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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 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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Alon writes,
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.

It was never a question about 'knowing' a bubble was happening, it was how 'risk' is managed by hedge funds. I.e. playing off high debt ratings - aaa - to attract more investment and then insert risks hidden by lack of oversight or so-called transparency of accounting rules.

What I find interesting Alon is how you put together executive pay and leverage. Executive pay was part and parcel of the gaming risk on a big scale. People (an elite bunch of London hedgers) were paid big bucks to produce 'big' profits at AIG. In other words pressure was applied to make profits when there was none. Insurance is not supposed to do this sort of thing by the way.

Really, it doesn't matter whether Cramer said anything actionable or not! He's more or less calling out the SEC and double-dog-daring them to investigate him! Isn't he basically saying the Fed is too dumb to figure out what he's doing is unethical?

Lindsay: no, most people didn't know. Krugman did, and Roubini did, but that was pretty much it. The idea that the bubble was obvious is revisionist history, written by people who pretend they knew all along.

Doyle: there were profits, until 2008. It wasn't just fictitious value - the model survived the 2000-1 stock market crash. And it doesn't matter that over-leveraged firms also had very high executive pay. Excessive executive pay was and still is the norm in the US, both in firms that are now crashing (like AIG) and firms that are doing alright given the circumstances (like GE). You can make a good case that excessive executive pay is bad for the economy, but that's a separate issue. You might as well make an argument for universal health care, withdrawing from Iraq, making higher education free, and compelling the intelligence community to stop breaking civil liberties laws. These are all good things, as is capping executive pay, but they're tangential to the issue at hand.

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