Category | The Players

Michael Steinhardt – “When the Bad Guys Came to Town”

I feel the same strange admiration for Michael Steinhardt as one would for an old mobster sitting in a Tucson retirement home playing canasta. Steinhardt slipped through minefields that destroyed others, and for that alone he should be beyond cheap shots now. However, without telling Steinhardt’s story there is no way for me to make the connections that I wish to make, so I will relate the Steinhardt Tale, in four acts, with none of the shots being cheap ones.

Some years ago, I asked a Wall Street old-timer to summarize how Michael Steinhardt would be remembered. The old-timer was unusually pensive. A faraway look came into his eyes as he seemed to recall how the Street had once been, and how it had changed.

At last he replied, “Steinhardt? That’s when the bad guys came to town.”

Prelude

The central character of Mario Puzo’s The Godfather was “Vito Corleone” (played in the movie by Marlon Brando). Don Corleone was modeled after real-life Mob boss Vito Genovese, who headed the Genovese Crime Family. Other figures from this family include Charles “Lucky” Luciano, Frank Costello, Bugsy Siegel, Meyer Lansky (“Hyman Roth” in Godfather II), and Vincent “Jimmy Blue Eyes” Alo.

The Genovese Crime Family had a fence named Sol Frank “Red” Steinhardt, who was arrested in 1958 on charges of buying and selling stolen jewelry. The prosecutor at Red Steinhardt’s trial, Frank Hogan, described Red Steinhardt as “the biggest Mafia fence in America.” Red was sentenced to 5-10 years on each of two charges of fencing, and served several years at Sing Sing, a prison just north of New York City.

While in prison, Red Steinhardt put his son Michael through the University of Pennsylvania’s Wharton School of Business. When Michael Steinhardt finished Wharton in 1967 he started an early hedge fund, “Steinhardt, Fine, Berkowitz & Co.” As Michael later revealed in his book, cash from Steinhardt’s father and his “associates” funded his hedge fund. Thus, it was a conduit by which Mob cash passed into Wall Street (one former prosecutor shared with me an elegant phrase a Mafia suspect used under interrogation: “Yeah, in da 70’s weeze went from concrete to Wall Street”).

Michael Steinhardt Act I

Steinhardt’s first act was notable in three ways:

a) In the early 1970’s Steinhardt was a close financial associate of an international oil trader and general bon vivant named Marc Rich.

b) From his start in the early 1970’s, Steinhardt’s reputation was that of a hater, an in-your-face profanity-laced screamer of unprecedented proportions. Nothing I have ever seen from Hollywood captures the way I have seen it occur in reality on Wall Street, yet in that environment, Steinhardt’s verbal brutality towards others, including towards his subordinates, became the stuff of legend. For example, there is a story that may be true, or it may be apocryphal, but whichever it is, it is widely repeated around Wall Street: in the early 1990’s Steinhardt had a partner, Peter Toczek of the New York and Foreign Securities Corporation, who handled Steinhardt’s overnight trading. They were considered close (I even heard that Peter and Michael were “godfather” to each other’s children, but cannot verify that). As the story goes, Peter was paid a bonus that was smaller than he (Peter) expected, and he confronted Steinhardt over it. Steinhardt screamed at Toczek so abusively that all conversation in the office ceased, then continued berating and humiliating Toczek so badly that Toczek was reduced to tears. Toczek left for the day, went home, and keeled over, dead. Steinhardt showed no regret. (Whenever I hear this I think of the Eddie Murphy/Dan Akroyd movie Trading Places, where an essentially similar event transpires between Mortimer and Randolph Duke). Be this incident true or not (and in fairness to Steinhardt, Toczek is said to have topped out at 300 pounds), what is undeniable is that from the early 1970’s on Steinhardt was well-known for being absolutely brutal in his interactions with others.

c) The other technique Steinhardt pioneered in the 1970’s was an extremely aggressive trading style centering upon, “The Edge.” What “The Edge” means is “information asymmetry.” One person who worked at a major brokerage covering Steinhardt described to me their first encounter, decades ago: “We came out with a downgrade on a stock, I think it was GM. Minutes later I got a call from Steinhardt. ‘You fucking asshole,’ he said. ‘Why didn’t I know about this thirty minutes ago?'” (In other words, Steinhardt was demanding to know why he had not been tipped off to the coming downgrade.) “I told him, ‘Come on Mr. Steinhardt. You know that would be illegal. You know I can’t do that.’ Steinhardt told me, ‘You dumb fucking kid, you know the way the game is played. You look at how much vig I pay your firm each month and you tell me that.'” (Another Wall Street money manager who worked in these circles tells me, “Steinhardt always liked to get what he called, ‘fancy information.’ You know, analysts’ upgrades and downgrades, before the market got them. Steinhardt would tell them, “You want my business? You gotta get me some fancy information. That’s how you win my business.” )

Together, the screaming and “the edge” explain Steinhardt’s success: bullying people to get them to cough up “fancy information” minutes before the rest of the market has it (which makes it “fancy” no more), placing gigantic bets on that information, making tiny percentages from each, and rewarding providers of information with trading commissions while starving those who don’t play ball. That, anyway, is how Steinhardt is remembered (compare this with, say, Warren Buffett, whose “edge” is that he removed himself to Omaha to stay away from such Wall Street chatter, and who instead relies on business acumen and economic insight).

In fairness to Steinhardt, I do not mean to suggest that he was alone in seeking “The Edge”. He may have sought it more aggressively than those who came before him, but his methods pale in comparison with those of certain current money managers who will themselves be the subjects of later pieces.

Steinhardt Act II

Steinhardt’s second act also contained three scenes.

a) In the early 1980’s Steinhardt’s buddy Marc Rich turned out to be a traitor who was secretly doing oil business with Libya and Iran in violation of a number of US laws. This was a felony, as were the tax evasion schemes by which he hid his profits (Time: “The Marc Rich Case: A Primer“). Marc Rich the Traitor fled the United States with his associate “Pinky” Green for Zug, Switzerland, where he would become the most notorious fugitive financier since Nixon’s friend Robert Vesco (Slate: “Know Your Fugitive Financiers“). His present net worth is estimated at $1.2 billion (it is also uncertain as to whether he is or is not a US citizen, as for years he has neither paid US taxes nor renounced his citizenship).

b) Steinhardt morphed his hedge fund into a solo act: “Steinhardt Partners.” He also morphed politically: originally a Goldwater Republican, in the 1980’s Steinhardt played a leading role in the development of the new “Democrat Leadership Council,” and became its chairman in 1985. The DLC is the centrist Democrat group out of which Bill Clinton emerged onto the national stage. This brought him into close proximity with Marty Peretz, who parlayed his skill in marrying a Singer Sewing Machine heiress into becoming publisher of The New Republic (which I believe he has since sold, though he retains editorial control).

c) Another notable thing Michael Steinhardt did, at least according to the SEC and US Department of Justice, was in April and May, 1991 collude with another hedge fund, “Caxton”, to organize a scheme to manipulate the market in US Tresury Securities, a scheme which netted him tens of millions of dollars (Forbes put the number at $600 million). As a FOB (Friend of Bill) he is said to have been irked when President Clinton would not intervene on his behalf with the Department of Justice. However, Steinhardt’s pique may have been mollified when, in December, 1994, the DOJ settled the case for a $70 million fine and a lifetime promise to keep such crooked schemes out of the United States Treasury market (permanent consent decrees are a way of saying, “I may not have done it but I promise not to do again that thing I didn’t do”: when I see them, I think of the financial equivalent of Hannibal Lecter in a straight-jacket and mask, someone who can never be trusted around civilized peoples’ money).

Interestingly, accounts of this episode that I find in the press rarely fail to mention the tens (if not hundreds) of millions that Steinhardt made from the act. It appears to me that Steinhardt’s sense of shame is more developed than his sense of guilt, and hence, by making sure that the story is told in such a way that he appears to have had the last laugh on the DOJ, Steinhardt’s sense of shame is appeased. No sense of guilt, of course, can be invoked in such people (i.e., “sociopaths”).

Steinhardt Act III

After skating through his SEC and DOJ issues, Michael Steinhardt got busy reinventing himself as a friend to all mankind and general Great American. His first act as a Great American was to approach then-President Bill Clinton seeking a pardon for his good friend Marc Rich the Traitor (the billionaire who made his fortune doing deals with Iran and Libya while they were taking Americans hostage and killing GI’s in Berlin nightclubs).  Steinhardt’s December 7, 2000 letter to Bill Clinton seeking a presidential pardon for Marc Rich the Traitor is remarkable to me in numerous ways. I respectfully suggest you read it here because I am going to spend some time on it, as I think it reveals a great deal about Great American Michael Steinhardt.

Steinhardt’s letter opens, “Dear Mr. President, I think you may remember me…” Given that Steinhardt was Chairman of both the DLC and Progressive Policy Institute, which were Bill Clinton’s left and right skates through the Democratic Party in his rise to power, such coyness is scarcely credible.

“I became involved in the political world in the mid 80’s primarily because of my interest in ‘ideas’…” It is interesting to me that he put the word “ideas” in quotes. Whether they were intended as scare-quotes, or as some subtle nudge in a code known only to them, I do not know.

“Invariably, life is filled with conflictual judgments and none of us escapes unscathed,” opines Steinhardt before coming, in the second sentence of the second paragraph, to his request: “I am writing this letter, Mr. President, to appeal to you on behalf of my friend, Mr. Marc Rich, who, I think, has been punished enough.” At the risk of being schoolmarmish, I draw attention to the numerous infelicities of grammar and style, and note how odd it seems to find them in a letter to a sitting US president from a well-educated Wall Street tycoon. I hazard a guess that this was composed in some haste and not reviewed by a lawyer (who generally write competently). Again, this fact is mildly interesting.

At the crux of Steinhardt’s letter, where we would expect to find a semblance of argument, we find instead this odd collection of statements:

“While there remains controversy as to the facts surrounding Marc Rich’s indictment in the early 1980’s, there’s no doubt he was a successful person both, before and after, (sic) that horrific experience.” The “controversy” about Rich is that after breaking US law by trading with Iran and Libya he became a fugitive hiding out in Zug, Switzerland rather than face legal consequences for his actions. Steinhardt leaves unstated why a person’s “success” should generally make him a good candidate for a pardon. It is also interesting because in the case of Marc Rich, “success” meant “making money breaking US laws by doing business with nations which were kidnapping and killing Americans.” Steinhardt’s statement is also interesting in that it recasts Marc Rich’s actions from traitorous felonies into “a horrific experience” for Marc Rich (“playing the victim” scarcely describes this). Lastly, again I note the childish grammatical errors.

“It would not be possible to recreate the circumstances surrounding a highly complicated series of facts occurring over a long period in the early 1980’s.” That much is correct. It’s what happens when one flees the country for two decades. Why the difficulties created by this additional felony should count in Marc Rich’s favor, as opposed to counting against him, Steinhardt leaves unstated.

