MCShortbus

Adam Hyland

BeFrugalNotCheap

One minor quibble: those assets were not backstopped by the Fed until AFTER the run on the bank. Absent Fed or buyer intervention those accounts would have become worthless.

That's why this event was such a positive for markets. It restored the confidence of individuals with brokerage accounts at Wall Street firms with liquidity issues. Firms like Citi, Merrill, Bear, and E*Trade are very thankful for the Fed's swift action here. As are their clients.

ADismalScience

@orielbean: You couldn't be more wrong. You the consumer certainly can deposit funds at Bear Stearns. It's called a brokerage account. "So anything you owned related to Bear would most likely be in securities/stocks/etc and you would get screwed to the wall as the stock price fell." Wrong again. You could own the stocks/bonds of just about any company, in your BEAR STEARNS ACCOUNT, and the value of those stocks/bonds would NOT be affected by the fact that Bear meltdown.

charliebabbles

Clients who hold accounts at the firm.

ADismalScience

BaysideWrestling

lemur

The function of Banks is to provide liquidity to capital markets. What that means is that banks are responsible for supplying members of the economy with the funds they need to operate their businesses, purchase goods and services, etc. This increases the general function of the economy by encouraging commerce in all directions. It also helps prompt long-term growth by enabling risky investing in the financial, physical, and human instruments of economic growth: financial capital lik securities, physical capital like land or machines, and human capital like employees.

That's the good news. An economy needs that money to be invested wisely and ingeniously to grow. The bad news is that money can be invested poorly, like all that money banks wasted giving poor-credit borrowers mortgages.

There is a delicate balance struck the amount of capital that SHOULD be available given economic output and the amount that IS. Too much liquidity causes inflation, and too little crimps economic function. Striking that balance is the job of the banking industry, which interacts closely with sovereign nations and their treasuries.

ADismalScience

1. None of what I said means that bankruptcies aren't good sometimes. In every industry there is the "marginal" company, the company just hanging on/breaking even. Think CompUSA. Given a downturn, they go out of business. It isn't necessarily bad.

2. It is very much related to your ability to get a car loan. Imagine (probably not hard) that you have a wide choice of possible jobs if you have a car, but a narrow range if you have to take the bus. naturally, you would rather have a car and get a job you like. If you are denied a car loan, then your prospects are limited--you are worse off. You don't save up 10k in cash to buy a car, you rely on credit. If you don't get that loan because you are a bad bet, then thats your fault. If your bank doesn't have the money to give you the loan or is scared to give any loans, then you are worse off without having done anything bad. Through no fault of your own, you are limited to a smaller range of jobs and denied the job of your choice.

Adam Hyland

The opposite side is basically the argument that depositors/investors (not stockholders) in bear stearns would have been protected either by the fed (too big to fail) or by a white knight. That's a reasonable argument.

You didn't make a reasonable argument. You made some sort of broad, pejorative remark that seemed to presume that anyone who invests in a targeted portfolio should be a financial expert. That's a perfectly defensible statement if it were germane and if you chose to defend it. It isn't and you didn't.

Adam Hyland

stinerman

If intel wants to pay for it they have a few options:

1. Sell bits of intel as stock in order to get cash. Obviously, the more you sell the less you have and once you sell it you can't sell it again, so for publicly traded firms, they can't just magic stock into the air and sell it.

2. Borrow money from a bank. Just like homeowners and small business owners, large businesses borrow money from banks in order to do this. This sucks if the dollar amount is REALLY big or the outcome is really risky because real banks (regulated ones) have limits on how many of their eggs they can put in one basket and how risky their investments can be.

3. Borrow little bits of money a lot of times. This is basically what a bond issue is. Intel will sell bonds--an IOU--for the total sum, but each bond will be 1000 (or whatever) each and redeemable on a specific date. Those have the advantage of being easy to split up, so the total figure matters less.

4. Save the money from profits. This intuitively seems like a good idea until you realize that the people who actually own the profits are the stockholders. big companies will pay profits as dividends (small amounts of money paid for owning stock). They will also hold some profits for future needs or use them to pay down debt, but they don't tend to hold LOTS of money, mostly because they feel (usually) that they aren't best equipped to manage money, they are best equipped to make and sell computer chips.

Really, REALLY basically, those are the options.

In order for that new fab to get built, credit needs to get extended. That fab doesn't get build, jobs don't grow. Jobs don't grow, and the economy shrinks because there are more and more people every day (so GDP per capita shrinks, but not strictly GDP).

Some companies, like hedge funds, rely on short term loans very heavily, but that is a topic for another day.

Basically, a BIG (if not the single biggest) determinant of output is investment, and investment is basically driven by credit (well, it basically IS credit, but w/e).

