Pimp Your Finances

[Note - this was updated to include some new information that came from the Daily Show last night. I guess I need to do my homework and watch Comedy Center more]

Last week on the Daily Show, Jon Stewart delivered a blistering commentary on Jim Cramer and Co. at CNBC. On Monday, Cramer responded in his blog at Mainstreet.com. Here was the portion directed at Stewart:

The pundits won’t engage in the merits of, say, favoring Tier 1 capital for the banks vs. common equity, or forbearing on the banks to work the situation out over time because the banks can be profitable if we have some patience. They just attack me.

Take Frank Rich and Jon Stewart. Both seize on the urban legend that I recommended Bear Stearns the week before it collapsed, even though I was saying that I thought it could be worthless as soon as the following week.

I did tell an emailer that his deposit in his account at Bear Stearns was safe, but through a clever sound bite, Stewart, and subsequently Rich — neither of whom have bothered to listen to the context of the pulled quote — pass off the notion of account safety as an out-and-out buy recommendation.

The absurdity astounds me. If you called Mad Money and asked me about Citigroup, I would tell you that the common stock might be worthless, but I would never tell you to pull your money out of the bank because I was worried about its solvency.

Your money is safe in Citi as I said it was in Bear. The fact that I was right rankles me even more. I never said the same thing about Lehman, where your accounts weren’t safe.

I expect a skewering from the comedian Stewart. I was shocked, however, that the rigorous Rich wouldn’t investigate further and relied on the show’struncation of the truth.

His rebuttal comes down to four key points:

1. His quote on leaving your money in Bear Stearns on March 11th, 2008 was intentionally taken out of context
2. He was right, because he was referring to the safety of deposits in the bank, not the value of the stock
3. He never recommended Bear Stearns as an outright buy
4. As early as the following week, he said that Bear Stearns might be worthless

In the interest of fairness, I’m going to take a look at all the claims, and provide links to all my sources. That way, you can be the judge.

1. The Bear Stearns Quote was taken out of context

Verdict: true.

The complete exchange from the March 11th show actually went like this:

Dear Jim:
Should I be worried about Bear Stearns in terms of liquidity, and get my money out of there?

Cramer says:
No no no! Bear Stearns is not in trouble. If anything, they’re more likely to be taken over. Don’t move your money from bear.

2. Cramer was right, because he was referring to the safety of deposits in the bank, not the value of the stock

Verdict: unclear, but I’ll give him the benefit of the doubt on this

While the original caller confirmed in a later episode that he was asking about the safety of his deposits (source: wikipedia), it’s still unclear what Cramer was referring to in his response.

He clarified his remarks on March 17th on CNBC’s Street Signs, saying:

Keeping money at Bear – I guess I could have caused a run on the bank and said take your money out of Bear. I guess people could say hold it, he’s saying buy the common stock. I mean, what the heck. I cannot cause a run.

It turned out the Federal Reserve guaranteed the money. I’m not going to tell people to pull money out of these places. The Federal Reserve is guaranteeing the money.

After reading his clarification, it seems like there are a few things noticeably absent in his original statement.

Nowhere did he mention anything about the FDIC or the Federal Reserve, or even use the word “deposits”, which would’ve made his intentions clear. And the blanket statement “Bear Stearns is not in trouble” is broad enough that it could seen as referring to stocks also.

3. Cramer never recommended Bear Stearns as an outright buy

Verdict: false.

It appears as if Cramer did not recommend to buy Bear Stearns on the March 11th show, although many many of the sites that track his show interpreted it that way (such as the unofficial Cramers-Mad-Money.com or the equally unofficial Seeking Alpha: Kramer’s Picks).

However, if you go back to Cramer’s March 6th show, he had the following to say during his “Buy / Sell” segment:

I believe in the Bear Stearns franchise. Bear Stearns at $69 bucks? I’m not giving up on the thing.

That sounds like a recommendation to buy, or certainly not to sell, to me.

In the Lightning Round segment of the same show, he added:

Bear’s a great financial brand, but aside of Hudson City Bancorp, [I] can’t get behind any banks in the market

If Cramer’s advice on was not a recommendation to buy, it was walking a fine line (and he definitely never suggested selling). He had established a pattern of defending and praising Bear Stearns in the two weeks prior to their collapse.

4. As early as the following week, he said that Bear Stearns might be worthless

Verdict: true, but ultimately pointless.

Cramer may have actually said it that same week, on Friday, March 14th, at least according to another statement he made on the March 17th episode of Street Signs:

I said the common stock was worthless on Friday, as soon as this thing was at 36 because we saw a look at the bonds. If you kept your money in Bear you made out. You got the liquidity.

Even if he did say that Friday, it would have done little for investors. By that point, the stock had been plummeting for three days.

Here’s the history of Bear Stearns from that week (according to Bloomberg.com, the wikipedia history of Bear Stearns, and a page about the Bear Stearn class action lawsuit):

• On Tuesday, March 11th,  Bear Stearns closed at $62.97.
• On Wednesday, March 12, Bear Stearns closed at $61.58. CEO Alan Schwartz realized the company wouldn’t have enough cash to operate through the end of the week, and called government officials, regulators, and JP Morgan’s CEO.
• On Thursday, March 13th, the stock closed at $57. After a series of late night discussions, the Fed announced they were providing cash, but only through JP Morgan, because Bear Stearn didn’t have direct access to the Fed.
• On Friday, March 14th, the emergency loan deal was announced, and the bottom fell out. The stock closed at $30.
• On Sunday, March 16th, JP Morgan made an offer to buy Bear Stearns for $2 per share.
• On Monday, March 18th, Bear Stearns opened trading at $3 a share.

So even if Cramer did call the stock worthless at $36, that still would’ve been after a drop of 43.8% over just three days.

Couple that with the fact that the only way Bear Stearns could get emergency funding was through another bank, and it shouldn’t have been a surprise to anyone that the company was in dire straights by that point.

Summary

Cramer was at least partially correct in his rebuttal, but he failed to deliver a knock out punch in vindicating himself.

All he said was basically “you can’t prove that I said to buy Bear Stearns,” but for me, that’s not very satisfying. He couldn’t prove it wasn’t what he meant, and the best follow up he had was to call it worthless shortly before the Federal Reserve and the Treasury Department forced Bear Stearns to sell itself. Not exactly timely advice.

Also, despite replying in a six page blog entry, Cramer only found time to reply to one of Stewart’s five criticisms. I read Cramer’sresponse with an open mind, but in my opinion, it left a lot of questions unanswered.