“For Marc Rich, whose personal life has already been burdened by the profound constraints imposed by the circumstances of this case punishment (sic), have been in some ways severe. He could not properly mourn his daughter. He could not live with his children or grandchildren. He has suffered more than most. As in his (sic) mid 60’s, there would be nothing more important to him than to return to the United States of America and to live in peace.” Steinhardt’s letter, which is a compilation of intellectual gibberish, reaches a crescendo in this description of the hardships that Marc Rich the Traitor has endured. Marc Rich made a fortune committing numerous felonies, fled the country with his fortune, and has lived as a fugitive ever since: this has imposed a hardship on Rich and his fortune because his family remained in the country he betrayed, but now he wants to return to that country with his fortune without facing legal consequences for his acts, and therefore he should be allowed to do so. As an old professor of mine used to say, “I understand everything but the ‘therefore’.”

“I have known Marc Rich for more than twenty-five years. I assure you that Marc Rich’s moral and ethical standards amply justify your consideration of his pardon, so that in his remaining years he could fulfill his highest aspirations (sic), which will make all of us, as Americans, proud.” What can we learn from this bizarre claim? We learn that Marc Rich the Traitor, indicted felon and fugitive financier, has “moral and ethical standards” to which Michael Steinhardt looks up: I suspect that much is true. We also learn that Marc Rich has aspirations to return to this country, and he should be allowed to do so because…. he has aspirations to do so. Why the aspirations of billionaire fugitive felon traitors should be accommodated is something Steinhardt considers so obvious as to need no defense.

As far as I can see, Steinhardt’s sole argument in this letter is that Marc Rich should be accommodated because he is “successful.” And we should be proud of successful men and their aspirations because we – are — Americans. And we should be proud of that, too, dammit. Unless we get a good deal on some Libyan Light Crude.

This lack of argument notwithstanding, on his last morning in the White House, Bill Clinton pardoned Marc Rich. Bill was unusually close-mouthed about his reasons, saying only that he had become “impressed” with the case for pardoning Marc Rich. How that “case” was presented (or on what size check) is something that Clinton archivists refused to release to the press just last week, seven years after the events in question. Marc Rich’s attractive socialite wife Denise Rich also played a role in convincing Bill Clinton of the merits of this case, though precisely how she posed her “case” remains similarly unknown.

Another interesting event from Michael Steinhardt’s third act is that he got involved in the creation of an elite private school in New York City, the plans for which were scrapped from fear it might tolerate miscegenation (that is, the creation of mixed ethnicity couples). I am not writing of some half-educated redneck preacher’s college, I am writing about a proposed elite private school in Manhattan. I tend to be a “whatever makes you happy” kind of guy, but there are lines for me, and they exist this side of philanthropy that takes as a paramount concern the possible co-mingling of races.

Michael Steinhardt, Act IV

How is Michael Steinhardt currently regarded? A man who got his start with and became a conduit for Mafia cash on Wall Street? A man whose personal brutality became the stuff of Wall Street lore (e.g., dressing down a longtime partner to the point of cardiac arrest)? A man who joined that personal brutality to a system of high fees paid to knowledgeable insiders to develop “the edge” with which he could rob “the dumb money” not privy to that information? A man who made tens if not hundreds of millions of dollars tampering with the market for United States Treasury securities, then bought his way out of trouble with a $70 million payment and a lifetime promise to wear the financial equivalent of a Hannibal Lecter mask around the US Government’s money? A man who was financier to a fugitive felon trading with our nation’s enemies, then obtained a presidential pardon for that traitorous crony? A man who lets his philanthropy be constrained by bigotry?

Thanks to the wonders of a PR agency known as, “the New York press corps,” the man is now considered a deep-thinking financial statesman, philanthropist, and yes, Great American.

Dénouement

Steinhardt Partner’s head trader was Karen Backfisch, also known as “The Trading Goddess,” who has often been described as “Steinhardt’s protégé.”

Jim Cramer, the television personality, publicly emphasizes his career at Goldman Sachs followed by his time spent running his own hedge fund. In truth, however, as soon as he left Goldman Sachs, Jim Cramer spent 1-2 years ensconced in Steinhardt’s offices at the Burroughs Building in Manhattan. Cramer housed in Steinhardt Partners and his office was three doors down from Michael Steinhardt’s.

Karen Backfisch met Jim Cramer there in Steinhardt’s offices, and they married. As will be discussed shortly, Jim has publicly acknowledged that what he knows about trading he gleaned from Karen Backfisch, which knowledge she had gained as Steinhardt’s head trader.

Before Karen Backfisch, Steinhardt had another protégé, in the early 1970’s, fresh out of Harvard’s MBA program. His name is “David Rocker,” and I will have something to say about him soon as well.

And so ends the tale of when the bad guys came to Wall Street.

Posted in The PlayersComments (1)

Michael Steinhardt – "When the Bad Guys Came to Town"

I feel the same strange admiration for Michael Steinhardt as one would for an old mobster sitting in a Tucson retirement home playing canasta. Steinhardt slipped through minefields that destroyed others, and for that alone he should be beyond cheap shots now. However, without telling Steinhardt’s story there is no way for me to make the connections that I wish to make, so I will relate the Steinhardt Tale, in four acts, with none of the shots being cheap ones.

Some years ago, I asked a Wall Street old-timer to summarize how Michael Steinhardt would be remembered. The old-timer was unusually pensive. A faraway look came into his eyes as he seemed to recall how the Street had once been, and how it had changed.

At last he replied, “Steinhardt? That’s when the bad guys came to town.”

Prelude

The central character of Mario Puzo’s The Godfather was “Vito Corleone” (played in the movie by Marlon Brando). Don Corleone was modeled after real-life Mob boss Vito Genovese, who headed the Genovese Crime Family. Other figures from this family include Charles “Lucky” Luciano, Frank Costello, Bugsy Siegel, Meyer Lansky (“Hyman Roth” in Godfather II), and Vincent “Jimmy Blue Eyes” Alo.

The Genovese Crime Family had a fence named Sol Frank “Red” Steinhardt, who was arrested in 1958 on charges of buying and selling stolen jewelry. The prosecutor at Red Steinhardt’s trial, Frank Hogan, described Red Steinhardt as “the biggest Mafia fence in America.” Red was sentenced to 5-10 years on each of two charges of fencing, and served several years at Sing Sing, a prison just north of New York City.

While in prison, Red Steinhardt put his son Michael through the University of Pennsylvania’s Wharton School of Business. When Michael Steinhardt finished Wharton in 1967 he started an early hedge fund, “Steinhardt, Fine, Berkowitz & Co.” As Michael later revealed in his book, cash from Steinhardt’s father and his “associates” funded his hedge fund. Thus, it was a conduit by which Mob cash passed into Wall Street (one former prosecutor shared with me an elegant phrase a Mafia suspect used under interrogation: “Yeah, in da 70’s weeze went from concrete to Wall Street”).

Michael Steinhardt Act I

Steinhardt’s first act was notable in three ways:

a) In the early 1970’s Steinhardt was a close financial associate of an international oil trader and general bon vivant named Marc Rich.

b) From his start in the early 1970’s, Steinhardt’s reputation was that of a hater, an in-your-face profanity-laced screamer of unprecedented proportions. Nothing I have ever seen from Hollywood captures the way I have seen it occur in reality on Wall Street, yet in that environment, Steinhardt’s verbal brutality towards others, including towards his subordinates, became the stuff of legend. For example, there is a story that may be true, or it may be apocryphal, but whichever it is, it is widely repeated around Wall Street: in the early 1990’s Steinhardt had a partner, Peter Toczek of the New York and Foreign Securities Corporation, who handled Steinhardt’s overnight trading. They were considered close (I even heard that Peter and Michael were “godfather” to each other’s children, but cannot verify that). As the story goes, Peter was paid a bonus that was smaller than he (Peter) expected, and he confronted Steinhardt over it. Steinhardt screamed at Toczek so abusively that all conversation in the office ceased, then continued berating and humiliating Toczek so badly that Toczek was reduced to tears. Toczek left for the day, went home, and keeled over, dead. Steinhardt showed no regret. (Whenever I hear this I think of the Eddie Murphy/Dan Akroyd movie Trading Places, where an essentially similar event transpires between Mortimer and Randolph Duke). Be this incident true or not (and in fairness to Steinhardt, Toczek is said to have topped out at 300 pounds), what is undeniable is that from the early 1970’s on Steinhardt was well-known for being absolutely brutal in his interactions with others.

c) The other technique Steinhardt pioneered in the 1970’s was an extremely aggressive trading style centering upon, “The Edge.” What “The Edge” means is “information asymmetry.” One person who worked at a major brokerage covering Steinhardt described to me their first encounter, decades ago: “We came out with a downgrade on a stock, I think it was GM. Minutes later I got a call from Steinhardt. ‘You fucking asshole,’ he said. ‘Why didn’t I know about this thirty minutes ago?'” (In other words, Steinhardt was demanding to know why he had not been tipped off to the coming downgrade.) “I told him, ‘Come on Mr. Steinhardt. You know that would be illegal. You know I can’t do that.’ Steinhardt told me, ‘You dumb fucking kid, you know the way the game is played. You look at how much vig I pay your firm each month and you tell me that.'” (Another Wall Street money manager who worked in these circles tells me, “Steinhardt always liked to get what he called, ‘fancy information.’ You know, analysts’ upgrades and downgrades, before the market got them. Steinhardt would tell them, “You want my business? You gotta get me some fancy information. That’s how you win my business.” )

Together, the screaming and “the edge” explain Steinhardt’s success: bullying people to get them to cough up “fancy information” minutes before the rest of the market has it (which makes it “fancy” no more), placing gigantic bets on that information, making tiny percentages from each, and rewarding providers of information with trading commissions while starving those who don’t play ball. That, anyway, is how Steinhardt is remembered (compare this with, say, Warren Buffett, whose “edge” is that he removed himself to Omaha to stay away from such Wall Street chatter, and who instead relies on business acumen and economic insight).

In fairness to Steinhardt, I do not mean to suggest that he was alone in seeking “The Edge”. He may have sought it more aggressively than those who came before him, but his methods pale in comparison with those of certain current money managers who will themselves be the subjects of later pieces.

