PART 1--CRAMER "DO WE CARE" CRAMER
Risky Business
Jim Cramer in his Wall Street Office. (Brian Smale)
• Howard Kurtz is The Post's media reporter. This article is adapted from "The Fortune Tellers: Inside Wall Street's Game of Money, Media and Manipulation" (Free Press). Kurtz will be fielding questions and comments about this article Monday at 2 p.m. at washingtonpost.com/liveonline.
By Howard Kurtz
Sunday, August 27, 2000; Page W08
It was the worst day of Jim Cramer's life.
For 14 years, the flamboyant Wall Street trader had worked insane hours, getting to the office by 5 each morning, shouting orders, playing each hiccup in the market to make money for himself and his small coterie of investors. He had become fabulously wealthy in the process, but somehow that wasn't enough. Even as he gambled millions on stocks each day, Cramer had also built a thriving career as a commentator, spouting off on television and in magazines about the very market in which he was so heavily invested. He filed seven or eight columns a day for TheStreet.com, the financial news service he had created and nurtured through tough times.
Cramer wanted to tell everyone what he thought about the market at every possible hour. He was bursting with the brilliance of his ideas, the motor-mouth kid who couldn't keep quiet in class. If there were no TV and no Internet, he would have gone door to door. He was, in short, the perfect embodiment of the dizzying culture of Wall Street, determined to be faster and smarter than everyone else, louder than everyone else, more famous than everyone else.
But now, on the morning of October 8, 1998, Cramer was watching it all unravel. The once-soaring stock market had been in a stomach-churning decline since July, slicing nearly 2,000 points off the Dow Jones industrial average and making fools of many of those who had so confidently placed their bets on the exhilarating ride up. Suddenly, inexplicably, one investor after another had been calling Cramer and demanding his cash. Before long, half the 100 investors in the hedge fund, Cramer, Berkowitz & Company, were bailing out. There was talk that Cramer was losing his focus, that he was spread too thin with his various media ventures.
Cramer's confidence was badly shaken. No one, not a single investor, had ever bolted on him before. What had he done wrong? True, he was having a bad year; the fund had earned just 2 percent since January. But these mass defections were his worst nightmare. All of the fund's money was invested in the ailing market, yet Cramer was required to wire the cash to his disgruntled clients by 1 p.m. He had six hours to come up with more than $50 million.
Most of the time, Cramer was cool in a crisis. Sitting at the trading desk in his eighth-floor office at 100 Wall St., surrounded by four computers and a Bloomberg terminal flashing the fate of stocks in green and red, he would bark orders to his staff, scan the newspapers, listen to CNBC on the television set behind him, write his online pieces and scroll through his e-mail-sometimes all at once. He would pick up the black phone with the open line to his broker and buy "five AOL" or sell "10 Sun Micro" as easily as a couple of lottery tickets, when he was actually betting hundreds of thousands of dollars on companies with amazingly volatile stocks.
But today was different. To help out a longtime friend who needed to withdraw his investment, Cramer had, as required by federal rules, announced a day on which all his clients would be eligible to pull their cash. The due date fell on October 8, which happened to come during a near-panic on Wall Street. The Dow had dropped from more than 9,300 to less than 7,500 in less than three months. Cramer had persuaded a few of the defectors to stand by him, but many were determined to pull the plug.
In the worst blow of all, one of those abandoning ship was Martin Peretz, the owner of the New Republic and one of Cramer's closest friends. Cramer thought of himself as having been like a son to Peretz. They had been tight since his days at Harvard Law School, when he took one of Peretz's classes, and in 1996 they had teamed up to launch TheStreet.com.
But their relationship had grown increasingly strained, particularly after Cramer argued that he was doing far more work for TheStreet.com and successfully demanded a million more shares in the company. Now, at Cramer's most vulnerable moment, Peretz was striking back. A couple of other investors told Cramer that Peretz had urged them to pull out of the hedge fund, saying that he knew Cramer better than anyone, that Cramer didn't care about the business anymore and was spending all his time on TheStreet.com. Peretz would later say he had told only one person to leave the fund, but Cramer was convinced that his longtime friend was responsible for this terrifying run on his bank. It was, in Cramer's eyes, the ultimate betrayal. He had not cried since his mother's funeral, but at night he had found himself bawling over this massive vote of no confidence.
