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March 15, 2009

Jim Cramer's confession could end his career

Henry Blodget at Slate explains what Jim Cramer was actually confessing to in those clips from The Street.com that Jon Stewart showed played on the Daily Show.

Blodget suggests that many of the trading strategies that Cramer confesses to having engaged in as a hedge fund manager, and recommends to his viewers, may constitute illegal market manipulation.

One particularly ironic detail. In the video, Cramer advocates spreading lies to reporters to move the price of a stock, including a specific CNBC reporter. Remember, Cramer wanted to go on the Daily Show to defend CNBC from Jon Stewart's previous ribbing.

via Naked Capitalism.

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It should end his career. It should have ended his career when he first said it in 2006. There's no reason for this guy to still be around after admitting to that level of fraud, and it's a stain on CNBC that they didn't dump him the day after it ran.

The philosophy that wealth, influence and being on the inside gives you an essential advantage over the regular guy, whether in matters of finance, business, government or the equal enforcement of criminal or civil law, is the single most corrosive and undermining force at work towards the destruction of the Republic. If the equal rule of law is not re-established we will continue this slide towards a future of failure. We must have a level playing field.

I am surprised as to how anyone can say that Jim crammer did not warn anyone.He warned bernankie -he does not know how bad things are-.He warned trichet the EU guy and told that his emphasis on inflation will bring about recession,he warned against constant manipulation of short sellers and asked for uptick rule reinstatement. He complained aginst naked short selling by hedge funds.Insted of going after the rating agencies which gave false high quality ratings to realestate portfoios, going after crammer who again and again warned the listners as to how bad things are is unfair and uncalled for.

As I remember, when Cramer's interview first hit then net (it seems like it was within the last six months), it made a pretty big splash for just that reason; i.e. he was admitting to blatantly manipulating the market.

As I recall he gave a pretty contrite apology on his show "Mad Money" and said that he misspoke/was misunderstood/yadda-yadda-yadda.

To me, and I'm not an SEC guy, and I don't know anything about the legal ins and outs of this sort of thing, technically speaking, what I heard him say was:

"OK, this is how you can rob a bank, and I know, cause I've done it in the past."

I'm not sure that counts as a legal confession or any of what he said was actionable in a court or anything like that, but it sure as LOOKED like he just admitted to doing something wrong.

If you have a decent lawyer, it's not a legal confession. "The philosophy that wealth, influence and being on the inside gives you an essential advantage over the regular guy" is called realism.

So, you agree that there are two Wall Streets, one for the ordinary investor and one for the big players who cut insider deals.

If a prosecutor wanted to bring a charge against Cramer, those clips could easily be used as evidence before a grand jury or at a trial. Obviously, the defense would argue that Cramer misspoke or was joking or that the specific thing he said he didn't wasn't strictly illegal.

Perhaps more importantly, if somebody else has a good lawyer, that person may be a leg up on a lawsuit against Cramer, or The Street, or CNBC.

Who said anything about insider deals? The most important thing about being an insider is knowledge, not deals. The best scientists are those who know everything there is to know about their fields, so they can quickly spot which avenues of research are most useful; data faking and publication-by-famous-name are for people with more delusions than knowledge. The best lobbyists are those who know which mid-level administrator to talk to, and how to argue merit well; excessive contributions are for people who have no merit to argue. And the best hedge fund managers are those who can leverage their knowledge of finance to turn risky investments into less risky ones, raking in huge profits; those who do insider trading are so bad at honest trading they're willing to risk jail time.

Alon, in this particular context, we're not talking about legal professional expertise, we're specifically talking about illegal market manipulations that can only be carried out by insiders. For example, Jim Cramer says he deliberately lied to reporters about other people's companies in an attempt to manipulate the stock price.

If you want to talk about claims to professional expertise, then all kinds of financial professionals should be held accountable for their failures to foresee the crisis. Cramer put himself forward as an oracle. Obviously a lot of other people did, too, while charging big bucks to manage other people's hard earned cash. Those people didn't deliver on their promises of expertise. That's a legitimate critique in and of itself.

