In Defense of Jim Cramer on Bear Stearns 18 comments
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Jim Cramer has come under criticism in the past few days for his position on Bear Stearns before the big collapse. The criticism is unjustified - at least with regard to Cramer's remarks last week. On 'Mad Money', Tuesday March 11, Cramer was asked a question from a viewer who had a brokerage account at Bear - here's how he responded (you can stop it after the first 30 seconds):
Now, it's possible to construe the question as 'Should I take my money out of Bear Stearns stock?' (I did at first, given that Cramer usually addresses stocks), but I don't think that was actually the question - or Cramer's intended answer. Cramer was allaying concerns about the safety of keeping your account at Bear, as a depository. And he was right - there was no need to panic on that (just on the BSC equity). He was of course off-base in saying more generally 'Bear Stearns is not in trouble,' but with regard to the brokerage accounts held there, that was essentially true as well.
Yesterday on CNBC, Cramer explained his position. The editor of this YouTube video obviously does not understand the distinction that Cramer was making between Bear brokerage and BSC equity. But the oft-criticized Cramer was absolutely right in this case:
But if you're interested in what Cramer has actually said about BSC stock, we have a record of that right here.
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This article has 18 comments:
investmentscientist.co.../
Bear Stearns is a bank that among other things holds deposits for customers. The deposits are insured up to a point by the government..."Remember FDIC"...so deposits up to $100,000 are insured regardless of what happens to the bank, i.e., bankrupcy or takeover.
BSC is also a publically traded equity. Someone can have $100,000 on deposit at BSC and at the same time own $100,000 worth of its stock. If the stock goes bankrupt, the $100,000 on deposit is safe because it is insured by the government but the $100,000 investment in the stock would be mostly lost assuming the company doesn't emerge from bankrupcy and very little cash is left for shareholders upon liquidation.
It sounds like what Jim Cramer was saying on March 11th is that investors should not make a run on BSC and remove their deposits. Of course if a depositor had more than $100,000 in the bank ($250,000 for an IRA - see en.wikipedia.org/wiki/...) they could lose the balance above that amount. I don't think his advice to "not take your money out" was a reference to investments in the stock.
I also think that if you're concerned about your 200 shares in any financial institution you should probably sell it and put it somewhere safer for the time being. This message is at least 6 months old now.
2) If he was doling out financial advice that can be so easily confused between a company's stock and it's liquidity, then he's an even bigger hack than most people think.
Did Cramer know this? The very next day, Cramer complained that "the Fed bailed out the hedge funds who held accounts at Bear." He went on to say that the Fed's action was welfare "for the hedgies." Clearly Cramer knew that the accounts at Bear were only institutional.
If Cramer did not know that Bear does not have a retail brokerage, it would mean that his research into Bear Stearns before he recommended the stock was horrifyingly poor. It would mean that Cramer told everyone to "BUY BUY BUY" without even knowing the nature of the business that the company was in. Would you ever buy a business without knowing what it sells? We must assume Cramer knew that Bear has no retail accounts, and therefore that the email question dealt with money in Bear stock and not money in a Bear account.
When Cramer attempted to defend himself by claiming that he was addressing a person with money on deposit at Bear, he was counting on the abject ignorance of his listeners and viewers.
In the end, however, it does not matter whether Cramer thought he was talking to an account holder or a shareholder. Let's rephrase Cramer's defense after he was skewered by John Stewart on the Daily Show.
John Stewart played the tape of Cramer's advice to a question from a viewer saying, "Should I take my money out of Bear?" Cramer's answer was, "NO NO NO. Bear is fine. They are not in trouble. Don't take your money away from Bear. That would be silly."
Cramer said at the start of his defense, "I did not make a mistake. I was not saying that people should stay in Bear Stearns stock. Why would I say that when I told everyone to sell the stock?" Cramer then played his own edited version of the tape.
Inherent in Cramer's statement in his own defense is an acknowlegement by Cramer that the problems at Bear were sufficiently severe that shareholders should sell.
Cramer's version of the tape carefully edited out the statements by Cramer that "Bear is fine," and "Bear is not in trouble."
After the tape was played, Cramer said, "Not only was my call correct, but people in the business have praised me for my prescience. I told account holders they were not in any danger because I knew the Fed would bail them out, but I told shareholders to sell because I knew Bear was in serious trouble."