Steinhardt Act II

Steinhardt’s second act also contained three scenes.

a) In the early 1980’s Steinhardt’s buddy Marc Rich turned out to be a traitor who was secretly doing oil business with Libya and Iran in violation of a number of US laws. This was a felony, as were the tax evasion schemes by which he hid his profits (Time: “The Marc Rich Case: A Primer“). Marc Rich the Traitor fled the United States with his associate “Pinky” Green for Zug, Switzerland, where he would become the most notorious fugitive financier since Nixon’s friend Robert Vesco (Slate: “Know Your Fugitive Financiers“). His present net worth is estimated at $1.2 billion (it is also uncertain as to whether he is or is not a US citizen, as for years he has neither paid US taxes nor renounced his citizenship).

b) Steinhardt morphed his hedge fund into a solo act: “Steinhardt Partners.” He also morphed politically: originally a Goldwater Republican, in the 1980’s Steinhardt played a leading role in the development of the new “Democrat Leadership Council,” and became its chairman in 1985. The DLC is the centrist Democrat group out of which Bill Clinton emerged onto the national stage. This brought him into close proximity with Marty Peretz, who parlayed his skill in marrying a Singer Sewing Machine heiress into becoming publisher of The New Republic (which I believe he has since sold, though he retains editorial control).

c) Another notable thing Michael Steinhardt did, at least according to the SEC and US Department of Justice, was in April and May, 1991 collude with another hedge fund, “Caxton”, to organize a scheme to manipulate the market in US Tresury Securities, a scheme which netted him tens of millions of dollars (Forbes put the number at $600 million). As a FOB (Friend of Bill) he is said to have been irked when President Clinton would not intervene on his behalf with the Department of Justice. However, Steinhardt’s pique may have been mollified when, in December, 1994, the DOJ settled the case for a $70 million fine and a lifetime promise to keep such crooked schemes out of the United States Treasury market (permanent consent decrees are a way of saying, “I may not have done it but I promise not to do again that thing I didn’t do”: when I see them, I think of the financial equivalent of Hannibal Lecter in a straight-jacket and mask, someone who can never be trusted around civilized peoples’ money).

Interestingly, accounts of this episode that I find in the press rarely fail to mention the tens (if not hundreds) of millions that Steinhardt made from the act. It appears to me that Steinhardt’s sense of shame is more developed than his sense of guilt, and hence, by making sure that the story is told in such a way that he appears to have had the last laugh on the DOJ, Steinhardt’s sense of shame is appeased. No sense of guilt, of course, can be invoked in such people (i.e., “sociopaths”).

Steinhardt Act III

After skating through his SEC and DOJ issues, Michael Steinhardt got busy reinventing himself as a friend to all mankind and general Great American. His first act as a Great American was to approach then-President Bill Clinton seeking a pardon for his good friend Marc Rich the Traitor (the billionaire who made his fortune doing deals with Iran and Libya while they were taking Americans hostage and killing GI’s in Berlin nightclubs).  Steinhardt’s December 7, 2000 letter to Bill Clinton seeking a presidential pardon for Marc Rich the Traitor is remarkable to me in numerous ways. I respectfully suggest you read it here because I am going to spend some time on it, as I think it reveals a great deal about Great American Michael Steinhardt.

Steinhardt’s letter opens, “Dear Mr. President, I think you may remember me…” Given that Steinhardt was Chairman of both the DLC and Progressive Policy Institute, which were Bill Clinton’s left and right skates through the Democratic Party in his rise to power, such coyness is scarcely credible.

“I became involved in the political world in the mid 80’s primarily because of my interest in ‘ideas’…” It is interesting to me that he put the word “ideas” in quotes. Whether they were intended as scare-quotes, or as some subtle nudge in a code known only to them, I do not know.

“Invariably, life is filled with conflictual judgments and none of us escapes unscathed,” opines Steinhardt before coming, in the second sentence of the second paragraph, to his request: “I am writing this letter, Mr. President, to appeal to you on behalf of my friend, Mr. Marc Rich, who, I think, has been punished enough.” At the risk of being schoolmarmish, I draw attention to the numerous infelicities of grammar and style, and note how odd it seems to find them in a letter to a sitting US president from a well-educated Wall Street tycoon. I hazard a guess that this was composed in some haste and not reviewed by a lawyer (who generally write competently). Again, this fact is mildly interesting.

At the crux of Steinhardt’s letter, where we would expect to find a semblance of argument, we find instead this odd collection of statements:

“While there remains controversy as to the facts surrounding Marc Rich’s indictment in the early 1980’s, there’s no doubt he was a successful person both, before and after, (sic) that horrific experience.” The “controversy” about Rich is that after breaking US law by trading with Iran and Libya he became a fugitive hiding out in Zug, Switzerland rather than face legal consequences for his actions. Steinhardt leaves unstated why a person’s “success” should generally make him a good candidate for a pardon. It is also interesting because in the case of Marc Rich, “success” meant “making money breaking US laws by doing business with nations which were kidnapping and killing Americans.” Steinhardt’s statement is also interesting in that it recasts Marc Rich’s actions from traitorous felonies into “a horrific experience” for Marc Rich (“playing the victim” scarcely describes this). Lastly, again I note the childish grammatical errors.

“It would not be possible to recreate the circumstances surrounding a highly complicated series of facts occurring over a long period in the early 1980’s.” That much is correct. It’s what happens when one flees the country for two decades. Why the difficulties created by this additional felony should count in Marc Rich’s favor, as opposed to counting against him, Steinhardt leaves unstated.

“For Marc Rich, whose personal life has already been burdened by the profound constraints imposed by the circumstances of this case punishment (sic), have been in some ways severe. He could not properly mourn his daughter. He could not live with his children or grandchildren. He has suffered more than most. As in his (sic) mid 60’s, there would be nothing more important to him than to return to the United States of America and to live in peace.” Steinhardt’s letter, which is a compilation of intellectual gibberish, reaches a crescendo in this description of the hardships that Marc Rich the Traitor has endured. Marc Rich made a fortune committing numerous felonies, fled the country with his fortune, and has lived as a fugitive ever since: this has imposed a hardship on Rich and his fortune because his family remained in the country he betrayed, but now he wants to return to that country with his fortune without facing legal consequences for his acts, and therefore he should be allowed to do so. As an old professor of mine used to say, “I understand everything but the ‘therefore’.”

“I have known Marc Rich for more than twenty-five years. I assure you that Marc Rich’s moral and ethical standards amply justify your consideration of his pardon, so that in his remaining years he could fulfill his highest aspirations (sic), which will make all of us, as Americans, proud.” What can we learn from this bizarre claim? We learn that Marc Rich the Traitor, indicted felon and fugitive financier, has “moral and ethical standards” to which Michael Steinhardt looks up: I suspect that much is true. We also learn that Marc Rich has aspirations to return to this country, and he should be allowed to do so because…. he has aspirations to do so. Why the aspirations of billionaire fugitive felon traitors should be accommodated is something Steinhardt considers so obvious as to need no defense.

As far as I can see, Steinhardt’s sole argument in this letter is that Marc Rich should be accommodated because he is “successful.” And we should be proud of successful men and their aspirations because we – are — Americans. And we should be proud of that, too, dammit. Unless we get a good deal on some Libyan Light Crude.

This lack of argument notwithstanding, on his last morning in the White House, Bill Clinton pardoned Marc Rich. Bill was unusually close-mouthed about his reasons, saying only that he had become “impressed” with the case for pardoning Marc Rich. How that “case” was presented (or on what size check) is something that Clinton archivists refused to release to the press just last week, seven years after the events in question. Marc Rich’s attractive socialite wife Denise Rich also played a role in convincing Bill Clinton of the merits of this case, though precisely how she posed her “case” remains similarly unknown.

Another interesting event from Michael Steinhardt’s third act is that he got involved in the creation of an elite private school in New York City, the plans for which were scrapped from fear it might tolerate miscegenation (that is, the creation of mixed ethnicity couples). I am not writing of some half-educated redneck preacher’s college, I am writing about a proposed elite private school in Manhattan. I tend to be a “whatever makes you happy” kind of guy, but there are lines for me, and they exist this side of philanthropy that takes as a paramount concern the possible co-mingling of races.

Michael Steinhardt, Act IV

How is Michael Steinhardt currently regarded? A man who got his start with and became a conduit for Mafia cash on Wall Street? A man whose personal brutality became the stuff of Wall Street lore (e.g., dressing down a longtime partner to the point of cardiac arrest)? A man who joined that personal brutality to a system of high fees paid to knowledgeable insiders to develop “the edge” with which he could rob “the dumb money” not privy to that information? A man who made tens if not hundreds of millions of dollars tampering with the market for United States Treasury securities, then bought his way out of trouble with a $70 million payment and a lifetime promise to wear the financial equivalent of a Hannibal Lecter mask around the US Government’s money? A man who was financier to a fugitive felon trading with our nation’s enemies, then obtained a presidential pardon for that traitorous crony? A man who lets his philanthropy be constrained by bigotry?

Thanks to the wonders of a PR agency known as, “the New York press corps,” the man is now considered a deep-thinking financial statesman, philanthropist, and yes, Great American.

Dénouement

Steinhardt Partner’s head trader was Karen Backfisch, also known as “The Trading Goddess,” who has often been described as “Steinhardt’s protégé.”

Jim Cramer, the television personality, publicly emphasizes his career at Goldman Sachs followed by his time spent running his own hedge fund. In truth, however, as soon as he left Goldman Sachs, Jim Cramer spent 1-2 years ensconced in Steinhardt’s offices at the Burroughs Building in Manhattan. Cramer housed in Steinhardt Partners and his office was three doors down from Michael Steinhardt’s.

Karen Backfisch met Jim Cramer there in Steinhardt’s offices, and they married. As will be discussed shortly, Jim has publicly acknowledged that what he knows about trading he gleaned from Karen Backfisch, which knowledge she had gained as Steinhardt’s head trader.

Before Karen Backfisch, Steinhardt had another protégé, in the early 1970’s, fresh out of Harvard’s MBA program. His name is “David Rocker,” and I will have something to say about him soon as well.

And so ends the tale of when the bad guys came to Wall Street.

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Jim Cramer is a Complicated Man

I would rather try describing what an oyster tastes like than try to analyze Jim Cramer. For the sake of the integrity of my story, however, analyze him I must. I will confine myself to two prefatory comments:

 

1) Jim is a complicated man. I say this neither to excuse nor condemn him. Instead, I am acknowledging that to my eye Jim Cramer’s moral code is written in hieroglyphics, and I would no more try to judge that code than would an anthropologist pass judgment on the rite-of-passage ceremonies of some obscure tribe. In the face of something so foreign, one may only say, it is what it is. The precise reason why Cramer exists beyond good and evil, however, must wait until the end of this piece.

 

2) The first lesson I had in securities law was given me by Gordon Macklin, a revered figure within modern Wall Street history: he built NASDAQ, and was the Co-CEO of Hambrecht & Quist. I was fortunate enough to have Mr Macklin as a kind of Dutch Uncle to me from the time that I was a teenager until his passing in early 2007. When I was a lad I once asked Mr. Macklin, “Do companies ever do this-or-that in order to make their stocks go up?” Macklin replied, “There is one thing you need to know about securities law: anytime someone purposefully does something in order to make a stock go up or go down, he is doing something illegal. You can go to law school and study it for years, but that’s what it boils down to. You make bets on stocks, but you never purposefully make the price of a stock move in either direction. It’s manipulation. It’s illegal. That is the first thing you need to know about the stock market.”

Years later I went to work for one of the great Graham-Dodd value investors of Wall Street. From the behavior of him and those in his firm the same lesson was reinforced, and I internalized it to the point that it would have seemed strange even to mention it. In fact, I would put it on par with knowledge among health care workers that one is supposed to wash one’s hands between seeing patients, and when I left Wall Street I would have supposed it as rare to find someone there who did not know that one does not purposefully move the prices of stocks as it would be to find a nurse who did not know about germs.

