Jim Cramer on market manipulation: It's a pretty good game

(Via AUL)
Naked Capitalism has a great post called Traders behaving badly which nicely illustrates a system that kills minnows and rewards sharks.

That analogy does double duty - it applies to the market at large, and the culture within a firm.

Yves Smith spells out what happens when a trader crosses a line to bring home the big bucks:

...this type of chicanery gets perilous little notice. Why? Because management is complicit, either by commission or omission. The poster boy of "commission" was Joe Jett, the Kidder Peabody so called rogue trader who in fact never lost the firm a dime, but reported huge phantom profits due to a flaw in Kidder's reporting system. I won't bore you with details, but there is good reason to believe that Jett thought the profits were real, that he did not think he was perpetrating a fraud.

However, anyone with an operating brain cell, and particularly his bosses, should have questioned the idea that it was possible to make such monster profits in the Treasury market, Even if Jett had miraculously discovered some anomaly, it should have been arbitraged away, pronto.

So what happened? Jett was barred from the securities industry, and forced to disgorge his bonuses (I am going from memory, but I believe they were about $8 million). And what happened to his boss, Ed Cerullo, who made $20 million thanks to Jett? Nada.

That's why this crap continues.

Not much to add there, other than this crap needs to stop.

The bonus from this post is the link to Slate's article by Henry Blodget, Cramer vs Cramer.

Blodget goes through Jim Cramer's interview with Wall Street Confidential and susses out all the potential SEC violations Cramer is sorta-kinda admitting to having committed.

Jon Stewart thrashing of Jim Cramer will get a lot of play, but Blodget makes it seem that Stewart was positively benign compared to what he could have done.

Consider this Cramer quote (from the same interview):

    The great thing about the market is it has nothing to do with the actual stocks. Now, maybe two weeks from now, the buyers will come to their senses and realize that everything that they heard was a lie, but then again, Fannie Mae lied about their earnings for $6 billion, so there's just fiction and fiction and fiction.

    I think it's important for people to recognize that the way that the market really works is to have that nexus of: Hit the brokerage houses with a series of orders that can push [the stock] down, then leak it to the press, and then get it on CNBC—that's also very important. And then you have a kind of a vicious cycle down. It's a pretty good game.

I'll just quote Blodget here and refer you to the full post. It rocks.

What are the implications of the clip? Well, first, Cramer is once again giving terrible advice. How? By advising investors to engage in practices that might be considered illegal. Cramer appears to say it's OK to orchestrate prices ("it's important to foment …"). "The SEC doesn't understand," so you won't get caught. Even if this were true, and even if the only consideration were risk/reward, this would be bad advice.

Second, Cramer is implicitly undermining everything he says on his CNBC show. The whole conceit of Mad Money is that small investors can compete with the Big Boys of Wall Street. Well, if this is really the way the Big Boys play the trading game, how can that possibly be true? Is Cramer just implying (but not saying) on Mad Money that small investors should break laws?

Read the whole thang