Stewart Lectures Cramer

If you haven't seen it, Jim Cramer went on The Daily Show and was totally owned by John Stewart. Cramer went on hoping to merely apologize and then get in Stewart's good graces, but Stewart didn't let him off the hook. Stewart played some clips showing Cramer bragging about manipulating markets. Specifically, Cramer bragging about how easy it was to push the S&P futures down! Cramer is clearly exagerrating there, as this market is too large for Cramer to profitably move around, like you thinking you can push IBM up or down $10. He also disavowed Rick Santelli's rant against bailing out renters (oops! homeowners), saying "I don't know where he grew up, but I've lived out of my car", in a clear attempt to pander to the audience as if he grew up in some great hardship (if you graduate from Harvard and then sleep in your car as a journalist during your first job, I don't think that's the same as growing up in Detroit, or being truly homeless). Clearly, Cramer is a braggart. He's also overconfident about his opinions. He does not appear to have a good batting average. After this performance, I would add he's a moral and intellectual coward. He didn't defend his behavior, he tried to suck up to a celebrity bigger than him in a sycophantic way, and it didn't work.

Nevertheless, Stewart is still profoundly wrong in his assumptions about this crisis. Stewart seemed to think that Cramer and CNBC knew that the market was a pure 'greater fool' play all along, where people are selling worthless crap to the next guy in a pure ponzi scheme. The implication was that CNBC had a financial incentive in hyping stocks, even though they knew it was worthless (I guess he thinks they are evil and stupid, because it would have to bust). But I don't think the people at CNBC 'knew' the market was overvalued. There are bears on the show every day, but there are always bears. If CNBC knew about 2008 in 2007, they would have been very prescient, but they did not. Its a very simplistic view of the world to think bad things happen out of bad faith, as with individuals this is often the case, with the madness of markets, it is much more complex.

Further, Stewart emphasized the 30 to 1 leverage, as if this highlighted the investment banks were being imprudent. With hindsight, that was a bad call. But as I mentioned earlier (see here and here), many investment banks were at that level of leverage for over a decade. Only a handful of investment banks really increased their leverage (not commercial banks) over the past decade, and the market decline occurred throughout the financial sector of thousands of firms.

So, as frustrated as Stewart is with this crisis, his premise that this was caused by bad faith and 30 to 1 corporate leverage, is simply wrong. Most of the banks selling these mortgages had them on their balance sheets. They incorrectly believed in the business model. Stupid, but not a conspiracy. As per 30 to 1 leverage, yes this is a bad idea, and I went over why this is so in my earlier post, but many investment banks had been doing this for over a decade so it is not specific to this crisis, just a perennially bad corporate decision.