Now it had become a matter of survival. If Cramer could not come up with the money in time and the market crashed, he would be personally liable for the losses suffered by his disgruntled investors. For the first time in four years, Cramer called his wife, Karen, a former trader with whom he had co-founded the hedge fund, and asked her to leave their home in Summit, N.J., and come to work. Get a sitter for the kids, he said, find a way to get down here. When Karen Cramer showed up, her husband's shirt was soaked through with sweat. The computer screens were all flashing red. Declining stocks outnumbered the winners 9 to 1. Was this a good buying opportunity-or another 1987 crash?
Cramer was selling stocks all morning-many of his best stocks, the ones he hated to lose, to come up with the cash he desperately needed. Karen manned the desk while he frantically tried to talk the last few defectors out of leaving him. Who knew where the bottom was? Cramer was scared. Traders were never supposed to admit that, but this was a truly frightening moment.
At 1:15, CNBC anchor Ron Insana came on the air with some breaking news. Cramer thought the mere sight of Insana would cause further losses, since he had been delivering consistently bearish news in recent days. But wait! Insana was talking about his conversation with former Federal Reserve governor Lyle Gramley. "Shut up," Cramer shouted, hitting the volume button. Insana reported that Gramley believed the Fed members were arranging a conference call to consider cutting interest rates. The Dow moved up 30, 40, 45 points as Insana delivered the news. Now the day's loss was less than 200. Cramer had just filed a bearish column for TheStreet.com. "What if Insana is right?" Karen asked him. "You will never live this piece down."
Still, Cramer remained reluctant to buy. That, he soon realized, was a colossal mistake. Insana had been right about the conference call-and a few days later the Fed lowered interest rates. Prices were moving up; the long slide was over. The Dow began what would be a steady climb back over 9,000. It was remarkable, Cramer thought, the first time a market slide had been halted by a TV reporter's scoop.
The carnage was over. Cramer's last-minute maneuvering had saved the company, but he had lost millions in the process. He had also lost Marty Peretz, who had humiliated him and brought him low. This was an ugly way to make a living, Cramer thought, an utterly soulless business. It had made him rich, but at a breathtaking price.
When journalists cover politics, their outsider role is clearly defined. No single reporter can affect White House policies or a candidate's campaign through mere analysis or commentary. True, if several news organizations pound away in unison, they can put an issue on the national agenda or throw a politician on the defensive. But such efforts can be measured only roughly, through the fleeting snapshot of opinion polls. In this realm, journalists are scorekeepers, second-guessers and naysayers, and their influence is ephemeral and diffuse.
In the business arena, however, financial journalists are players. They make things happen instantaneously, and their impact is gauged not by subjective polls but by the starker standard of stock prices. A single negative story, true or not, can send a company's share price tumbling in a matter of minutes. A report about a possible takeover attempt can immediately pump up a stock, adding billions to a company's net worth. The clout of financial journalists affects not just the corporate bottom line but the hard-earned cash of millions of average investors. And in business, unlike politics, the reporting of rumors is deemed fair game, since rumors, even bogus ones, move markets.
Journalists, of course, don't spew out information and speculation in a vacuum. They are used every day by CEOs, by Wall Street analysts, by brokerage firms, by fund managers who own the stocks they are touting or are betting against the stocks they are trashing. These money men are as practiced in the art of spin as the most slippery office-seeker, measuring their success not in votes but in dollars, not in campaign seasons but in minute-by-minute prices.
Amid this daily deluge, there's one inescapable problem: Nobody knows anything. These are savvy folks, to be sure, but all of them-the journalists, the commentators, the brokers, the traders, the analysts-are feeling their way in a blizzard, squinting through the snow, straining amid the white noise to make out the next trend or market movement or sizzling stock. They traffic in a strange, souplike mixture of facts and gossip and rumor, and while their guidance can be useful, they are just as often taken by surprise, faked out by the market's twists and turns, their piles of research and lifetime of learning suddenly rendered irrelevant. They talk to one another, milk one another, belittle one another, desperately searching for someone who knows just a little bit more about the stock that everyone will be buzzing about tomorrow. It is a mutual manipulation society that affects anyone with a direct or indirect stake in the market, which is to say nearly everyone in America.
