"It was just stupid"

TheStreet.com's co-founder, Jim Cramer, explains why he regrets his dot-com days.

By Katharine Mieszkowski
Published June 4, 2002 7:30PM (EDT)

Back in 1998, when it seemed that anyone with an E-Trade account could make a bundle on Wall Street, Jim Cramer was having such a bum year he almost lost his business. The money manager who co-founded TheStreet.com, Cramer had become the all-purpose stock market media pundit, his red face and wild hair as much a fixture on the likes of CNBC as the scrolling ticker.

While everyone else was raking it in, you could read about Cramer's humiliating bad calls every day in his columns on the TheStreet.com.

Cramer's hedge fund -- the tightfisted mom-and-pop outfit Cramer Berkowitz, which had generated more than $300 million in profits -- was on the verge of insolvency. But somehow, his Internet company, TheStreet.com -- a dot-com with eight-figure losses whose very desks cost $50,000 a pop -- was taking off. It would go public in 1999, with trading opening at $63 a share.

Soon the company that Cramer had spent his high-profile career building would be worth less than his dot-com sideline. But while Cramer might be Mr. TheStreet.com to the public, he'd lost control of that company to the point where he was not allowed even to visit the offices without explicit permission from the executives.

In "Confessions of a Street Addict," Jim Cramer dishes the ironies of his career on Wall Street and at TheStreet.com. But for all the juice in Cramer's own revelations, the controversy around another book by a former Cramer employee, Nicholas Maier's "Trading With the Enemy," has stolen the headlines.

First, Maier's red-faced publisher sent 4,000 copies of his book to the shredder when an anecdote about Cramer's having been investigated by the Securities and Exchange Commission proved false. But according to the New York Post, which has been hot on the story, Maier has since testified to the SEC about allegedly shady practices at Cramer Berkowitz. Among other things, Maier has accused Cramer of using his relationships with on-air stock market reporters, such as CNBC's Maria Bartiromo, to work a trading edge.

Under fire, Cramer has responded with his own finger-pointing. He accused Rupert Murdoch's media empire of conspiring against him, since HarperCollins is the publisher of Maier's book and Cramer has a checkered history with Fox News.

Now retired from his hedge fund, Cramer works "only" from 8:30 a.m. to 7 p.m., writing columns for TheStreet.com and appearing on CNBC and Bloomberg Radio.

He talked to Salon about his book, Maier's book, and why he wishes he'd never started TheStreet.com in the first place.

Who ultimately do you think is to blame for the dot-com bubble? Wall Street? The venture capitalists? The half-baked companies themselves? The government regulators?

I like to look at it in terms of power and powerlessness. The government was powerless to stop it because you don't have an SEC that's chartered to examine value. It's chartered to be sure that you disclose, thinking that if people are confronted with the true facts, they will be able to make rational decisions. The government is taken out of the equation.

The venture capitalists hold the key. Since all their companies are coming public at a premium, they have a precious commodity, so they're courted, and they can ask for more outrageous terms than typical. The investment banks are anxious to move as much product as possible. They are always value-judgment neutral. Like the SEC -- but not for the same reasons -- they're never going to put any judgment on [the value of a company], because there is too much money to be made.

And the public loved it. The public loved it!

So no one is to blame? Or we all are?

Yeah, the only people I would exempt are the government, because the government really and truly plays no role in valuation.

This was a valuation bomb, not a disclosure bomb. Enron and Global Crossing -- those are issues of disclosure. They simply didn't tell us how bad things were. If you go back and look at all the dot-com prospectuses, they're filled with how bad things are.

The great Wall Street promotional machine accentuates whatever happens to be the mood of the public. Wall Street was complicit and the public was complicit and the companies were certainly complicit and the venture capitalists were complicit.

It takes all of those to make it happen.

So, how was this bubble different from others?

We've seen this particular kind of boom thousands of times before, but it had never before had one particular element that no one banked on, which was this love affair by the public with their computers and their fast phone lines, and the enabling brokerage houses that allowed you to be able to get in on the hot deals for the first time even if you weren't an institution.

That took a conventional weapon and turned it into a nuclear weapon.

You write that the IPO of TheStreet.com could have made you believe, like a Marxist, that capitalism would collapse under its own weight. How could you go along with the deal when you knew how bad it was?

Take a look at the operating structure of the company. I had no operating role, and I think that most of the substance of the book [that deals with] TheStreet.com is how it was hijacked from me.