It's not as simple as saying that hedge fund managers (or other financial professionals) must have done a bad job because the economy collapsed.

However, as an investment professional, you get paid to predict the future better than the average person. People entrust their money to you because you promise to do a good job of predicting the future. When you don't foresee the biggest crisis in history, the average person is entitled to demand answers as to why you fell short.

Alon,

yeah but we are talking about different type of information. This is not a natural or scientific fact, but fraud. Created/manipulated event.

so for eg. if I know a good looking apple is rotten, and I know you like apple. Then I sell that apple to you, you wouldn't call my knowledge "scientific" in context of buy and sell.

It is a fraud. I knowingly misrepresent the value of that apple.

Same with stock trading, people buy stock because it has "value", be it short term pricing movement, or long term investment fundamentals. If I can give the impression that a stock has higher price through me gaming the market. (eg. fake buy and sell, pump and dump, insider knowledge of of some sort) then you will call me defrauding you. I have valuable information that I gain through gaming the system to deceive you the actual price of said stock.

Some of those financial instruments are very complex and not that liquid. It is very easy to manipulate and deceive buyers.

Cramer? You want the lowdown on Cramer? Deep Capture has the whole sordid story. http://www.deepcapture.com/ Jon Stewart's inspiration and info are from there.

Lindsay, there's still a big difference between "demanding answers," which is legitimate in many circumstances, and having a comedian say, "We are capitalizing your adventure," which is stupid. For a start, suppose that hedge fund managers had seen this crisis coming in January of '09. Then they would all sell their assets, creating a financial panic; in that case, the crisis would've unfolded in the same way, only a few months earlier. The advantage of hedge funds over regular investments is relative, not absolute - once the market was dominated by them, there was no additional benefit. To demand otherwise is like to demand that all high school students perform above average on standardized tests.

jim desai -

Thanks for telling us.

I just found this from 2005:

=========================================================================================
Without Uptick Rule, Downside Will Rule

By Jim Cramer

Just when you thought it couldn't get nastier for the "longs" out there, the people who just play from the long side, the SEC passes the Hedge Fund Relief Act, and it goes into effect Monday.

Oh, it's not called that. It is just the suspension of the "uptick rule." But it certainly will have that impact, for both the hedge funds and the market....Get ready for some real volatility, which, of course, is just a code word for downside action!
=========================================================================================

Alon, this isn't just about hedge fund managers, it's about the entire financial services industry. It's also about the PR flaks masquerading as journalists at CNBC who fed the hype instead of critically assessing the facts on the ground.

You keep using the word "PR flak" when the vast majority of people in finance didn't think there was a bubble going on. Do you really think Cramer knew there was a bubble but didn't say so?

I think he didn't think very hard, he didn't see it was his job, and structurally it wasn't. The incentive for finance professionals was to cash in on short-term high risk profits. They were getting paid a percentage of all the money they managed, plus a cut of the profits. During the good times, they were getting 30% rates of return for their clients and generating huge fees and bonuses for themselves. Instead of critically assessing the costs and benefits of these risky bets, CNBC and Jim Cramer cheered on the excess.

Btw, ordinary people did capitalize Wall Street's adventure. Where do you think the all those money managers got the money they sunk into toxic assets? A lot of that capital came from ordinary investors who had pension funds and 401ks and mutual funds and the like. Of course, now that the banking system is imploding, we're paying again to recapitalize the banks.


Do you really think Cramer knew there was a bubble but didn't say so?

Cramer explicitly said that people should buy stock that was overvalued because it would continue to go up in price against all logic.

That is the definition of a bubble and it was in the clips. You should consider watching them.

You should also distinguish between employing superior knowledge and engagin in illegal market manipulation.

