'Mad Money' Causes Mad Losses

Whether or not Jim Cramer ‘knew better’ about BSC when he made the statement below to Erin Burnett on CNBC yesterday afternoon:

“Look, let’s understand two things, 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. 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. They are not guaranteeing the equity. I got a lot of things wrong in my life, but I don’t regret the fact when I said don't take your money out of Bear. If you have your money in Bear you still got it today. Remember, there’s Bear Stearns the common and that person was going to pull the money out of Bear. We got a guarantee. JPMorgan is now Bear.”

One thing’s for certain: this is the danger that exists when a large group of investors rely on a single source as their primary source of investment information – and suddenly, that source is wrong.

We don’t mean to go lightly on Cramer – I mean, if he did in fact make the ‘strategic decision’ that he ‘could not cause a run,’ then 20/20 hindsight given what’s occurred tells us his response was irresponsible. But quite frankly, we think this was just one of those situations where it was impossible for him to come out unscathed. Would we have rather had him ‘cause a run’ on the bank? Would that have been responsible? I suppose we’ll never know.

The real problem is the bigger picture issue – when investors are looking to one source, and when that source understands the power (as Cramer well understands) and credibility their recommendations have with their audience, we’re treading into dangerous territory. Dangerous for the investment ‘advisor’ because he needs to responsibly weigh his influence into the words he chooses; and dangerous for investors, because this ‘skewing’ – no matter how honorable the intentions – can result in conflicted advice.

Clearly we didn’t learn any lessons from the Global Settlement back in 2003, or investors would recognize that when they blindly follow the direction provided to them by a single source, they know how the story ends: massive losses.

Hopefully investors – and maybe even Cramer himself – will learn a lesson from this situation and recognize that diverse views strengthen our market structures and help in educating investors so that they are more capable of making sound investment decisions.