Skilluminati Research

The Truth Behind Jim Cramer’s Mega Market Meltdown

Posted Aug 07, 2007 5 comments

If you haven't seen his "doom meltdown", start here: Youtube Link. Here's the highlights, just to give you a sense of the overall tone:

And Bill Poole [pres. of Federal Reserve Bank, St. Louis]? Has no idea what it's like out there! My people have been in this game for 25 years. And they are losing their jobs and these firms are going to go out of business, and he's nuts! They're nuts! They know nothing! We have Armageddon. In the fixed income markets, we have Armageddon. We'll spend billions in Iraq to build homes. We are gonna have thousands of people -- we have thousands of people losing their homes right now. Fourteen million people took a mortgage in the last three years. Seven million of them took teaser rates or took piggy back rates. They will lose their homes.

When I watched Cramer's performance (and the man is always entertaining) I wasn't thinking about the impending financial collapse of the United States -- I was actually thinking about something I read 2 months ago. I found this transcript in the June 2007 issue of Harper's Magazine, where Cramer is VERY frankly discussing his Hedge Fund days. The actual conversation took place on December 22, 2006, and the venue was "Wall Street Confidential", an online show produced by The Street Dot Com, an online investment advice site. I have been unable to find an actual copy of the video interview, only online summaries. But the transcript is very illuminating:

CRAMER: You just create an image that there’s going to be news next week that’s going to frighten everybody. This is what’s really going on under the market that you don’t see.

TASK: And that nobody else talks about except you.

CRAMER: Right, but what’s important when you’re in hedge-fund mode is to not do anything remotely truthful, because the truth is so against your view that it’s important to create a new truth, to develop a fiction.

TASK: SO you’re talking about the mechanics of the market-

CRAMER: Well, the mechanics are much more important than the fundamentals.

TASK: Well, okay, but in terms of the fundamentals-

CRAMER: Who cares about the fundamentals? Look at what people can do. The great thing about the market is that it has nothing to do with the actual stocks. Now look, maybe two weeks from now buyers will come to their senses and realize everything they heard was a lie but then again Fannie Mae lied about their earnings for six billion dollars, so you know-

TASK: Right, and Bristol-Myers lied.

CRAMER: It’s just fiction and fiction and fiction. I think it’s important that people recognize that the way the market really works is to have that nexus: hit the brokerage houses with a series of orders that can push it down, then leak it to the press, and then get it on CNBC-that’s also very important. Then you have sort of a vicious cycle down. It’s a pretty good game, and it can pay for a percent or two.

I first read that on the drive to Logan Airport, and it grabbed me something important, so I made a copy of it. On Friday, August 3rd, I started being contacted by very worried people who had just watched -- either on TV or online -- Jim Cramer having his meltdown. I was immediately struck by the fact what he was doing on August 3rd was almost exactly what he was saying on December 22nd.

Get Familiar with James Cramer.

Cramer is a very public figure, especially by the standards of Wall Street. If you're interested, he gave a short and excellent interview to the producers of PBS's Frontline for their episode "Betting on the Market" -- you can read that here.

James Cramer has a very interesting background: he's a Harvard Law School buddy of Eliot Spitzer, who is currently Governor of the state of New York. He has also worked as a journalist in Tallahassee, Florida, living on the same block as the Chi Omega sorority, scene of Ted Bundy's most infamous crime. Cramer was allegedly one of the first people on the scene after the murders.

After Harvard Law, he went to work for Goldman Sachs and made $700,000 in his first year on the job -- clearly, the man has talent.

Today, he's making most of his income off investments (duh) and the website he co-founded, The Street Dot Com, which was founded in 1996. According to SEC filings, he earned a total of $2.4 million in 2006 from the site. Curiously, the SEC filings list him as "co-founder, director and columnist" -- but the site's actual "Who's Who" masthead lists him only as a humble "blogger."

Closing Time

Obviously, I'm not the only person who raised their eyebrows when they read Cramer's statements from December 22, 2006. Henry Blodget did a good article in Slate magazine, entitled "Will Cramer's Crazy Confession Destroy his Career?". It should definitely be mentioned that Henry Blodget himself was convicted of running a securities fraud operation in 2002 and has been banned from the market for life because of that. And, of course, Henry Blodget doesn't have a TV show.

Because of the publicity that his comments generated in financial circles, Cramer responded with a 3 paragraph explanation -- so it's only fair that I close this article with Cramer's side of the story:

You may have seen some articles the past several days attacking me about an interview I gave recently where I discussed the kinds of manipulative trading practices that go on every day in the investing community. Let me say this: No one knows and respects the securities laws more than I do. (I didn't go to Harvard Law School for nothing!)

When I was a hedge fund trader in the 1990s, I played fair, and I did nothing that violated those laws. But others did not play fair, and that's why I started TheStreet.com and have been writing about these abuses for nearly a decade -- to explain to my readers how the markets really work. I wanted to give transparency to the market and tell people the good and the bad.

Some professional traders don't like it when I expose how their game is played, and some of the TheStreet.com's competitors don't like it when people are interested in what I have to say. But I am going to continue to write and talk about how the markets really work -- in my own sometimes hyperbolic and tongue-in-cheek style -- and call them as I see them. That's the least I owe you.

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