Jim Cramer has spent his investing career manipulating stock prices up and down, and his career as a journalist explaining how he does it. Thus to this untutored eye, Cramer’s public statements appear to be confessions of wildly illegal acts. So my second prefatory remark is that Jim Cramer’s continued freedom bewilders me.

 

I felt that, in fairness to Cramer, I should be clear about those two points. I also believe that, deep down, Jim will be grateful for what I write here.

 

 

 

JIM’S BACKGROUND AND EARLY MOMENTUM

 

Jim Cramer grew up in Philadelphia, Pennsylvania, then attended Harvard, where he was editor of the Harvard Crimson. After graduatiing in 1977 he spent two years as a general assignment reporter, first in Florida for the Tallahassee Democrat and then in California for the Los Angeles Herald Examiner. He began investing in 1979. In 1981 Cramer entered Harvard Law, but spent much of his time there thinking about stocks and investing. “By the end of the first year,” he later wrote, “I was reviewing the portfolios of most of my professors” (Jim Cramer, Confessions of a Street Addict, New York: Simon & Schuster, 2002, page 14). After a summer associate position at the prestigious New York law firm of Fried Frank, and some time doing legal research for Alan Dershowitz, Cramer decided to shift from law to business.

Cramer’s early investment success attracted the attention of Martin Peretz, owner and editor of The New Republic and friend of Michael Steinhardt, and in 1982, Peretz handed Cramer a check for $500,000, for Cramer to invest. In the summer of 1983 Cramer interned at Goldman Sachs, whereat Cramer learned the plumbing of the stock market. In 1984, when Cramer graduated from Harvard Law, Peretz threw Cramer a graduation party attended by Peretz’s wealthy friends, many of whom placed money with Cramer. After graduating Cramer again went to work for Goldman, where his primary job was new-client acquisition (among the wealthy clients Cramer brought to Goldman was Steve Ballmer, who recently became the CEO of Microsoft). Cramer viewed himself as a young go-getter, and claims that some of Bud Fox’s exploits in the movie Wall Street were inspired by an interview the film-makers did with Cramer (Confessions of a Street Addict, page 33).

While at Goldman, Cramer wrote short financial pieces for The New Republic. Among them was a positive book review for Peretz’s friend Ivan Boesky. However, Cramer became unsatisfied with life at Goldman: he preferred picking stocks to selling the picks of the Goldman Research Department. In 1986, after a negative article about Cramer appeared in The New York Times, Cramer decided to leave Goldman Sachs and set up his own hedge fund with Larry Levy. Peretz, who still had money with Cramer, helped Cramer’s new fund raise capital.

“I went to see Marty’s good friend Michael Steinhardt, the same man whom I had told that Reebok was a great long and not a great short. Steinhardt had not covered the Reebok. He had let it run, against my advice. He told me, however, that he would have saved millions of dollars had he listened to me and that he wanted to put money with me and give me office space so I could learn how to trade. I told him I knew how to trade. He told me no, I knew how to spot good ideas; I had no idea really how to run money, even though I had been trading for almost a decade.” (Confessions of a Street Addict, page 47.)

 

 

 

JIM MEETS A GAL AFTER HIS OWN HEART

 

Cramer started the fund in a corner of Steinhardt’s office in April 1987. During his first week he suffered huge losses, dropping 9.9%. John Lattanzio, one of Steinhardt’s main traders, offered to help Cramer out of trouble. Lattanzio advised Cramer to sell everything, cover his positions, and start over. Fatefully, Lattanzio also suggested that Cramer study other veteran Steinhardt traders, among them, Karen Backfisch (Confessions of a Street Addict, pages 51-52).

Karen Backfish had graduated from the State University of New York at Stony Brook and went on to work at Lehman Brothers. She had risen to become an assistant vice president at Lehman, helping portfolio managers. Karen’s boss, Mark Howard, was hired away to Steinhardt partners, and he brought Karen with him. As Cramer frequently makes clear, she showed him the ropes at Steinhardt’s (in fact, he has frequently called her, “The Trading Goddess”).

“How she did it was by gaming Wall Street, trying to anticipate moves of analysts before they were made, and placing big bets on the direction that analysts were going to go. That way, she said, you always had an edge, you never owned anything idly, and you always had an exit strategy.

“I said that’s all well and good, but no analyst is going to give you a call before announcing his position. You can’t get analysts to tell you what they are going to do beforehand.

“Of course, she said. So what you had to do was make dozens of calls to brokers and analysts every day to ask them what they thought of stocks. She said you looked for situations where the analysts were growing more positive and you fed them positive information that you got from others. You pitted them against one another. You told them that someone else was going to upgrade. If you could be sure they were warming up to a story, or if you caught them on the phone before they told their sales forces that their earnings estimates were too high or too low, you might have something.

“Karen explained to me that the analyst game was a game of sponsorship. Analysts like to get behind stocks and bull them. You have to get in on the ground floor when they start their sponsorship campaign. If Merrill is the sponsor of a stock, it could be good for 5 points. If Goldman sponsored something, it could be good for 10. You want to buy something and flip it—sell it immediately—into the sponsorship. That’s the only sure thing on Wall Street.

“When I asked her how we could find out about all of these wonderful things when I was jut a little hedge fund manager, she said one word: ‘commish.’… Commissions, she explained, determined what you are told, what you will know, and how much you can find out. If you do a massive amount of commission business, analysts will return your calls, brokers will work for you, and you will get plenty of ideas to make money, on both a short- and long-term basis… Commissions greased everything.” (Confessions of a Street Addict, pages 51-52.)

Again, I find this perplexing because, to this admittedly non-lawyerly eye, it is a description of a crime. It would be illegal for analysts at Merrill Lynch or Goldman Sachs to reciprocate large trading commissions paid to their firms by tipping off traders about upcoming “sponsorship” of various stocks, thus permitting those traders to “sell into the sponsorship.” So is, I reckon, “pitt[ing] analysts against one another” by “feeding” them information (“You told them that someone else was going to upgrade”) if is untrue, and arguably, even if it is true but done simply to move a stock (and as we shall see, the veracity of any of this matters matters little to Jim). Even if it’s “the only sure thing on Wall Street,” it is illegal. Yet Jim tells this story, proudly, in his own book. The reader may also note how closely it matches the story I told about Michael Steinhardt, and one man’s description of what it was like to be on the receiving ends of such calls. “Confessions” indeed.

 

In 1988, Karen joined Cramer & Company. The fund performed well at first, and Jim and Karen married. In 1990 she became pregnant but kept working. In 1992, Cramer & Co. hired Jeff Berkowitz from Columbia Business School. Cramer described their evolving business model succinctly:

“We had it down to a science in 1992: my wife would pick stocks that technically looked ready to go up, or she would keep track of merchandise to see what was down to tag ends. She would then generate a list of stocks that could move quickly on good news. Jeff would then go to work calling the companies to try to find anything good we could say about them. I would call the analysts to see I they were hearing anything. When we found a stock that looked ready technically to break out, or where the supply had been mopped up, and Jeff found something positive at the company, and I knew the analyst community didn’t know anything positive, we would load up with call options and common stock and then give the good news to our favorite analysts who liked the stock so they could go do their promotion. That would get the buzz going and we would then be able to liquidate the position into the buzz for a handsome profit.” (Confessions of a Street Addict, page 61).

In his pride at mastering “down to a science” the art of manipulating public interest, Jim left unstated how he felt about the public that, once its interest had been so stimulated, found itself on the other side of the trades from which Jim was profiting. In fact, Jim seems to have a tin-ear for his own words, because, as I said earlier, what he describes above would have seemed patently illegal to Wall Street folks of a generation ago, for the reasons I described at the outset of this piece.

 

Years later, in a venue he apparently did not anticipate would become public, Jim described how he really felt about those compliant analysts and reporters he manipulated artfully and with such apparent ease. Here is a transcript of the event. For the full video, see here. Or, just go here and pick whichever part of the video grabs you. It matters not where you start it, as throughout it Jim Cramer displays his comfort with stock manipulation in ways that he claims no no one else will admit, but which are illegal and beyond the capacity of the SEC to grasp, as he sees it. Also throughout it Jim displays his thorough comfort at fleecing the rubes (that is, cheating other market participants by manipulating stocks): in fact, the video is an exercise in Jim’s pride in that direction.

 

 

 

 

NICHOLAS MAIER AND TRADING WITH THE ENEMY

 

In 1994 Cramer hired Nicholas Maier as a favor to Marty Peretz, who was close with the Maier family. Maier worked for Cramer until 1998, then left and wrote a tell-all book about his years with Cramer: Trading with the Enemy: Seduction and Betrayal on Jim Cramer’s Wall Street (New York: HarperCollins, 2002) It contained detailed description of Cramer’s manic and abusive style. For example, Maier recounted the following scene after a trader at Cramer’s firm, Mark Kantor, executed a buy order at a price one-quarter point higher than what Cramer had expected, a total difference of $625:

“‘The broker fucked us, big time!’

“‘The eighth offering was fading when we called,’ Mark explained.

“Jim bit down on his lower lip as his hands clench into fists. He leaned forward to get closer to Mark, and started banging on the top of his monitors. The crown of his balding skull reddened as he yelled at the top of his lungs in a high-pitched whine.

“‘I told you they fucked us! Fucked us, fucked us, fucked us!’

“‘Listen to me.’ With piercing eyes Jim scanned our sober faces. ‘This is not some fucking joke!’ he screamed, spit flying from his mouth. ‘We are at war. We are in a foxhole.’ He flung out his hands. ‘Everyone out there is the enemy!’

“Mark nodded to show Jim that he understood. That wasn’t what Jim wanted. He started smashing his phone over and over on the desk in front of him. He lifted a monitor and heaved it like a shot put. After flying several feet, it shattered on the floor.” (Trading with the Enemy, page 29).

 

Maier also described Cramer’s questionable trading ethics. One passage noted a brush with naked short selling:

Jim turns toward his head trader. “Mark, sell ten thousand Bristol Myers.”

“We never bought any Bristol Myers,” Mark replies.

“We own the calls,” Jim corrects Mark impatiently, aggravated by the delay.

“So sell it short?” Mark asks for clarification. Mark knows that according to the SEC rule book, selling stock you don’t already own (even if you do own the call options) must be marked and executed as a short sale.

“You are confusing me with someone who gives a shit. Just sell it! I said hit the fucking bid!” adds Jim, not interested in wasting time over petty semantics. Skirting the “plus tick” rule in this case won’t necessarily make us a lot of extra money, but in Jim’s eyes, the rule is still an unenforceable annoyance. “And don’t ever ask me that again!” (Trading With the Enemy, pages 70-71).

 

Please put a pin in this expression of Jim Cramer’s concern for this somewhat obscure “plus tick” rule. I will return to it later.

 

Maier also describes Jim’s cozy yet perilous relationship with analysts at brokerage firms. When one unlucky analyst forgot to call Jim before he downgraded a stock, Jim screamed into the phone:

“All I pay you too much fucking money for is … to pick up the goddamn phone and call me—call me—before you call anyone else.” (Trading With the Enemy, page 86).