Adam Hyland

Although I am pretty adept at Computer Science theory, I am pretty inept at Economic theory. Why is it bad if businesses can't get loans? I understand that getting a business loan can be vital to start a business but relying on a loan to survive seems like caveat emptur. Is it bad for the economy if a few bankruptcies "cull the herd"?

If I can't get a mortgage, I don't buy a house and rent. If I can't get a car loan, I take public transit (or buy a beater for cash).

sleze69

kittenfoo

Whether you're taking his comments out of context or not Bear still became more or less insolvent, so I'm not sure that part really matters- he was wrong.

That said- we should expect personalities such as himself to be wrong frequently- if he was always right you could go to the bank get a loan for $100K and retire in a year or two off the returns.

JeffM

douche

axiomatic

[www.marginalrevolution.com]

is an interesting take on the EMH, even though it isn't couched as such.

Adam Hyland

As for the consequences to the economy if the beilout didn't happen? There was a bank run in progress on bear stearns. That means that people were taking their money out rapidly. Since bear makes a lot of their profit on highly leveraged investments--they borrow a LOT of money and invest it and then repay the loans, if they have to take money out to pay depositors they can't pay back the principle or interest on some of their very short term loans. And because they are so leveraged, they can't borrow as much money if the size of their initial deposits are so low.

Bear is a relatively large investment bank, part of what is sometimes referred to as the "shadow financial system". I don't like that term because it has lots of connotations that aren't always true, but it gets the point across. Investment banks are institutions that aren't faced with the same regulatory control and protection as regular banks. Consequently they are riskier and more profitable than regular banks. A good deal of investment flows through these guys. If depositors and investors had a reason to believe that the firms weren't solvent or weren't liquid (couldn't pay their debts if they wanted to or couldn't move money to pay their debts) then they would take money out.

That money leaves, the investment banks can't take out loans to buy other investments. That means a big chunk of credit (loans) available to businesses is gone and at the worst time, right when there is a credit crunch

That's the basic rundown of what might have happened if Bear had been allowed to fail.

Adam Hyland

If you have investment vehicles HELD buy Bear Sterns the SIPC insure them. Should a person own stock that is going bankrupt or declining in value such as Bear Sterns -- this is not covered with the SIPC.

catland

I equate preventing a bank run to the optimal outcome in a prisoner's dilemma. I've understood enough game theory to be a partial believer in the EHM, but I don't think there are enough rational actors to make it perfect. You're going to get fat tails.

As for the rest of your argument, Occam's Razor prevails. At least in media terms. If they're going to write for 4th-grade readers they're going to rely on 4th-grade interpretations.

ADismalScience

Adam Hyland

Please someone explain the consequences to the economy if the Fed didn't bail BS out and let it go under.

sleze69

When I make a mistake, it's MY mistake. Americans need to stop shifting the blame.

axiomatic

But you are right in a larger sense in that what forestalls those fears is a widespread feeling fo confidence in the institutions and mechanisms at work. In light of that, it is not socially irresponsible advice to tell people to not put money under their mattress.

I don't know if we can come to an agreement over whether or not the market 'called' the bailout early. I guess that depends on your view of the EMH, among other things. What I can say is that if Jim Cramer felt that a coming bailout would vindicate his advice, her certainly didn't voice that opinion on the 11th.

More to the point, we are both attributing subtlety to him where he does not seek it. he makes his niche being blunt and loud. And in this case he offered a broad prediction/admonition that requires a high level of understanding, speculation and nuance in order to defend. We can postulate that he had all of those nuances in mind when making this frothing response, but that he just failed to mention any of the caveats. I choose the simpler explanation.

Adam Hyland

Adam Hyland

I'm aware of the technical uncertainty that Bear was going to find a buyer, but every bank on Wall Street was salivating that entire week for those assets and knew what was going on. It depends entirely on your perspective, and Cramer has the degree of information connectivity to have understood what was going on. I know I viewed the Fed's actions as inevitable. As did several savvy institutions, which made tons of cash on both sides of Bear's fluctuations over the last two weeks. Look at the trading activity - the market called this.

As a Bear client, I suppose you would have had valid fears. Cramer was attempting to assuage said fears - that's a valid path. Keep in mind, it only becomes a run on the bank if people panic irrationally. Sort of a chicken and egg thing, no?

ADismalScience

if the fed hadn't stepped in, would those other buyers have balked on the deal? who knew what the B.S. balance sheet looked like? Where was the credit going to come from to finance such a deal? How long would due diligence take? How low would B.S. employees and stockholders allow the price to go without some government compulsion? even WITH the actions of the fed, the bailout price has risen 5-fold. How many similar deals between companies or between investors and companies have been scrapped since the beginning of the credit crisis? Clear channel is one example, there are others where availability of credit and cost of credit changed attitudes. And those businesses and deals didn't represent something as murky and unknown as B.S. to potential buyers.