The business world of the 21st century moves with a lightning quickness that would have been unimaginable just a few years ago: online investing, global trading, an increasingly volatile stock market. And the media play a vastly more important role in pumping and publicizing the money machine, moving stocks with an endless cascade of predictions, analysis and inside dope. This is America's new national pastime, pursued by high-powered players and coaches whose pronouncements offer the tantalizing possibility that the average fan could share in the wealth. Like modern-day fortunetellers, they gaze into the future where untold riches await those who can divine the right secrets.
No one embodies the new culture more completely or colorfully than James J. Cramer. The son of a man who sold gift wrap for a living, Cramer grew up in suburban Philadelphia, peddling ice cream and soda during Phillies games, before winning a scholarship to Harvard and becoming president of the Harvard Crimson. After graduation he landed low-paying reporting jobs at the Tallahassee Democrat and Los Angeles Herald Examiner, then returned to Harvard for law school. He soon began leaving stock tips on his answering machine-Marty Peretz was so impressed he gave the young man $500,000 to invest-and eventually talked himself into a job at Goldman Sachs. In 1987 Cramer went into business with another young trader, Karen Backfisch, and a year later they were married. Fortune touted the couple with this headline: "Are These the New Warren Buffetts?"
By the late '90s, even as Cramer was managing $300 million of other people's money, he continued to moonlight as a magazine writer, online columnist and CNBC commentator. A charismatic man who was utterly incapable of hiding his emotions, he enjoyed picking fights with critics like Alan Abelson, the veteran Barron's columnist. And Abelson wasn't shy about punching back, describing Cramer the television personality as "an unfailing and formidable threat to coherence," and Cramer the writer as "a threat to ob-jective journalism, since he's an unremitting practitioner of subjective journalism, with only one subject-himself."
But that was precisely the point. The whole premise of Cramer's financial writing was that he would bring the average Joe inside Wall Street and explain the intricacies of the game as he risked his own cash. That meant he had to be candid about his setbacks as well as his triumphs, making Cramer one of the few financial hotshots who advertised his screw-ups. But it also meant that his journalism and his financial holdings sometimes collided head-on.
While many reporters and commentators occasionally tripped over potential problems involving their financial interests, Cramer's immersion in the crazed environment of Wall Street is at the heart of his high-decibel persona, the very essence of his appeal. He prides himself on dirtying his hands in the trenches and openly disdains journalists who calmly analyze from the safety of the sidelines. Cramer tries to deal with this inherent conflict of interest by always disclosing his holdings and never directly urging people to buy or sell. But these caveats are sometimes drowned out by the market's mighty roar.
On the morning of December 2, 1998, Cramer was doing his biweekly stint as a co-host of "Squawk Box," CNBC's popular morning show, and when the talk turned to Internet stocks Cramer insisted on calling many of them "Fraud-U-Net" stocks because they seemed wildly overvalued. He brought up a Phoenix company called WavePhore, whose CEO, David Deeds, was to appear on the program that morning. Cramer vowed that he was going to try "to get the truth out of the guy," which was that the stock, in Cramer's view, was badly overpriced.
"I called my stock-loan department and said, `Listen, I want to short 25,000 WavePhore because I think this thing is a big speculative bubble,' " Cramer told viewers, referring to the practice of betting that a stock's price will fall. Cramer aggressively questioned Deeds later in the show. All this was like yelling fire in a crowded theater. WavePhore's stock plummeted 38 percent that day. Investors figured that if Jim Cramer was trying to dump the stock, it was time to bail. Cramer quickly realized he had made a terrible choice of words. He wasn't really shorting the stock; he had simply meant he was trying to check on whether other brokers were doing so.
WavePhore officials went ballistic, and the Securities and Exchange Commission began investigating whether Cramer had actually tried to short the stock. CNBC executives felt that they had no choice but to suspend him.
Cramer called his lawyer. Had he done anything wrong? The attorney said he had not. But Cramer felt as if a menacing cop had pulled him over for speeding. It was scary. He began paying the first of $50,000 in legal bills. CNBC brought Cramer back to "Squawk Box" four weeks later to be grilled by host Mark Haines.
The situation was clearly awkward for Haines. He liked and trusted Jim Cramer. He was absolutely confident that Cramer did not mean that he had literally shorted the stock, for Cramer would never have attempted such a crude and blatant manipulation. But Cramer had certainly blundered by using such crude Wall Street shorthand. This, Haines felt, was the risk you took by having on guests who invested their own or other people's money. There was always the potential for traders to use the program for their own financial ends. Still, he preferred such guests because, unlike mere observers, they put their cash on the line every day.