In Maier’s artful summary:

“Jim didn’t care whether an analyst was ultimately right in his or her opinion. He just wanted to take advantage of the closest thing to a sure bet in the stock market today: the short-term effect any commentary might have.” (Trading With the Enemy, page 86).

Presumably, the reader sees the consistency between this story and the one in “Michael Steinhardt – ‘When the Bad Guys Came to Town'” about the broker whom Steinhardt berated in precisely the same manner. It would seem that Steinhardt taught Karen and Karen taught Jim, who wanted “The Edge” just as much as Steinhardt had.

In fact, Trading with the Enemy is replete with examples of how analysts release information to favored insiders before a formal report is released. Maier recounts a social evening with a Smith Barney analyst. The analyst tells Maier that the Smith Barney analyst is going to change a “hold” rating on a stock to a “buy,” then adds this:

“Listen, Sherlock, just remember one thing. If you’re going to buy it, buy it with us. We get a cut of every trade you do in the stocks we cover.

“Thus there was a quantifiable reason that such information was ‘leaked’ to good clients like Cramer & Company. This senior analyst received a direct kickback from getting Cramer & Company to traffic in stocks his company covered. Joe helped me to make money, and I was expected to return the favor. By the time the stock was upgraded from a hold to a strong buy, Cramer & Company had bought fifty thousand shares. All the trades were placed with Smith Barney.” (Trading With the Enemy, page 90.)

 

 

 

JIM’S BEHAVIOR BECOMES TOO OBVIOUS FOR EVEN THE SEC TO MISS

 

While Cramer & Co. was establishing itself as a viable hedge fund, Jim Cramer continued working on the side as a financial journalist, in an lapse of multiple social institutions (e.g., editorial judgment, regulation, and perhaps law enforcement). In 1990 the Wall Street Journal approached Cramer and asked him to help found a new opinion magazine about stocks and personal finance. Jim Stewart, Steve Swartz, and Norm Perlstein wanted a “real live money manager” to write for them. Cramer accepted their offer.

In 1995, Jim Cramer’s two vocations—money manager and journalist— finally collided in a way that resulted in an SEC investigation. Cramer and Maier tell the story in different ways. I will relate the events from both of their perspectives.

 

In February 1995, Cramer wrote a piece for his “Unconventional Wisdom” column in SmartMoney. The piece was entitled “Pity the Poor Orphans”, and focused on four stocks that lacked coverage by Wall Street analysts: Canonie Environmental, Hogan Systems, Rexon, and UFP Technologies. In his column Jim made strong claims about these stocks, predicting, for example, that “when the move comes, Canonie… might triple in price” and that UFTP would “grow like wildfire.” (Trading With the Enemy, page 107).

After the article appeared, all four stocks jumped between 30 and 50 percent in a few days. Unfortunately, the article had neglected to mention that Cramer had large positions in all four stocks. Shortly thereafter, Howard Kurtz of the Washington Post wrote a story about how Cramer had used his position at SmartMoney to enrich himself. CNBC’s Dan Dorfman also called for an investigation.

Eventually the SEC opened a formal investigation into Cramer on three grounds:

1) Whether Cramer was allowed to write about stocks he owned;
2) Why had Cramer failed to disclose his ownership;
3) Whether Cramer took money from the companies to write favorable articles.

For his part, Cramer claimed that the column’s omission of any mention that he owned large positions in the stocks he was touting was an oversight of the publisher, and that he, Cramer, had immediately contacted DowJones to notify them that his article moved the stocks. He also claims he placed a call to his lawyer, Bruce Birenboim, a partner at Paul Weiss. Cramer consulted Arthur Liman, lead counsel for Michael Milken, for legal advice during the SEC investigation. According to Cramer, Liman told Cramer that this was just a “hangnail” and he had nothing to worry about. (Confessions of a Street Addict, page 74.)

DowJones conducted its own internal investigation. Eventually, DowJones wrote a letter to the SEC accepting blame for failing to disclose Cramer’s ownership in the article, and the inquiry ended. Dow Jones also paid for Cramer’s legal fees, about $700,000. (Confessions of a Street Addict, page 81.)

Cramer has minimized the significance of the entire episode, writing, “They were tiny stocks that I thought represent value because they weren’t being promoted or sponsored by any firm.” (Confessions of a Street Addict, page 70.) In later years, Cramer would go on to claim that it was obvious from the tone of the article that he owned the stocks, and additionally, that the episode was part of a conspiracy against him driven by Rupert Murdoch and News Corp (Katherine Mieszkowski, “It was just stupid,” Salon.com, June 4, 2002).

 

Unsurprisingly, having observed the preceding events from the inside, Nick Maier tells a different story:

“…none of the orphans had been winners for the firm until then. Jim’s typical approach was to constantly trade in and out of the market. When he started picking away at these names, he had no intention of ever owning 10 percent of Canonie, Hogan, Rexon, or UFP Technologies. Because they performed so poorly, we continually averaged down, and eventually acquired more shares than we ever imagined we would. Once that happened, because of their illiquid status, it became impossible to sell even had we wanted to…There were plenty of days before Jim wrote the article, and even more after, that he criticized those stocks as perennial ‘pieces of shit’ and ‘worthless losers.'” (Trading With the Enemy, page 110.)

In short, Maier is contending that advice Cramer was giving the public under the guise of helping them manage their savings (“SmartMoney“) was actually being driven by Cramer’s need to dump his own positions without cratering the market. When a trusting public acted on Jim’s tip and bought shares, he dumped his shares onto the public. The only lesson Cramer learned from the “four orphans” incident, Maier claims, was that he, Cramer, had the power to move stocks through the press.

 

Cramer went on to build controversial relationships with CNBC news anchors, including Maria Bartiromo and David Faber. Cramer credits Bartiromo with bringing him to CNBC (Confessions of a Street Addict, page 126). Maier has clarified how Cramer used these relationships:

“Jim’s strategy was to put in his order to buy a stock with Mark and then dial Maria. As soon as she announced the news on television, the stock would often jump. Jim then had Mark peel off whatever we had bought.” (Trading With the Enemy, page 124-125.)

Note the consistency in this progression from Michael Steinhardt to Karen Backfish to Jim Cramer. Steinhardt had a taste for “The Edge,” that is, knowing what analysts were going to say before the public knew. Then for Karen Backfish and Jim Cramer the Edge became telling analysts what to say. Eventually Cramer’s “edge” became writing the news himself and having it appear in his own columns, or spoon-feeding it to compliant reporters who would regurgitate it on cue.

 

Nicholas Maier worked for Cramer until 1998. He left, and his tell-all book was published in 2002, shortly after Cramer’s Confessions of a Street Addict, at which point Journalist Jim Cramer’s commitment to the First Amendment snapped. He sued HarperCollins and Nick Maier for statements about Cramer’s dealings in a company called Western Digital. HarperCollins proceeded to buy up all copies of the book that were already in the market (David D. Kirkpatrick, “HarperCollins To Junk Copies Of a New Book Cited as Libel,” New York Times, March 16, 2002). HarperCollins then did one reprint of the book, but it was missing three pages. Trading with the Enemy is now only available used, in secondary markets (word is that in some circles folks will pay big money for any copy of the original book which includes those three pages).

After the publication of Trading With the Enemy and in the face of various forms of intimidation, Nick Maier did his best to disappear from the face of the earth. Some years ago I tracked Nick down: he was living a quiet, modest off-the-grid life (and had found one of my favorite places in the world to do it). Given that years had elapsed between the legal mushroom cloud under which Nick had disappeared from New York and the time I located him, I thought he might be willing to meet. I asked an associate to contact Nick. Over the phone, Nick was open and forthcoming. Between that day, however, and the moment several days later when my associate arrived on his doorstep, Nick’s attitude had changed. According to Nick, just the day before, “A plane full of New York lawyers had descended” on him, and he would be unable to speak.

Nick had closed his book with a personal reflection: “I understand that a lot of people are reading this book because of James Cramer, but it was written to leave him behind.” (Trading with the Enemy, page 192.) I apologize, Nick, for any trouble I reintroduced into your life that day.

 

 

 

THESTREET.COM

 

In 1996 Cramer co-founded TheStreet.com with Marty Peretz. Cramer and Peretz wanted to challenge newswires like Reuters, DowJones, and Bloomberg for a fraction of the fee. Cramer envisioned “an on-line newspaper that reported and commented on stocks in real time” (Confessions of a Street Addict, page 84). Early employees of the TheStreet.com included well-regarded journalists such Michael Lewis, Ravi Desai, and Andrew Drake.

The first few years at TheStreet.com were difficult. Cramer and Peretz both spent millions sustaining the company, and eventually had a falling out. Cramer claims his physical absence from TheStreet.com—a self-imposed rule due to his primary job as a fund manager—led to waste and inefficiency. In 1997 the company finally reached 10,000 subscribers, a turning point. “We were pleased to rope in Herb Greenberg, the finest investigative journalist in the country…a hire which further boosted traffic.” (Confessions of a Street Addict, page 137). I believe, and I will later show you why I believe, that Herb Greenberg is,in fact The Worst Business Journalist in America. There may be no one in the same ballpark as Herb, as far as that goes. But that is a story for a later date.

 

1999 was an eventful year for Cramer and TheStreet.com. Cramer and Peretz made up after their bitter falling out. TheStreet.com replaced CEO Kevin English with Tom Clarke from Technometrics. The company cut costs and signed a formal deal with CNBC to share content. Most significantly, in 1999 TheSteet.com decided to go public. The IPO was underwritten by Goldman Sachs, Cramer’s old firm.

Cramer claims to have had no working knowledge of the IPO process prior to his experience with TheStreet.com.

“For those of us in the stock-buying business, the inner workings of the underwriting process had remained a total mystery. For all the years I had traded stock, underwritings had been controlled, in secret, entirely by the syndicate desk.”(Confessions of a Street Addict, 249.)

Cramer opines about the injustice of the system, especially when TheStreet.com opened for $19 and quickly spiked to over three times that price. Cramer blamed Goldman for under-pricing TSCM, and claims he advised his father and everyone he knew to sell their shares right when trading opened. He also claims Knight/Trimark manipulated the price by controlling both the buy and sell sides in order to “squeeze” the price up. (Confessions of a Street Addict, 262.)

“We had succeeded in making all the buyers lose money and all the sellers win. TSCM got one third of what people paid for the company, a colossal price screw-up. The rest got left on the table. It is a fiasco that haunts me to this day.” (Confessions of a Street Addict, 264).

As with so many of Jim’s statements, this is scarcely credible. In fact, Cramer & Co. employed a syndicate manager, Betsy, whose job it was to spot hot new offerings. When Betsy was fired, the syndicate job went briefly to Maier. Several years before TSCM went public Cramer explained the IPO process to Nicholas Maier as follows:

“IPOs are the way the brokerage houses pay back their customers,” Jim explained. “Their investment banking divisions make money underwriting he deal, we make money when it opens at a premium, and the only people fucked are the idiots who hold on longer than the initial print.” (Trading with the Enemy, page 95.)

That is to say, those average American investors whom Cramer now goes on TV nightly and tells, “I want to make you money.”

