Jim Cramer 
Jim Cramer in a calm moment.

Blawgletter went to a speech on Saturday by Jim Cramer, he of CNBC's Mad Money.  He said a Great Many things by way of telling us what brought on the Current Financial Crisis.  But he offered a single solution:  charge the bad guys with crimes and send them to prison.

Going to the brig, he said, "is socially awkward" for These People.  Sending white-shoe Wall Street goons there, he said, will teach a lesson.  It will also help prevent the next Big Financial Catastrophe, he said.

The crime?  Market manipulation.

How so?  Bear with us.  It gets pretty thick.

Hedge Fund A wants to drive down the market price of, say, Goldman Sachs.  HFA starts by shorting the stock.  Big time. 

In the old days — 10 or so years ago – HFA couldn't do that because a short seller had to own or "borrow" all the shares it wanted to short.  But the Securities and Exchange Commission stopped checking awhile ago.  So HFA could short millions and millions of shares even though it couldn't comply with the own-or-borrow rule.

The SEC's view of its "uptick" rule aids the strategy.  The rule barred shorting until a stock's price rose a bit.  It aimed to prevent a downward vortex.  But the SEC quit enforcing the uptick rule, too.

HFA next doubles down on its bet that Goldman Sachs stock will fall by buying credit default swaps.  The CDSs guarantee HFA a big payoff if Goldman Sachs bonds take a tumble.  They will, of course, if investors start doubting the firm's solvency.

Now comes the fun part.  Credit rating agencies and journalists begin calling HFA to find out why HFA shorted Goldman Sachs stock in such a big way.  HFA says it has heard the firm has real trouble, could collapse, can't survive.  The agencies and reporters, HFA hopes, will downgrade their ratings for the Goldman Sachs bonds.  If they do, HFA will collect Big Bucks on the CDS contracts.

Mr. Cramer supposed that HFA might not have acted alone.  Other hedge funds might have chosen the same strategy.  Perhaps they acted together.

The result?  Goldman Sachs stock dropped.  A lot.  A healthy firm teetered on the brink of extinction.  Meanwhile, HFA and its friends reaped Large Rewards.  The shorts paid handsomely, as did the CDS contracts.

Fact or fiction?  We don't know.  But we Totally Agree that the lurch towards deregulating financial markets made the scenario possible and probably likely.

We also accept Mr. Cramer's penitentiary remedy.  He proposed a special Department of Justice section that would go after the bad guys, on Wall Street and beyond.  But we add that the crime angle takes its power in part from the fact that Congress and the courts have made civil fraud cases so hard to maintain.  They've judged that plaintiffs must detail, in their complaint, facts that compel a "strong inference" of intent to defraud.

Civil lawyers who suspect fraud can seldom get such key information.  Criminal prosecutors, by contrast, have authority to issue subpoenas and compel testimony to a grand jury.  And insiders who know what went on tend to go to the authorities in hopes of cutting a deal that'll keep them out of the hoosegow.

Which leaves us with the Department of Justice as the protector of market integrity. 

Thank God someone will do it.  Thanks, Jimbo.