They let me have some lip service. Periodically, I was allowed to play a role. But this was a rogue company. And it's a company where if I had said no, or if I had said yes, it really wouldn't have mattered. Not until we took the dramatic action at the top [firing the CEO and replacing board members].

I hated it. I just hated it. It was just stupid.

A friend asked me the other day, "Do you regret that you did it?"

And you know, I thought about it for a long time, and I said: "Yeah, I do. I just do." I'm proud of what we've accomplished now, but I don't think that it was worth it.

Why not?

Because it caused too many problems in my personal life.

I mean, I wish that we could have done it without all the heartache. And if you told me, "No, the heartache comes with it," I would have told you that even as great as the product is, the heartache was just too hard. I just feel awful about what everyone went through with this thing.

Now, the end product is good, and we'll make it as a company, but I think a lot of what happened that went wrong with me in my life had to do with TheStreet.com, not with Cramer Berkowitz.

Why has TheStreet.com survived when so many other dot-coms haven't?

Because we have an unbelievably good CEO who came in and was an adult, Tom Clarke. He very quickly realized when we had $120 million in the bank that we were about to lose $120 million, even though the board disagreed with him.

And that was amazing, because all these companies thought that their $100 million was going to last forever. We happened to be blessed with a CEO who said: "Look: $120 million, we could piss that away overnight."

So we were able to change the culture of the company, but it was brutal.

The brutality of getting the company to be in the right shape was unparalleled in terms of the cruelty of it. When you shrink a company from 310 employees to 120 employees, that's just Bethlehem Steel, and coming from the point of view of an ex-socialist, it was hideous. But coming from the point of someone who says, "Listen, we can save 120 jobs," it was great.

Do you think that there's anything about The Street's business model that makes it different from all these dead companies?

Yeah. We stuck with paid [subscriptions] the whole way, even though our previous CEO, Kevin English, wanted to get rid of it. And sticking with paid was brilliant, and it saved our lives.

You write that the old Wall Street hands hated the dot-coms because they knew the whole thing was a bubble. Your wife, for instance, was shorting these stocks. So, did some of your colleagues think you'd gone over to the dark side when you were doing this dot-com?

People only thought it was amusing until that weird confluence of retail investors who kind of hijacked the process, and the excess liquidity that the Fed pumped into the system to beat the Long-Term Capital morass.

Until that, everyone just thought it was just the ultimate folly. And then suddenly it was: "Well, holy cow. This company is worth more than Cramer's real company. The joke company is worth more."

To me, as someone who is torn and conflicted and passionate about everything he does, it was just a nightmare for me that it was like that.

You write that the reason that your hedge fund succeeded is that you recognized that Wall Street was this fashion show, and it was all psychological. After the bubble, do you think that small investors have learned this lesson?

No. I think people need the help of pros, frankly. I think that you really need someone who understands the process to help you through it. It has to be someone who has been around and has a cynical view of the capital-formation process.

It's just way too hard. I feel so many people are out there still trying to understand the way it works, and they just don't get it.

But wait. Wasn't part of your success as a media commentator in promoting the idea that individual investors could make their own decisions?

Yes. I made the mistake of thinking that people could do a fairly modicum amount of homework.

Let's take the case of WorldCom, OK?

I would have thought, in the democratization days, that you could go look at WorldCom, and when you saw that the debt got out of control, that they had borrowed too much money, that you would sell WorldCom. Because you would go, "Well, holy cow! It's like they've taken down four mortgages."

What I didn't count on was a lot of people don't even know what debt is. They don't even know that you have to look at the balance sheet. They kind of melded this bizarre belief in stocks with a philosophy called "buy and hold," so they could buy and hold really bad stocks, and ride them to zero.

I mistakenly thought that you could teach anybody, or that people knew. I just did not know how little people understood about a balance sheet. I used to say if you can do your checkbook, you can understand a balance sheet. But maybe you can't.

Do you think that when the next wave of Wall Street hype comes around we won't have learned this lesson?

No. We won't have learned jack, because it's the nature of manias. It just happened. I think that there will be more people who will be skeptical, and they will therefore lose even more money because they're skeptical initially.

You write that in 2000, you realized it was clear that the Web wasn't going to be a commercial endeavor except for eBay and America Online. Do you still think that today?

I think that it's a very unimportant piece of commerce.

I was hoping that it was going take off like TV. For instance, TV is not as good as print news, but TV news kind of took over. It meant the end of the afternoon papers, and the papers never really had a chance versus the profitability of the networks.