 

Also of note is the fact that outside of Cramer himself, the largest owner of TheStreet.com was David Rocker (whom I mentioned at the end of the Steinhardt piece). Mr. Rocker’s shares of TheStreet.com were held through two offshore funds, Helmsman and Compass, located in the British Virgin Island. A question the reader might ask at this point is, did these hedge fund managers (Cramer and Rocker) own TheStreet.com because they thought it would be a good investment? Or is there anything in our story thus far that would suggest a benefit a money manager might enjoy in not just knowing what analysts are going to say before they make it public (e.g., Steinhardt’s “Edge”), not just being able to count on CNBC’s Maria Bartiromo to regurgitate tips she is passed, or even, writing one’s own columns in SmartMoney (i.e., Cramer’s techniques in the 1990’s), but in becoming an actual publisher of financial news?

 

Anyone? Anyone?

 

Bueller?

 

 

 

JIM CRAMER THROWS SOME MISDIRECTION ABOUT ENRON

Here is an announcement of a speech Jim Cramer gave on October 25, 2006 at the Union Club in New York City:

Proof that Jim made this speech

The URL link is as follows: “http://www.thestreet.com/video/10318181/directorship-cramer-speaks.html” . Note the “Directorship-cramer-speaks” part of the URL.

 

Shortly after Jim made that speech I received an email from a money manager back East:

“Patrick,

“James Cramer gave a speech at some forum, which he posted to his website today. He basically indicts himself one minute and twenty-five seconds into the speech by letting the world know that he received copies of the Enron partnership agreements from a Merrill banker. Agreements that he specifically states were not disclosed to the public at the time. I am no lawyer but this seems highly illegal.

“You can see it here: http://www.thestreet.com/video/10318181/directorship-cramer-speaks.html

“Hope all is well…”

I clicked through and there was, indeed, a poorly shot video of Jim Cramer, standing in a luncheon in New York, claiming that before Enron collapsed he had been provided confidential documents by one of Enron’s bankers (Merrill Lynch) about the “Special Purpose Entities” Enron was using to play its financial shenanigans, and that he (Jim) had used the information to trade ahead of the general public by shorting Enron before its collapse.

Unfortunately, that video is no longer available on TheStreet.com. But I saw the video and it was exactly as described. It has been disappeared from Jim Cramer’s videos. This is one of those moments, as I predicted in an earlier post, where you, the reader, will simply have to decide for yourself whether to believe me or not.

If what Jim says is true, then the banker providing Jim this document broke the law. I believe the question of whether the recipient of inside information who then trades on it is breaking the law is somewhat ill-defined (Martha Stewart was alleged to have done this, but was actually brought down for obstruction-of-justice: in any case, a good rule to follow is, “if one knows it is material and non-public, one should not trade on it”). What is not ill-defined is that such a person is acting unethically: in this case, he’d be selling to an unwitting public shares of a company that he knew to be a scam, thanks not to original research but to inside information provided by the scam company’s banker.

However, I believe that Jim neither broke the law here nor committed the unethical act of trading on inside information. That is because I think the story Jim told in that video is a lie, a red herring cast to keep anyone from digging into the story of who really shorted Enron first, and why. That story that has yet to see the light of day, incidentally.

Wall Street has more misdirection than a David Copperfield routine.

 

 

 

CRAMER AFTER CRAMER BERKOWITZ

 

In 2000 Jim Cramer resigned from Cramer Berkowitz.

“I had broken enough furniture and monitors and keyboards to last a life-time. More than a lifetime in fact. As a forty-five-year-old hedge fund manager, I had already overstayed my actuarial table. Time to get out before the game killed me. Time to get out before I killed someone else.” (Confessions of a Street Addict, 312.)

Numerous well-regarded money managers on Wall Street have told me a different story, however. They generally say that, though Jim is loathe to disclose it, Jim’s career as a hedge fund manager was mediocre until his last two years, when he had enough of an up-tick that he was able to quit with a smile and move to TV. Whichever is the truth, Cramer’s primary affiliation is now with CNBC, where he has his own show, Mad Money (though Cramer continues to work as a part-time analyst and director for TheStreet.com).

Whatever the truth is in that regard, it is clear that Jim Cramer’s investment horizon is short. Cramer believes that the market is irrational and that “buy-and-hold” is just “brainwashing that Wall Street relies upon to keep you from taking back your assets under its management.” (Jim Cramer’s Real Money, 234). In his writings he proudly describes how he trades on short-term volatility. Given Cramer’s access to both public and institutional information channels, it is plausible that he has been tempted create the volatility upon which he trades. In recent writings, Cramer displays awareness that, as both a journalist and an investor, he is potentially conflicted.

“I know it may look to some that I am corrupt because I praise stocks I own, even though I tell you I own them. But think about the logic of it: I champion the stocks I own because I like them enough to put my money behind them. I champion the stocks I own because I think they can make me money and you money, too. By similar logic I knock stocks I don’t own because I think they are too rich and you could lose money if you buy them. I try to explain this all of the time on radio and TV. Nevertheless, people confuse my motives and believe that I am picking on bad guys and pumping stocks I own so I can make money. If only life were that simple and if only I were that powerful!” (Jim Cramer’s Real Money, 58).

Given the sheer size of Jim’s body of work it is difficult to know whether Jim Cramer uses his position as a public figure to manipulate prices. He has written thousands of articles and mentioned individual stocks many times over, at different times, as both a bull and a bear. Cramer’s opinions change so often that it is difficult to know what he believes. In fact, this inconsistency has become a rallying cry for critics. One well-known example is Jim’s shifting attitude towards Wharton Professor Jeremy Seigel, author of Stocks for the Long Run. In 2000, Seigel wrote an op-ed in the Wall Street Journal warning investors of excess valuations. Cramer responded in a piece on TheStreet.com as follows:

“I really have no use for theoreticians of the market. They make you no money. We are in a casino-like market and I want to game the casino. The absurdity of a Jeremy Siegel from Wharton coming out with some statement about valuation and how he thinks it’s wrong is just poppycock. Valuation is what it is. If you could sell only thousands of dollars worth of stock at these prices, then I would be wrong. But you can sell trillions of dollars worth. So what does it matter if an academic says the prices are wrong. They are the prices. That is the hand you are dealt, so figure it out or get lost.” Cramer Rewrites ‘How an Old Dow Learned New Tricks’,” TheStreet.com, March 18, 2000.)

Curiously, Jim Cramer wrote a piece two years later (“Checking in with Jeremy Siegel”) that struck a different note:

“Jeremy Siegel is one of the great ones. Anyone who has read Stocks for the Long Run knows that Siegel didn’t succumb to the craziness of the late 1990s. From his desk at the Wharton School, this towering financial professor penned a piece that ran the week the Nasdaq hit its high in 2000.This memorable piece said that while Siegel remained a believer in the long-term value of stocks, the prices of the Ciscos and the Nortels had just gotten too nutty and he wanted everyone to sell tech. It was one of the most stark and prescient calls I have ever seen…That’s why I paid extra close attention to Professor Siegel’s words as I shared a panel with him Sunday at Philadelphia’s Hill Towers as part of a fundraiser.” (“Checking in with Jeremy Siegel,” The Street.com, November 18, 2002.)

Cramer mentions Siegel twice in his latest book, going so far as to call him “the nation’s foremost stock historian.” (Jim Cramer’s Real Money, 211.)

 

As for Jim Cramer’s acumen as a stock picker, whole websites are devoted to logging Cramer’s nightly statements on Jim Cramer’s Mad Money. A few industrious journalists have tried to dig further back in time and assess portions of Cramer’s large written record. For example, in 2004, Barron’s Alan Abelson wrote a piece testing two grand predictions made by Jim Cramer for TheStreet.com. In the first, “When to Embrace the Untried Stocks,” Cramer praised WebEx (WEBX), Netflix (NFLX), Amedisys (AMED), Armor Holdings (AH), XM Satellite Radio (XMSR) and Taser International (TASR) for having the common characteristic that “they go up…they go up consistently, almost every day” (Jim Cramer, “When to Embrace the Untried Stocks,” TheStreet.com, April 2, 2004). Abelson, however, looked into each of these stocks and noted that:

“…what they have in common are valuations that, when they’re not elevated, are absurd. Judge for yourself: WebEx is selling for five times this year’s estimated sales and 35 times expected ’04 earnings. Netflix is selling for 3.2 times projected sales and 62 times estimated earnings. Amedisys is going for 1.7 times this year’s estimated sales and 22 times earnings. Armor Holdings, 1.41 times and 19.7 times, respectively, anticipated sales and earnings. XM Satellite Radio, 21 times sales; it lacks a P/E for the good and sufficient reason it’s supposed to lose $3.27 a share this year. Last but not least, Taser International fetches 24 times sales and over 100 times estimated earnings.” Alan Abelson, “Up and Down on Wall Street,” Barron’s, April 29, 2004.)

In fact, in April of 2004 three of the six stocks Cramer lauded—NFLX, WEBX, and TASR—peaked (and two became members in good standing of the Regulation SHO Threshold List). AH and XMSR stayed flat. Only one had “gone up” over the long-term: AMED.

Abelson also examined some of Cramer’s predictions prior to the dot-com bust. He cites a speech given by Cramer in February 2000 entitled, “The Winners of the New World.”

“Here are the fabulous 10 stocks Mr. Cramer touted so grandly on Feb. 29, 2000, their price per share that day and where they are now: 724 Solutions, $1,882 a share then; around $4 a share today. Ariba, $132.25 then; $3 now. Digital Island, $116 then; acquired in September 2001 for $3.40 a share. Exodus Communications, $71.19 then; went belly-up in September 2001. InfoSpace, $1,085 a share then; $40 now. Inktomi, $137 then; acquired by Yahoo! in March 2003 for $1.65 a share. Mercury Interactive, $96 then; $45.50 today. Sonera, $55.80 then; acquired for about $6 a share in March 2003. Verisign, $253 then; $16 today. Veritas Software, $131 then; $27-plus now. (Alan Abelson, “Up and Down on Wall Street,” Barron’s, April 29, 2004.)

More recent analyses of Cramer have been less anecdotal, and more scathing. For example, “Jim Cramer Deconstructed” (CXO Advistory Group) publishes and regularly updates a comprehensive analysis of Jim Cramer’s stock-picking. As they summarize their findings:

 

“In summary, Jim Cramer’s stock market calls since May 2000 have low consistency and an accuracy just below average.” (Emphasis in the original.)

 

In fact, however, Cramer is not just “below average.” One really need look no further than Jim’s language: touting any stocks with the words, “they go up…they go up consistently, almost every day” is, to any sane investor, simple charlatanism. In the 19th century a man may have been able to stand on a sidewalk touting an elixir that cured hangovers, gout, typhus, and the Clap, and people did not know enough not to believe him. Today, anyone attempting such snake-oil entreaties would be met with general head-wagging and laughter, because consumers are scientifically literate enough to know of the several biological mechanisms underlying such maladies and understand the impossibility of any one elixir curing all of them. Similarly, someone recommending stocks because “they go up consistently, almost every day” to investors possessing a basic understanding of markets and finance will induce precisely the same head-wagging and laughter. Unfortunately, biological literacy is more widespread than is economic literacy, and Jim Cramer manages to stay on the air, pitching financial snake-oil to the general public nightly.