Haines got right down to business. "Fraud is a heavy word," he said, fingering his glasses.
"That would be wrong . . . I didn't say that," said Cramer, looking visibly nervous.
"If you tried to short the stock because you knew the CEO of WavePhore was going to be on CNBC and you were going to be tough on him in the interview, that could be construed as stock manipulation," Haines said.
"If I were to do that, that would have been wrong. It was not my intention," Cramer said.
CNBC decided to reinstate Cramer, but network executives were worried about the appearance that they were being used to move the market. They decided to hand out written conflict-of-interest guidelines to the market pros who appeared on CNBC, who now had to disclose if they owned the stocks they were talking about. What's more, their private actions had to be consistent with what they were saying on the air. They couldn't talk up a stock and then sell their holdings for a quick profit. Cramer had reminded them that they were all playing a dangerous game.
It was 5:45 a.m., the sky over Wall Street jet black, and Jim Cramer was at his desk, fuming about Hewlett-Packard.
On this Wednesday morning, February 17, 1999, Cramer felt sandbagged by the H-P folks. Days earlier, Cramer had met with the computer company's executives at a Goldman Sachs technology conference, and they had assured him that they were having a great quarter. Right. A story in that morning's Wall Street Journal reported that H-P's quarterly revenues were up a measly 1 percent. This was no minor matter for Cramer, for he owned millions of dollars in H-P stock, 2 percent of his entire fund. He had dumped $350,000 of the stock a week earlier, but he still had to take major losses. He felt sick to his stomach.
The Net hype, Cramer believed, was out of control. Just look at eBay. The place had just 130 workers and was valued by Wall Street at $11 billion. Cramer calculated that eBay was trading at $86 million per employee. Eighty-six million! It was nuts. All these yo-yos out there were watching CNBC and placing their buy orders as soon as the next guest was announced to talk about his company's Net strategy.
This, Cramer felt, was a prime example of how CNBC had changed the world. The great unwashed now got the same real-time information as he did. What was once an elite corps of professional traders was now a huge mob, all trying to squeeze through a narrow door. Cramer regarded CNBC as part of the lifeblood of the market, so important that he moved out of his old offices because the building didn't get cable.
The room turned manic just before the 9:30 opening bell. "Merrill Lynch raising numbers on Hewlett!" a staffer shouted. Cramer sipped a Diet Dr Pepper and scanned his computer screens.
"EBay up 14, huh?"
"I want to buy 10 AOL," meaning 10,000 shares.
"What do we do on Lucent?"
"These are head fakes," said his partner, Jeff Berkowitz.
"Ah, Intel's not coming in. Is Intel a head fake?"
"I dunno, so we do nothing," Berkowitz said.
On the TV behind Cramer, Mark Haines was expressing relief that the Dow was down just 40. "This is not as bad as we expected," Haines said.
"It's early, Mark, it's early," Cramer muttered.
Now Cramer was standing, barking orders to his staff. "I want to sell Intel! Sell 5 Intel! Sell 5 more Micro!"
He studied the computer screen. "[Bleeping] Intel is so powerful. How could Intel be going up?" He decided it was a temporary blip. "Sell 5 more Intel! Sell another 1,000 Yahoo!"
Surprised that tech stocks weren't taking more of a beating, Cramer started banging out a Street.com column at 10:15. "We are sitting here amazed . . . I doubted Mark Haines when he pronounced all is well at 9:45. But I should have been buying rather than snickering." Cramer looked over the piece he had filed at 7:32 that morning, saying that tech stocks were "not so hot."
"I look really stupid," he said. "I wrote that piece, I'm already wrong! Jesus Christ, it's so hard."
Soon the Dow was out of the red and up 5 points. The second-guessing began. "Everything I sold was wrong, everything I bought was right," Cramer said.
He tallied up his score sheet. The firm had lost $240,000 on Hewlett-Packard, $40,000 on Intel, $180,000 on Qwest Communications. It had picked up $15,000 on Lucent Technologies and Time Warner. All told, Cramer had lost close to $400,000, and the take-out sushi hadn't even arrived yet for lunch. |