And we can't accept as given the fed's actions. Just because they happened doesn't mean they were inevitable. And predictions were mixed on whether or not the fed would allow an investment bank to fail. Alternatively, the fed could have failed to act in time and margin calls on B.S. could have forced them to be unable to honor withdrawl requests--news of that would have spread pretty damn quickly and made things much worse for anyone involved w/ B.S.

Adam Hyland

So Jim is an idiot.

orielbean

I bought BSC at $6.29 and people thought it was dumb to buy it at more than $2 then I doubled it Monday.

midwestkel

Trai_Dep

Adam Hyland

Your first point isn't true, which makes your second point irrelevant. Other buyers were already clamoring, which should have served as sufficient confidence for Bear's customers that their assets would be protected. Plus, everybody knew the Fed would step in.

I mean, you're RIGHT. But you're not correct.

ADismalScience

There's information, and then there's context. If you've got one without the other you're in trouble, no matter what.

Mr. Gunn

Trai_Dep

orielbean

two things (I like lists).

No one aside from the chairman of the fed reserve and the head of the treasury department (and probably not even them) knew about the possible deal with JP Morgan that week. No one knew that a deal would be possible or necessary when Cramer's show aired. So we can't logically defend cramer's statements with the disposition of BS accounts because of the bailout.

Second. BS isn't a bank. Your deposits aren't insured. If Bs went belly up and didn't have the assets to pay out to customers, you would get jack. Nothing.

Adam Hyland

orielbean

no, no no no.

First: If he WAS talking about accounts at bear stearns, then he wasn't any more correct than if he were talking about the stock. Had bear stearns been allowed to fold, the people who had their money in accounts there (of various types) would have gotten soaked. B.S. would have been liquidated and the customers, secured debt holders, unsecured debt holders and investors would have been paid off, in that order. Maybe you would have gotten your money back, maybe not. But the fed deal DID go through, so that lets CNBC continue this nonsense.

Second: The graph flashed during the answer was the stock price for BS. If he wanted to removed ambiguity he should have said, "Stock in bear stearns and bonds issued by bear stearns seem to be bad investments, but money held in accounts there is probably safe and not worth the transaction costs of switching in order to make it safer." Instead he did what he always does, yelled at the camera and announced that BS was fine and any attempts to get money out of there were "silly".

Third: This guy makes his money on being a loudmouth and being totally free from nuance. It's how CNBC distinguishes this show from other networks and other shows at different times. It makes people remember the show. Consequently, it isn't in his interest to break character and give sophisticated advice. It is in his interest to spout and yell and spit over news and questions. People like that should get called on it when they are flat out wrong, if only to give more credence to the virtue of compromise.

Adam Hyland

Amen.

I don't like Cramer - and I agree with the assessment that his show is directly connected to that short-run, gambling view of investing that can so dangerous. But people have to understand: that's CNBC! This is on between shows called Squawk Box and Fast Money that fetishize trading and financial markets. Complaining about finding histrionics and bad calls on CNBC is like complaining that you saw genitalia on the Playboy Channel.

He is perfect for what they are trying to do on CNBC, he has a substantial track record as a top-flight money manager, and as others have pointed out he wasn't STRICTLY wrong. Whether or not his "brand" survives seems totally independent of the facts.

ADismalScience

And, that this is different from owning stock in Bear Stearns, which turned out to be a disaster.

So if you were investing with Bear Stearns, and they get bought by JP Morgan, your funds just transfer over, right? And its somewhat irrelevant to you that their stock is now in the toilet?

ludwigk

Cramer sucks..can you belive he's almost 65!

chilled

charliux

You are insane to buy on margin. Even Cramer will attest to that.

ironchef

SIPC will protect your shares held at Bear Sterns. Even if Bear Stearns disappears, your shares of say AAPL, IBM, etc are protected by the SIPC.

It makes no promise about stock price.

ironchef

Moral of the story for me was that Cramer is smart, and knows what he's talking about, but is just as easily taken in as anyone else.

kenboy

TedSez

schiff

nequam

Hossofcourse

Your timing issue (that Cramer gave his advice even as liquidity fell) is compelling only in an efficient market, which does not exist. It is the weakest part of your argument.

Once again, the liquidity disaster was caused by people heeding the opposite of Cramer's advice by pulling their money. In any event, it was not a foregone conclusion. BS could have satisfied its customers and forestalled a run on the bank. The fact that they did not do so successfully is independent of Cramer's advice.

nequam

Stocks are backed by the SIPC
[www.SIPC.org]

ironchef

now stock is a different story....

P

redkamel

Chongo

orielbean

Ilovemygeek

Still, the things he said were taken out of context.

marchhare22

1. If someone tells me not to worry about X and then X becomes a problem, why X became a problem has no bearing on whether or not the advice was good. It was bad advice. Why the advice was bad is secondary. Why it was bad may help me decide whether the person who gave the advice was honestly mistaken or just plain stupid but not whether the advice was good or bad.