 

 

 

JIM CRAMER AND THE SHIFTING TRUTH ABOUT BEAR STEARNS

 

During the recent collapse of Bear Stearns Jim outdid himself in a way that combined the things that make him so unique: cock-surety coupled with deceit and historical revisionism enabled by the media which depends upon him, all outdone by Web 2.0, followed by more fake concern for the welfare of the general public over the elimination of a rule which he flouted when he himself ran a hedge fund.

First, days before its collapse, Jim told the public that Bear Stearns was just fine. Then when it collapsed he claimed he had meant the opposite of what he had said. However, his own people at TheStreet.com had recorded his opinion on the stock, and their record was precisely as the rest of the world heard it. Jim’s answer? Change the records of the Street.com. However, the maker of this video kept screenshots of the original, and his reconstruction of Jim’s perfidy is a classic.

Next, Jim went on TV and blamed the collapse of Bear on the elimination of “the up-tick rule” (in brief, since 1934 “the up-tick rule” has provided constraint on the ability of hedge funds to manipulate stocks downwards, but the rule was eliminated in the summer of 2007). In his best statesmanlike manner Jim explained the significance of the up-tick rule, urged viewers to contact Congress, and castigated the SEC for having betrayed those honest, hardworking Americans whose savings were damaged by the SEC’s callous foolishness in eliminating the up-tick rule.

Here is the funny part about that: remember I asked you to “put a pin in” that section from Nick Maier’s book, where Jim chewed someone out for asking if he had to follow a certain rule? That was the up-tick rule:

“Jim turns toward his head trader. ‘Mark, sell ten thousand Bristol Myers.’

“‘We never bought any Bristol Myers,’ Mark replies.

“‘We own the calls,’ Jim corrects Mark impatiently, aggravated by the delay.

“So sell it short?’ Mark asks for clarification. Mark knows that according to the SEC rule book, selling stock you don’t already own (even if you do own the call options) must be marked and executed as a short sale.

“‘You are confusing me with someone who gives a shit. Just sell it! I said hit the fucking bid!’ adds Jim, not interested in wasting time over petty semantics. Skirting the ‘plus tick’ rule in this case won’t necessarily make us a lot of extra money, but in Jim’s eyes, the rule is still an unenforceable annoyance. ‘And don’t ever ask me that again!'” (Trading With the Enemy, pages 70-71).

That “plus tick” rule is precisely the “up-tick” rule whose loss Cramer now goes on TV to bemoan, explaining, quite correctly, how its elimination has turned into a wealth-transfer mechanism from hard-working Americans to hedge funds. He just never cared when he ran one. One wonders if he does now, or if he even knows.

 

 

 

JIM CRAMER AND THE FRIEND FROM THE FROZEN FOOD AISLE HE DOES NOT KNOW

The reader has been served enough Cramer Bad Craziness, I expect. To do the story justice I would conclude by explaining what is really happening in Jim Cramer’s head. Such explanation would properly invoke E. R. Dodd’s shame-culture/guilt-culture distinction, and Martha Nussbaum’s The Fragility of Goodness as well.

But I will be more succinct. The way to understand Jim is to see him (as is evident from his TV behavior) as a deeply conflicted man, and so, one engaged in continuous prophylactic spinning. He spews endlessly self-contradictory babble because he has, in fact, lost his mind, and one must filter everything Jim says and does through the knowledge that Jim Cramer is insane. I don’t mean it in a cutesy way: he has suffered a decade-long breakdown but got paid for doing it on air.

That’s why, as I said at the outset, Cramer exists beyond good and evil: he cannot remember if he is a good guy playing a tough, or a good guy playing a tough but one who wants to help the public, or is a good guy playing a tough who wants to help the public but is still on the inside with the really smart-money. Somewhere in his double-triple-quadruple agent shtick he lost his mind, and he has no idea what truth is anymore. He reminds me of some lines from Talking Heads’ “Life during Wartime”:

“Transmit the message, to the receiver
hope for an answer some day
I got three passports, couple of visas
don’t even know my real name”

Jim is a condemned man distractedly waiting for the key to turn in the cell door, incoherently muttering sayings he picked up along the way, stripped of any real need to make sense of them to his listeners or himself.

 

 

Insane though he be, Jim has been the lowest common denominator of many who are integral to the Deep Capture story. In fact, it was because of this that I decided it was impossible to tell that story without telling his own: most of the players, as well as most of the pawns, can be described by their relation to Jim Cramer.

The next two pieces are going to discuss two of those people, one to whom Cramer has done all he can to associate himself, and one from whom Cramer has tried to disassociate himself.

 

 

 

Jim Cramer and Eliot Spitzer in photoboothHere is a college picture of Cramer and the one to whom he has done everything to associate himself:
That is Jim Cramer on the left. In the middle is Eliot Spitzer. I do not know the identity of Laughing Guy on Right.

 

The man from whom Cramer has tried, at least once, to disassociate himself, is David Rocker. As I have explained, Jim’s early hedge fund days were spent in the offices of Michael Steinhardt Partner. Before Karen Backfish, Steinhardt had an earlier protege, David Rocker, who worked for Steinhardt for years. Besides this Steinhardt overlap, Mr. Rocker was at one point (through two offshore hedge funds, Compass and Helmsman, both British Virgin Islands hedge funds), the largest owner of TheStreet.com after Cramer himself.

Here is Jim Cramer on TV in 2003, introducing David Rocker. Here is Jim Cramer interviewing me on TV, asking me a question from an email that he identifies as coming from David Rocker.

Yet here are a transcript (pages 21-23) and a recording of Jim Cramer coming on an earnings call and distancing himself from Mr. Rocker, denying even knowing Mr. Rocker other than having met him once in a grocery store:

“Jim Cramer – – Analyst
It is true that he [Rocker] does have a position in TheStreet.com which is a company that I have a position in, too, but I just want to clarify things. I don’t want anyone to have the impression that I have money with him, he has money with me. We don’t. And then just so you know, I asked e-mail permission to be able to read the posting on TV. I will not just read someone’s posting without permission and of course I welcome you on our show anytime you want to come on.

“Dr. Patrick Byrne – Overstock Com Inc – Chairman and President
And Jim, you’re welcome back here any time. You’re perfected the art of being an attack journalist. I think the next — I think I’m going to try being an attack guest, if you want to give me a chance.

“Jim Cramer – – Analyst
I’d love too. I think you’re — this is a great quarter and you’ve done a great job, and I don’t want anyone to think that there’s — I mean I don’t run a fund. I was a hedge fund manager for many years, Patrick, and there is a hedge fund out there called Cramer Berkowitz.

“Dr. Patrick Byrne – Overstock Com Inc – Chairman and President
I was referring to actually Rocker’s shows up as the second largest institutional owner in TheStreet–

“Jim Cramer – – Analyst
What people wanted was if people want to take a position in TheStreet.com, I can’t stop them or start them but they certainly don’t have any influence…. And I welcome you on the show. I don’t — you know, I mean I used to be a very scrappy guy and got into a lot of fights but I like them to be when they’re over principle, not over–I have no position with Rocker.

“Dr. Patrick Byrne – Overstock Com Inc – Chairman and President
I didn’t accuse you of that. I said I wanted to ask you that. My plan was to go on your show and ask you on the show. And I’m glad you cleared it up.

“Jim Cramer – – Analyst
I do admit, welcome the theater of it, I welcome the excitement of it, I think that you’re building a company, there are guys who are going to detract….

“Dr. Patrick Byrne – Overstock Com Inc – Chairman and President
Well, it– it was a legitimate question for me to ask.

“Jim Cramer – – Analyst
Absolutely, absolutely legitimate and that’s why I did not, you know, pick up my phone and call my lawyer and say, I don’t want to do that. You’re a businessman. I’m a businessman. And I congratulate on what is obviously a triumph.

“Dr. Patrick Byrne – Overstock Com Inc – Chairman and President
Did you pass on, last time you had me on the show you did read what you described as an e-mail from David Rocker.

Jim Cramer – – Analyst
I may have misspoke. I mean I had no communication with Rocker other than to ask him for permission to read his posting that was on TheStreet.com…. Well, you know, whatever he wants to do is fine but I don’t want you to give the impression that I am owned by him, he is owned by me. I’ve met him once in the supermarket. I’m kind of an independent operator as you are.

“Dr. Patrick Byrne – Overstock Com Inc – Chairman and President
Journalists can ask questions, I can ask questions.

“Jim Cramer – – Analyst
Oh, absolutely and I applaud your questioning and you critical approach to the way the press covers your company.”

Given their co-ownership of over 1/3 of TheStreet.com and their association through Steinhardt, given that Jim has had David Rocker on his show and quotes emails from David Rocker on-air as well, why would Jim Cramer try so hard to disassociate himself from Rocker like this? Cramer has said a lot of contradictory things, but why would he say of someone with such shared history, “I’ve meet him once in the supermarket”?

 

These are the next two players about whom I will write. As full as this piece had to be to set the stage, I can keep those pieces mercilessly short.

Posted in The PlayersComments (5)

Eliot “Slowhand” Spitzer & His Many Sugar Daddies

This is not another tirade against Eliot Spitzer, the man who slunk out of the New York Governor’s Mansion to the sound of champagne corks popping up and down Wall Street. As I said at the time in an interview with Neil Cavuto on Fox Business News, I am familiar enough with the culture of Wall Street to know that if we said, “Let he who is without sin pop the first champagne cork,” it would be a dry town.

Instead, it is a tirade against Eliot Spitzer, the man who sacrificed principle to get into to the Governor’s Mansion, a fellow who always acted from ambition and not integrity.

To ease into this, I will pose the reader a question. I note that the crusade for which Eliot Spitzer first made his name was a campaign to root-out conflicted research on Wall Street. Jim Cramer has often written (with no detectable irony) of this heroic Spitzerquest. For example, Cramer wrote in his 2002 book, You Got Screwed!

“The actions taken by the federal government subsequent to the prodding by elected officials such as Eliot Spitzer, the attorney general of New York, who got the ball rolling, certainly helped clarify conflicts, and even shed harsh light on the most revolting of them.”(You Got Screwed!: Why Wall Street Tanked and How You Can Prosper, Simon & Schuster, 2002, page 5).

In keeping with his tough-guy-looking-out-for-you shtick, however, Cramer added that “…within weeks of those actions, the complex of interests that kept you in the dark about how the stock market really works was right back in action.” (You Got Screwed! Page 5.)

Similarly, in Cramer’s latest book, he writes:

“Eliot Spitzer, the New York State attorney general, ended that game when he determined that analysts were no more honest than movie critics who are employed by the movie companies themselves.” (Jim Cramer’s Real Money: Sane Investing in an Insane World, New York, Simon & Schuster, 2005, page 134).

