Monday, August 06, 2007

Risk Week: Jim Cramer Shills for Hedge Funds

In view of the salient events of the last few weeks in the credit markets, and their overwhelming effects on the equity markets, I'm making this week's posts all about risk.

Yes, it's "risk week." I will be writing posts about various aspects of the recent activities in the debt and equity markets, and risk, and its management.

To begin my posts, I want to discuss Jim Cramer's outrageous comments last week on CNBC while speaking one afternoon (Thursday?) with Erin Burnett.

He set himself up as a sort of God of the markets, claiming various Wall Street trading desk personnel were beseeching him to tell Ben Bernanke how bad the credit situation is. Cramer alleged that these traders told him,

'You're the only one they'll listen to. You can get through to them....'

Nice try, Jim. But you're just a shill for your trading desk and hedge fund friends. They are using you the same way you used to use CNBC and The Wall Street Journal when you managed a hedge fund, as you have admitted.

What is going on now is not a general credit market meltdown. And in no way is it remotely as bad as Bear Stearns Chairman, Jim Cayne, alleged, saying it is the worst credit market in 20 years.

All that is happening is that some investment banks and hedge funds have made poor risk management and investment decisions. They hold more sub-prime mortgage paper than is prudent, if holding any at all is, at this point. These institutions would love to have the market bail them out. Rather than admit they have made costly mistakes, they would prefer that others believe, instead, that the credit markets are in crisis.

Thus, as Cramer was shilling the other day, Ben Bernanke must cut rates. Damn inflation, let's rescue some overpaid, underperforming traders and fund managers!

There is no crisis. What there is, is a case of some greedy, opportunistic, short-sighted managers at some firms being caught with heavy losses on bad investments.

It pains me to see CNBC allow Cramer to openly shill for his friends, and other industry insiders. At least this morning, several commentators directly contradicted Cramer, though not naming him specifically. They simply reiterated my position, that this is not a credit market crisis, it's a problem for some firms.

What most people fail to grasp is that these traders and fund managers will do anything to escape the losses they now face for injudicious decisions. If crying "fire" in a market, and getting others to stampede and believe the market is in crisis, so be it. So long as it leads to the Fed cutting rates, pushing debt prices up, then these traders and hedge fund managers will be relieved of some of their losses. And can rapidly dump their trash onto the market before others catch on.

The truth is, credit market problems primarily lie with a sub-species of the collateralized mortgage obligations market. Not corporate debt, or Treasuries. Not equities. It's a weakness confined to those players who knowingly bought sub-prime mortgages, or sub-prime-based paper, knowing the greater risk these mortgages bore.

I don't think it merits a general hand-wringing over the credit, or equity markets. And it certainly does not merit Jim Cramer anointing himself God of the market, and imploring Ben Bernanke to quit doing his job as Fed Chairman, and just loosen the monetary spigots to bail out some overpaid Wall Street traders, fund and risk managers.

Tomorrow: when a market is not a market, and why that surprised this generation's risk management whiz kids on Wall Street.

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