I was hoping that the same convergence would occur again with the Web, but ... it just turned out to be a very inefficient medium. I don't think it will be that way 10 years from now.

So, the hang-up is that we don't have broadband now?

It's not just that we don't have broadband. We also have to carry these heavy computers around everywhere. We haven't figured out how to do a docking mechanism, and people like to have the tactile feeling of paper.

[But] from the point of view of TheStreet.com now, it works well. Before, people wouldn't pay for an Adobe version of a research report. Now, they'll pay for it, and they're happy to. But that was something that they weren't willing to do five years ago, and now they are.

But again that's not a big use. That's a niche use. And it turned out to be a series of niche products that weren't as important to the economy as we thought, and a couple of huge wins like Amazon and eBay, although they were valued too high at certain points.

There's been a great deal of controversy swirling around your book and Nicholas Maier's book about you.

I've been incredibly controversial my whole career on Wall Street.

And there are a lot of people who would like to make a name for attacking me. All I can say is: Look, I had a great record on Wall Street. I retired. I got out of it because I couldn't stand how I became as a person. Not that I became an unethical person. I became a sick drone that just worked really hard, and that's not a life.

I stand by my record, and I think that a guy like Nick [Maier], he has to go sell his books. And let him go sell his books.

You've been quoted saying that Roger Ailes, the mastermind of Fox TV, is trying to torpedo your book since Murdoch also owns HarperCollins, which published Maier's book. What's the evidence?

Well, Roger has made a very forceful case in the Washington Post that it was a coincidence the New York Post attacked me every day just after [Maier's book] was published by the Murdoch empire, so I'll take him at his word.

If he says it, he seems like a man of his word. I'm glad he explained it to me.

People have been raising eyebrows about this idea that you were having early morning conversations with Maria Bartiromo, and making investments based on what you thought she'd be talking about on TV.

The way it works now is that Maria Bartiromo can call the research department of Goldman Sachs and say, "What did you recommend today?"

And they'll tell her. But when that process was started in the mid-'90s, those firms wouldn't take Maria's call. So, what would happen is that she would have to call accounts like mine and say, "What was the research?"

That was the extent of my role. I read her the upgrades and downgrades. She never commented to me what she was going to do with it, and I never knew.

But I gotta tell you: Did I own stocks that got upgraded and downgraded? Absolutely.

But did I try to figure out the so-called Maria effect? Give me a break. I'm trying to make hundreds of millions of dollars. And you don't make hundreds of millions of dollars trying to guess what Maria is going to talk about on TV.

This has been postulated as being a method of making money, and I just laugh. It's not a legitimate way, it's not a good thing, it's not what I did. What I tried to do, and I was very clear about this in the book, I tried to anticipate upgrades and downgrades. That's what I tried to do. And I was very good at that. And you could argue, "Jim, that's a scummy game."

But that's what I tried to do. The fact that I spoke to Maria or did not speak to Maria would not have meant a dime to my P and L [profit and loss].

So have you slowed down? Are you still waking up at 4 a.m.?

No. I don't have an alarm. I get up whenever I want. This morning, I got up at 6:15. I made the kids breakfast, I made them lunch, put them off to school. Left the house at 8:30 after having a cup of coffee with my wife.

Got stuck in bad traffic, but then went to a voice coach for my TV show. I've written a couple of articles. I'll do my radio show at 3. I'll have the TV show taped at 5:30, and I'll be home at 7. I'm working from 8:30 to 7 p.m. Before I was working from 4 o'clock in the morning to 11 with a break for dinner, so I'm working about six hours less.

I wish I could still do even a little less. I'm glad to take six hours out, but I'd like to take three more hours out, and I'd like to take a couple of months' vacation, and I can't do that.

So now that you're picking stocks for the long term as an investor, not a money manager, how often do you trade?

I have to get everything cleared by the general counsel of CNBC. I have a four-month holding period. In an emergency, I can ask for it after a month, but I haven't used that. I own the same stocks that I've owned for the last year for the most part, except for United Technologies, which went up a lot, and I sold that.

Do you miss the constant rush of trading all the time?

No. I can't go back. I don't go back to my old office. Well, I shouldn't say that I don't miss it. I just feel like I'm still close enough to remember what comes with it: the miserable nature, the unhappiness, the belief that I didn't do a good enough job, the belief that I let people down, the belief that my partners are more important than my family.

All that stuff comes with it, and it's undeniable, and I can't go back. I can't do it.

Katharine Mieszkowski

Katharine Mieszkowski is a senior writer for Salon.

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