Getting Rid of The Uptick Rule Causes Market Havoc, by Jim Cramer, TheStreet.com
Posted Apr 1st 2008 9:00AM by Jim Cramer, TheStreet.com
It was a cause I didn't want to take up. I didn't want to take it up because I knew the short-sellers would paint me as a naïve, clueless defender of the bull, and the long owners wouldn't really understand the idiosyncrasies of the subject. It was a cause I knew the brokers would never defend because their best business that is left is prime brokerage, and they need giant hedge funds to trade with them and can't risk alienating them.
I am talking about the uptick rule, the 70-year-old rule put in by the SEC to stop the process of "raiding" stocks, meaning sending them down by knocking all bids down underneath to where panic could and would ensue.
Today's typical. The Wall Street Journal breaks its seeming 10-year embargo on mentioning me or my show with a piece that basically says I have no idea what I am talking about and am a fool to bring it up. It quotes James Bianco, from Bianco Research right after me saying, "Anyone who thinks the removal of this rule is somehow causing havoc in the financial markets is hopelessly lost in the bark of one tree and may never be able to see the forest." He then goes on to say, "To suggest that the removal of this rule is causing the markets to go down is to loudly announce, "I don't understand the credit crisis and I am incapable of ever understanding it.'"
Put aside for the moment that Mario Gabelli and Marty Whitman are quoted as saying that it has never been easier to knock down stocks and that bear raiding's become incredible easy. The idea that I am loudly announcing that I don't understand the credit crisis and am incapable of understanding it is ludicrous. Was there anyone out there who more loudly announced this credit crisis before it happened than I did?
I knew this would happen. I knew that I would be regarded as a someone over his head who was attacking the people, not the fundamentals, and people would accuse me of being oblivious to the fundamentals.
Now, here is what you need to know. I have spent the better part of a year telling you that many, many firms would not make it. I have gone out of a limb and predicted that Washington Mutual could go and that Wachovia's in trouble and that Thornburg might go under. I have questioned the solvency of Citigroup and talked openly about how Merrill and Lehman needed capital or else. After reading an email on my show that asked if someone's deposits were safe in Bear I chose not to help cause a run on Bear's deposits by saying that they would be safe. Three days later with the stock at $37, down 20 from when I said the deposit was safe, I called the Bear Stearns stock worthless. Doesn't matter; I have been endlessly pilloried for being positive on Bear.
In short, as someone with a huge pulpit, I have done my very best to show all of the flaws of the system and to recommend only Hudson City Bancorp before Bear and JPMorgan after.
And now, because of this cause, I am labeled a foolish apologist and cheerleader of the financials and a blamer of the shorts. Where were these critics when I started screaming about these problems and openly criticizing the Fed and the administration? Oh, and now Jim Chanos has even gone as far as claiming I libeled short-sellers in an obvious attempt to get me fired at CNBC -- the note went right to management. And I like Chanos!
But ever since I started this cause, I have been inundated behind the scenes with people who have been in the business for years -- some of them professional short-sellers -- who know that this cause is just. They email me every day. They see me on the street. They call me in to talk about it. The fact that they won't go public is bad, but they have me and they know I will do it despite the catcalls and the derision because I know the truth.
I know the truth because I was one of the biggest short-sellers on Wall Street when I was in the game. I know how easy it is to create your own panic. You can make panic happen every day. I know the truth because pretty much all that my wife, Karen Cramer, did on Wall Street was advocate shorting and do shorting. I know the game because in 1990, when many people were losing money because of the financials, I had a great year because I shorted all of them. I know this because in 2000, when most funds were down, I made a fortune shorting -- so much that I retired.
So I am tired of hearing that I don't know the game. And let's face it: Even in the Wild West -- the commodity markets -- they have limits of how much you can send commodities down (and up) because they know you can institutionalize panic, which is what we have done in stocks.