Note also how Cramer said it would be "silly" to take money out of Bear Stearns. It is one thing to give level-headed advice and be wrong. It is another thing to engage in histrionics and label as fools people who do not follow one's advice. Actually, this gives credence to the thesis that Cramer's advice was stupid.

2. The clip that has been linked above shows Cramer giving advice on March 11th and on that same day, according to the chairman of the SEC, Bear Stearn's liquidity fell by 36%. The liquidity problem was occuring at the time Cramer gave his advice.

lemur

xamarshahx

Bladefist

Bladefist

hi

LOL!

rewinditback

nequam

Seriously I see both sides of the arguement, but this still rests on the fact how this letter was placed. kinda like asking him if I should leave my money in Washington Mutual CDs. It's really out of context for the show if he and others believed this was regarding their personal accts.

Milstar

Bear Stearns the stock is a far different story than keeping your money AT Bear Stearns.

The recommended selling the stock the FRIDAY before the meltdown. As for people holding their money at Bear accounts (NOT the stock,btw) The money is SAFE and still is.

ironchef

Kramer was talking about not pulling your money out of Bear, as in don't be stupid and make a run on the bank that doesn't have to happen. And it didn't have to happen. But it did happen because people were worried, and made emotional decisions rather than business decisions. And when all those people pulled their money out of Bear, Bear lost liquidity and had to be taken over. The whole thing wouldn't have happened if people had left their money in Bear.

This was all a run-on-the-bank fabricated by stupid people who made emotional decisions. Traders are famous for that. Let's not blame everyone else, it's the traders who pulled their accounts out of Bear that caused this mess.

humphrmi

But that's not what the SEC is reporting. Here is a letter from the chairman of the SEC, Christopher Cox:

[www.sec.gov]

Here is what he has to say about the liquidity of Bear Stearns, emphasis mine (this is from the bottom of page 3 and top of page 4; cut and pasted and cleaned a bit):

This unwillingness to fund on a secured basis placed enormous stress on the liquidity of the firm. On Tuesday, March 11, the holding company liquidity pool declined from $18.1 billion to $11.5 billion. This improved on Wednesday, March 12, when Bear Stearns' liquidity pool increased by $900 million to a total of $12.4 billion. On Thursday, March 13, however, Bear Stearns' liquidity pool fell sharply, and continued to fall on Friday. The market rumors about Bear Stearns liquidity problems became self-fulfilling. On Sunday, March 16, Bear Steams entered into the transaction with JP Morgan Chase. These events illustrate just how critical not just capital, but liquidity is to the viability of financial firms and how the evaporation of market confidence can lead to liquidity being impaired.

It seems clear to me that at the root of the crisis is a liquidity problem and that Jim Cramer gave bad advice.

lemur

EJXD2

jmschn

At the base of it, he's promoting personal equity investment, as opposed to using professionals. For the small player, this can obviously save on the costs of investment. It is a different take on diversification for those that don't have 5+ 0's in fairly liquid assets.

On the other hand, you could just listen to Warren Buffett who believes that a low-cost ETF tracking the S&P 500 is best...

cafematt

@Hossofcourse: You sir are an idiot there are mountains of posts on his site about the tech bubble and not getting screwed by over hyped zero profit tech start ups, its also covered in his autobio that was put out well before he even had a show.

full.tang.halo

jimmycaynesbluntashes

mbgrabbe

bluebuilder

nequam

K-Bo

jtheletter

nequam

Cramer's pathetic denial is just that.

He's to investing as is Paris Hilton is to acting.

Trai_Dep

Bladefist

jtheletter

29% for 37 yrs. - George Soros
21% for 40 yrs. - Warren Buffett
29% for 18 yrs. - Eddie Lampert
29% for 18 yrs. - Peter Lynch
24% for 13 yrs. - Jim Cramer
15% for 20 yrs. - Benjamin Graham

LynchMob52

azntg

LynchMob52

How many people have a retail account at Bear?? Oh, I guess this guy was.

He was wrong on Tuesday, right on Friday...that's the way Jim is.

gershinator

K-Bo

AaronZ

EBounding

esd2020

He may be somewhat crazy, but he is not stupid, he has made millions for himself and the companies and people he used to work for when he was a trader.

Falconfire

This is the problem with stock markets. If people weren't so impulsive, these problems wouldn't be so big. People lose more money through the hordes taking out their money because of collective fear of each other's actions than through the bad decisions of the companies to begin with.

Dobernala

BlondeGrlz

Hossofcourse

+ Watch video

boandmichele

The Cooler

NotATool

JustaConsumer

skittlbrau = baa

Front_Towards_Enemy

Beerad

valleyqueen

sleze69