Jim Cramer is no substitute for effective white collar laws and enforcement. To me, there looks like two large issues. One is the sub-prime mortgage backed securities, which were graded AAA using different criteria than criteria for other AAA securities, according to PBS's NOW. That could be conspiracy to defraud investors.

The other issue was the derivatives - wouldn't know what to charge here.

As far as Cramer is concerned, criminally, he may be beyond reach due to the statute of limitations. And civially, investers in his funds whould have to show losses, or reduced gains in order to sue. One thing I would agree with Cramer, that he said on the recent interview is, "where's the indictments?". And that's not meaning Cramer's indictment.

The incentive for finance professionals was to cash in on short-term high risk profits.

But hedge funds showed long-term profits right up until the financial crisis! It's not a question of bad incentives, or risky bets - hedge funds are really good at making risky bets that aren't supposed to default at the same time. The problem is that they got too good at it, so they started hedging against one another. It's an issue of leverage, not executive pay.

Btw, ordinary people did capitalize Wall Street's adventure. Where do you think the all those money managers got the money they sunk into toxic assets?

Big time investors, plus upper-middle class idiots who invested their savings in potentially risky assets (i.e. gambled them). I don't know what the proportions of each group is, in terms of the total volume of money they have in the market. Do you have any data one way or the other?

Cramer explicitly said that people should buy stock that was overvalued because it would continue to go up in price against all logic.

Yes, he helped fuel a bubble - which is what I have been arguing here all along. It's Lindsay who says he committed a crime.

It's Lindsay who says he committed a crime.

In the clips he admits that what he was doing was against SEC regulations.


CLASS ACTION SUITS

It will be interesting to see if any class action tort cases are initiated against CNBC, GE, Cramer, and others.

hedge funds are really good at making risky bets that aren't supposed to default at the same time. The problem is that they got too good at it, so they started hedging against one another.
Posted by: Alon Levy | March 16, 2009 at 01:07 AM

eh hmm, well in that case, their hedge (aka. financial model) obviously isn't taking into account the aggregate behavior of other "hedges". To me at least, it is common sense when something is that profitable, somebody will come in and try to emulate.

And this isn't the first time it happens. LTCM, the first big hedge failure, was precisely because the models says the market behavior is irrational, things will ultimately return to their favor.

except, the entire planet was laughing and bet against LTCM's believe of converging bond arbitrage. Everybody knows LTCM will run out of money and explode and bet on its explosion...

and boom...

there goes the model. (and a lot of money)

like they say. "a black swan has been found", there isn't enough financial history to predict deep into the future, let alone infinitely.

Henry Blodget is crying foul on Jim Cramer for market manipulation???

Irony is dead.

I said he may have committed a crime, and that he and CNBC were uncritical cheerleaders who helped fuel a bubble.

For the last time, this isn't about hedge funds per se. Quit beating that straw man. Strictly speaking, a hedge fund is just a special kind of partnership that allows high net worth investors to put their money under professional management with very few strings attached.

It's about a much larger speculative bubble that affected all of Wall Street. If you're a real journalist, you're supposed to be skeptical, not uncritically enthusiastic. CNBC was making money telling people what they wanted to hear: Buy, buy, buy--if you just buy what we tell you, you can keep on making 30% ROI forever!

People often say that nobody could have predicted the economic downturn--but that's not really true. Nobody can reliably and precisely time the market, and our unregulated chaotic market turned out to be much more fucked up than most people realized because everything was so interconnected.

Everyone knew, as a logical certainty, that the housing market (or the tulip bulb market, or the beanie baby market) couldn't keep going up forever. Everyone just chose to assume that the bottom wasn't going to fall out anytime soon.

As an infrequent watcher of Cramer -- I think I've just as often seen him trash stocks and companies as I have seen him state that something was a buy.

He could have put up a better defense for his show the other day. Some of his insights have been pretty good - situated as they are, in the middle of all the yelling and screaming and horns and buzzers.

For the strategies on the clips - no defense for that.

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