Cramer Vs Roubini Round 2

Jim Cramer says today's bank stress test results proves the era of systemic risk in the financial sector is over thanks to the brilliant Tim Geithner.

Thank Treasury Secretary Geithner. He seems to be following Cramer’s forbearance plan, a la the savings-and-loan crisis of 1989-’91. What worked then? Letting the private sector work out its own problems. Foregoing all talk of nationalization. That after all was the grizzly threat the bears used to scare the market. Well, now it’s more koala than Kodiak.

Look at what Geithner did: He gave poor grades to Bank of America and Wells Fargo to legitimize his stress test, saying the companies needed to raise $34 billion and $15 billion, respectively. But these figures can be met with virtually no difficulty, as BofA just needs to sell some assets and convert its TARP money in common stock while key investor Warren Buffett just has to cut a check to help Wells. This Washingtonian chest pounding provided wiggle room for Geithner to say that more troubled institutions like American Express, MetLife and Morgan Stanley were in the clear. The remaining banks can be scooped up by their stronger peers.

This solved the banking problem, Cramer said. It removed the systemic risk and put us back in a position where we can again trust company earnings. Forget the “Armageddon factor.” That’s not a concern anymore. Add in oil’s close at a six-month high and a tech-led rally at the end of the day, and it’s obvious why the market soared – 100 points in the Dow and an even bigger percentage jump in the S&P 500.

And in the blue corner, Nouriel Roubini, who says we still have a long way to go with the stress tests being a farce: the banks still need tens of billions to meet even the non-stressful test levels, and reality is already much worse.

Nouriel Roubini, co-founder and chairman at RGE Monitor, also known as Dr. Doom, feels these tests lack credibility and simply aren't stressful enough as the actual economic data are far worse than the worst case scenario of these tests.

"(But) if you assume the results have been leaked are true, you're going to find out that a large number of financial institutions have significant capital needs," Roubini told CNBC.

He also warns the government's plan to make banks covert more preferred shares to common stocks could lead to a creeping nationalization of the banks.

"Weaker institutions are going to find it very hard to raise money in the private sector because they're going to be further diluted by the government converting preferred into common shares. So eventually we may go into a creeping process of partial nationalization of some financial institutions," Roubini added.

Roubini suggests that if the end goal is to keep banks in the private sector, it might make more sense to convert the claims of bank creditors into equity.

So who is right? If Cramer is somehow correct, we're at the bottom now and recovery is now the buzzword for 2009. Everything from this point on is just the rest of the problems working themselves out, and Geithner and Bernanke were right all along.

But if Roubini is right, then the banks are extremely vulnerable to shocks from this point on as the stress test worst-case conditions have already been surpassed, and the second wave of mortage problems from ARMs combined with the commercial real estate crash could push us into a double dip Great Recession...one that could crack the already broken and stressed system and plunge us into another Depression.

My money's on the guy who has been right for the last three years. Your mileage may vary.