a vast, barely regulated market in which banks, hedge funds and others trade insurance against debt defaults. This isn't like life insurance or homeowners' insurance, which states regulate closely. It consists of financial contracts called credit-default swaps, in which one party, for a price, assumes the risk that a bond or loan will go bad. This market is vast: about $45 trillion, a number comparable to all of the deposits in banks around the world. … If they default, everyone is supposed to settle up with each other, the way gamblers settle up with their bookies after a game."

It looks like we have a lot more to worry about than how to spend our $800 or $1600 dollars!

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