During the period I traded professionally, I have seen and heard attempts to bear-raid stocks. I have seen and heard organized rings to take stocks down. But at all times, the brokers policed this stuff and I made it very clear to anyone who tried to involve me that I would go right to the SEC on this lest I would be called in myself for knowing about it, and I feared the SEC. I know this because I used to use married puts, where I would buy common and puts, and then bang down the common fast and hard, breaking the stock, before the SEC told brokers they couldn't do that any more because it was too easy to crack stocks, and crack stocks I did (as my brokers would attest) before the government decided to frown on it. I believe I did more married puts than any other firm during that period that it was legal.
It was child's play to take a stock down and everyone knew it. I was also able to "get a short off" at lightning speed while the bozos were all waiting for someone to give them an uptick. The common I bought protected me from violating the law until the government figured the game out and took away the safe harbor.
Now, because of a slippery slope that started with the ridiculous exemption of the ETFs, it became possible to bang down whole sectors. Of course, it was during a bull market, so who noticed? Then the government decided if it was OK for ETFs, then why not individual stocks? On a sleepy July day last year, with minimal comments, they scrapped a rule that was designed for just these circumstances, a vicious bear market where it made more sense to drive down stocks and profit quickly than to go long.
I would be having a field day buying puts right now and then slamming the common down to scare the heck out of the longs. With others in an unorchestrated way, I bet I could break a weak financial like WM today as easily as MBIA and MGIC and PMI and Ambac were busted. You can say, "They were worthless anyway," but they all needed capital to raise capital and the relentlessness of the beatdown made it so they were unable to raise the capital they needed because the stocks went down too much.
If I were in the game, I would be cracking the heck out of those stocks. They would be a free-fire zone, and I know others would see it and join in. I bet I could cause a run on a stock like Washington Mutual today.
Now, all of this is possible because you don't have to wait for a buyer. You can scare the heck out of any longs and trigger margin calls in a jiff. Lehman's raising capital today to try to stop this. Good luck. No matter how big the buyback, they have to stop at 3:30, so I would just wait until 3:31 and come in nuclear, or as I used to call it, a Blitzkrieg, and wreck the longs.
That this is so painfully obvious to everyone involved is amazing. Yet I can't get anyone to speak out about it besides me. I was joyous that Gabelli and Whitman came out today, but Whitman's tarnished because of his monoline support all the way down and Gabelli will be viewed as a cheerleader.
So, I am pilloried.
Let me say for the record that I do want price stability, that I don't stocks broken and I don't want people to leave the market. I do favor higher stock prices, I have never hidden that. The vast majority of people can't or don't know how to short. As a pro, I did, and if I were still at Cramer & Co., I would probably be arguing against me right now because of the money I could have been making.
So, to sum up, I know exactly what's going on and sometimes I wish I could quit all of this and just get back in and have my field day wrecking stocks that I know have weak fundamentals anyway. And let me reiterate that I would target the weakest and count on others to spread rumors -- that's illegal, and I am not going there -- to explain my actions in hitting stocks down.
I am sure that just admitting this legal raiding will raise hackles. But I am not going away with this issue.
I can't.
It's just too obvious.
And it worked for so many years; what was the point of getting rid of it? To let the quants have their way, and the hedge funds?
So, Chanos, accuse me of libel. So, Bianco, accuse me of not understanding the credit markets. Shorts, accuse me of defending broken stocks of broken companies.
But getting rid of this rule in the height of a bull market was the height of foolishness and now the SEC has no weapons to stem the cracking of both the good and the bad in a fragile system.
Keep calling me names, short-sellers. Keep attacking me.
Anyone who really knows me knows I live for it, and it will just make me more vociferous.
And cause me to notch up the issue to the point where everyone knows what is really going on. Then perhaps this SEC, which is lacking two members and is being disenfranchised by Treasury, can at least relook at the decision it made that sleepy July and recognize the havoc it is causing. |