In essence, Cramer was saying that he knew Bear had severe liquidity problems, but that the Fed would bail out account holders.
Okay, could Cramer have predicted with any certainty what the Fed might do? The answer is no. The Fed had never before in history bailed out an investment bank. The Fed did not even change its rules to allow investment banks to use the discount window until the Monday after the Bear failure. Historically, the Fed had let much larger investment banks, such as Drexel Burnham, to go under.
The thought that the Fed MIGHT take a history-making and unprecented could, at best, be termed a mere speculation. Cramer might just as well claim, "I told account holders to keep their money on deposit with Bear because I knew snake eyes would come up at the crap table and they would make their money back."
It doesn't matter whether snake eyes comes up or not, such advice is abysmally stupid.
Cramer, however, never said anything he claims to have said. He never uttered the words "shareholders should sell," he never mentioned the phrase "bail out," and he never used the word "FED" or "SIPC," or anything that hinted at the "prescient" advice Cramer claims he gave.
But let's give the Cramer the benefit of every doubt. Let's assume that Cramer does at least some amount of homework before he recommends a stock, and that he therefore knew that Bear does not have a retail brokerage operation. The email does not say who the writer might be or the amount on deposit at Bear, so let's make the ridiculous assumption that a hedge fund manager was emailing Cramer's show for his advice on what to do with the $1B of securities and cash on deposit with Bear. Cramer, knowing that the viewer was a hedge fund manager with an account at Bear, Cramer gave the hedge fund manager advice about that account. Let's also pretend that when the e-mailer said "should I take MY money out of Bear" he was really asking whether he should take his hedge fund's money out of Bear (since Bear only carries institutional accounts). Since the writer did not state how much money was in the account, we will, for the sake of example, assume that the hedge fund had a $1B account.
Now, lets further pretend that Cramer actually gave the allegedly "precient" advice Cramer falsely claims to have given, i.e. -- "Bear may have liquidity problems, so all you shareholders out there should sell. But account holder should leave their money at Bear because I'm sure the Fed will bail out account holders."
Remember, at that point the Fed had never before in history bailed out account holders at any investment bank. JP Morgan was not yet in the picture. Bear was not in any buy-out discussions, and the Fed had not yet declared that for the first time brokers could access Fed funds directly. The Fed had no legal obligation to bail out account holders at Bear, and many politicians were already objecting to the taking of such an action.
All we had to support Cramer's opinion that the Fed would bail-out Bear account holder was that Cramer believed it MIGHT happen. We'll give Cramer the benefit of the doubt and make the silly assumption that Cramer is so "prescient" that there was a 99% chance that the Fed would bail out account holders if Bear should go under, and only a 1% chance that they would not.
Okay, now let's look at how smart it would have been for Cramer to advise account holders to keep their money in Bear accounts. Cramer was advising that account holders make a bet on whether or not the Fed would take the historic action of bailing them out. The probabilities of the bet were:
99% chance the Fed bails out my account.
1% chance there is such a public uproar that the Fed decides not to take such first time historic action, and to let Bear and my account go down the tubes.
Is this a good bet?
If the 1% probability comes in and the Fed decides to let Bear and my account go down, the hedge fund manager loses $1B instantly. He will be reimbursed $100,000 by SIPC after waiting about one year. The reimbursement will paid with no interest.
So what does the hedge fund manager gain for taking this 1% risk of losing almost all of his investor's money? The answer: Absolutely NOTHING. He gets to keep his own money. Of course, if he took the money out of Bear, he would also get to keep his money without taking any risk at all.
Thanks Cramer, you gave great advice to account holders. Heads they win nothing, tails they lose everything. You are right. Failing to take such a wonderful risk would be "silly."
Incredibly, Cramer's defense indicated infinitely greater stupidity than if he had merely told shareholders to hold Bear stock. Why? Because if Bear doesn't fail or is bailed out by the Fed, shareholders might see their shares rise. Shareholders had a possibility of gain for taking the risk. Account holders had no possibility of gain whatever for leaving their money in an account at Bear.
Cramer is such a financial genius that he could not even figure that his phony defense made him look dumber than the actions he was defending. Cramer may be a lawyer, but he has a fool for a client.