The odd thing about these statements is that, as should be obvious from the post “Jim Cramer is a Complicated Man“, Mr. Cramer is the single most conflicted journalist-money-manager in the history of Wall Street. In fact, the concept of “journalist-money-manager” was invented to describe Jim Cramer, as before his rise to prominence US financial journalism still had editors with integrity. Yet while Spitzer “got the ball rolling” looking high and low for conflicts, “and even shed light on the most revolting of them,” he overlooked Jim Cramer and everyone in Cramer’s circle, without exception. Why is that?

The short answer is that Eliot Spitzer has had a unique relationship with Jim Cramer for three decades. It started when they became roommates and friends at Harvard Law. It continued throughout Spitzer’s subsequent career. Through it all theirs has always been much more than a casual schooldays’ friendship: Cramer has worked hard to aid Spitzer, both financially and professionally, and it appears that this good will was reciprocated.

This essay will explore the implications of their bond.

The Thug Also Rises

Cramer’s cronies have always been Spitzer’s biggest contributors. Nick Maier describes a fundraiser Cramer threw when Spitzer first pursued the Attorney General’s office:

“We invited every broker who covered us to that party, kept track of who came, and, most important, noted who contributed to Eliot’s campaign. The smart brokers made sizable donations and were rewarded for it. (Trading with the Enemy, page 33).

Early on, this connection between Cramer and Spitzer proved troublesome for Cramer. According to Cramer, from 1995 to 1997, Cramer & Co. yielded consistently high returns for investors. In 1997 Jeff Berkowitz was invited to be partner, and the fund became Cramer Berkowitz. 1998, however, was a crisis year for the fund. The melt-down of Long Term Capital Management had led to double-digit declines in the fund’s positions.

“Then, one day in early September, I got a call from one of my biggest investors, Eliot Spitzer, who was making his second bid for New York State attorney general. When Eliot studied with me at Harvard Law he had seen how driven I was and how much I loved the stock market. When I set up the fund he had come in as a partner early on and I had made the man a ton of money. Now the papers were saying that Eliot might be violating campaign finance disclosure laws by getting hidden money from his family. That was a total crock and I knew it, as I had made a boatload for Eliot. But there was only one way to refute his charge and it was to open up the fund. It was an emergency.” (Confessions of a Street Addict, page 186).

Cramer opened up the fund so Spitzer could withdraw. Many of Jim’s other investors chose the opportunity to withdraw as well. With help from Karen the fund did finish up for the year, but still disappointing relative to the averages.

Yet such occasional hiccups could not outweigh the great synergy that existed between the financiers in Cramer’s orbit and the Attorney General of the state where they did business. After Spitzer was elected to the position of Attorney General in 1998, he pursued a variety of targets. He started with conflicted researcher, but expanded his efforts to take on immensely powerful targets, such as AIG and Hank Greenberg, Marsh & McLennan (there targeting Hank’s son Jeffrey), and bond insurers such as MBIA and Ambac. As I will explain, however, Spitzer did not “take them on” in a way that would have been recognized as legitimate in any previous era.

The misdeeds upon which Spitzer focused were generally industry practices that extended beyond living memory. Some of these were obvious evils (e.g., conflicted research on Wall Street). Some were arcane probable-evils (e.g., the way Marsh Mac created insurance quotes for D&O insurance). And some were “evils” worthy of Talmudic dispute: for example, if in some negotiation the firm on the other side of the table offers you highly attractive terms, and you accept, is it your responsibility to approve of, or even know, the accounting method that other company uses to reflect the deal on its own books?

Novel were the misdeeds were for which Spitzer pursued his quarries, and more novel yet was his method. It is a truism that, as former New York Chief Justice Sol Wachtler put it, a good prosecutor “could get a grand jury to indict a ham sandwich.” It is also a given that no financial firm can withstand a criminal indictment: individuals of a financial firm may be indicted, but since it is the business model of financial firms to say, “Give us X now and trust us to give you Y in the future,” a criminal indictment is more or less an order to shut their doors.

Put these two facts together, and it means that it is within the power of every prosecutor to wake up on any given morning and destroy any financial firm in his jurisdiction. How? Here is one of several ways: at the end of each quarter every financial firm has to make thousands of estimates, estimates which in the light of hindsight may prove to be on balance accurate (or even conservative), but some of which will surely prove to be in error. Thus, if a prosecutor can indict a ham sandwich, think how easy it is to indict a firm whose books will, at any given time, always contain estimates some significant fraction of which are false. There are others ways, but its all basically the same idea: financial firms are uniquely ill-suited to be recipients of criminal indictments, and if a prosecutor looks hard enough he can indict …. the proverbial ham sandwich.

Thus every Attorney General is always in a position to destroy any financial firm in his or her jurisdiction. Most people who reach the level of Attorney General have the maturity not to abuse that vast power. Spitzer exercised it with abandon. For example, he went public with allegations of criminal misconduct against Hank Greenberg, the legendary CEO of AIG. Spitzer refused to negotiate with AIG until Greenberg stepped down from the company he had built. Given the dynamic described above, that demand is extraordinary: it is a negotiation where Spitzer was able to force the other side to cave without having anything on him. Spitzer’s power to end Greenberg’s career came not from any legal acumen, but was simply intrinsic to his position as AG: he threatened the destruction of a financial firm by bringing a criminal indictment, thus giving a good leader only one alternative. If you ever wanted to know what a thug would look like as an Attorney General, that’s it. That’s what one would look like.

Months after Greenberg stepped aside, Spitzer’s criminal allegations against Greenberg quietly fizzled out.

The previous example is not, alas, a one-off. In fact, the hallmark of Attorney General Spitzer’s reign was precisely the kind of headline-making bullying that would make the US Chamber of Commerce describe Attorney General Spitzer’s methods as, “the most egregious and unacceptable form of intimidation we’ve seen in this country in modern times.” That “form of intimidation” often bore the flavor of someone who had seen too much TV.

An example of that came in Spitzer’s dealings with the John Whitehead, the former chairman of Goldman Sachs, one of the most highly respected men in modern Wall Street history, and in my view, the kind of man the industry ineeds (that is, heavyweight players who keep the game straight, or at least reasonably straight, by keeping Young Turks in check: other than a few old-school guys like Ken Langone, such men are in short supply these days on Wall Street). John Whitehead had the temerity to write a Wall Street Journal op-ed (“Mr. Spitzer Has Gone Too Far“) that made the simple point that in America, people are innocent until proven guilty. That included Hank Greenberg:

“Something has gone seriously awry when a state attorney general can go on television and charge one of America’s best CEOs and most generous philanthropists with fraud before any charges have been brought, before the possible defendant has even had a chance to know what he personally is alleged to have done, and while the investigation is still under way.”

The day this editorial appeared, Spitzer called Whitehead (a retired octagenerian) and said:

“Mr. Whitehead, it’s now a war between us and you’ve fired the first shot. I will be coming after you. You will pay the price. This is only the beginning, and you will pay dearly for what you have done.”

Whitehead’s account went unchallenged by Spitzer.

The Many Sugar Daddies of Eliot Spitzer

Jim continued to support Spitzer in his re-election campaigns, even after he (Jim) left Cramer Berkowitz. For example, this 2003 New York Post article describes a huge fund-raising event for Spitzer that Cramer helped to organize (I beg the reader to please read this closely, as I will suggest two mental notes about this paragraph):

“Among some of the biggest donors to the day’s event were: hedge fund giant James Chanos, president of $1 billion hedge fund Kynikos Associates; Titan Advisors fund-of-funds chief George Fox and Jeff Berkowitz, manager for the hedge fund Cramer Berkowitz (co-founded with Street.com’s Jim Cramer); real estate mavens Edward and Howard Milstein; developer Donald Trump; class action attorney Melvyn Weiss… Weiss, whose own work in pursuing financial fraud has been bolstered by Spitzer’s prosecutorial zeal, was quick to point out that Spitzer’s work has made him more than a few enemies on Wall Street.” (Jenny Anderson, “Fundraising for a Fund Crusader,” New York Post, December 12, 2003).

The first mental note concerns this: “Among some of the biggest donors to the day’s event were: hedge fund giant James Chanos, president of $1 billion hedge fund Kynikos Associates.” Please stick a pin in the name, “James Chanos.”

The second mental note concerns the absence of critical thought exhibited by the New York Post in publishing this sentence: “Weiss, whose own work in pursuing financial fraud has been bolstered by Spitzer’s prosecutorial zeal…” How do we know that Melvyn Weiss’ work has been, “pursuing financial fraud”? Because Weiss said so? In fact, three years later, Melvyn Weiss was charged by the US Department of Justice with taking part in a now-notorious $200 million kick-back scheme involving one of the most powerful law firms in the United States, Milberg Weiss Bershad & Schulman (as of a few days ago, all three of Weiss, Bershad, and Schulman are convicted felons, as is their former partner, Bill Lerach) Thus, with the benefit of hindsight (or critical thought) it would have been more accurate for the New York Post to say, “Weiss, whose own work in practicing financial fraud…”

However, that would have been poor form of the New York Post, the piano player in the bordello that is the New York financial industry. That is why, as I will demonstrate in a later piece, the New York Post is for folks who move their lips while reading People Magazine.

Connections among Spitzer and Cramer’s cronies, such as Marty Peretz, no doubt proved calming on what may have been otherwise bleak and unhappy occasions. For example, in 2003 Spitzer’s office opened an investigation into an ailing hedge fund controlled by Gotham Partners Management. Shortly thereafter, Gotham closed down the fund, and no charges were filed. The fund’s principle investor was Marty Peretz. (Henny Sender and Gregory Zuckerman, “New York Examines research by Gotham Partners on MBIA, The Wall Street Journal, January 10, 2003.) In fact, in a turn-around which has become a standard operating policy against any who try to expose this group, Spitzer began an investigation in MBIA.

By 2005 this coziness between the Attorney General Crusader and hedge funds was an open secret. For example, The New York Observer eloquently explained in January, 2005):

“The ‘hedgies,’ as they’re sometimes called, love Eliot Spitzer. While Wall Street bankers have tended to steer clear of his campaign – in part because of a state law prohibiting contributions by any corporations that sell bonds to the state, in part because they’re still peeved about his crusade against corrupt stock analysts – hedge-fund managers seem to have Spitzer headquarters on speed-dial. Some of these guys, like Kynikos Capital’s James Chanos, always pop up on Democratic host committees (what else are they supposed to do with their $10 million year-end bonuses?). But others, like Stanley Druckenmiller… are genuine converts to the Spitzer cause.

“And why not? While the Attorney General brought his prosecutor’s wrath down on Canary Capital – a hedge fund tied up in the mutual-fund market-timing scandal – he has, thus far, left hedge funds largely alone. As the hedgies are fond of saying, Mr. Spitzer seems to ‘understand’ hedge funds. After all, some of his best friends are hedge-fund managers, and for many years he was a loyal hedge fund investor, reaping what his good friend James Cramer described in his book, Confessions of a Street Addict, as a ‘boatload’ of money from the Cramer-Berkowitz fund.

“But, perhaps most compelling, Mr. Spitzer’s tactics have been good for hedge-funders’ wallets…

“And, like so many of their breed, the hedgies know a good investment when they see one. ‘It’s a lot like investing,’ said Keith Rosenbloom, a Spitzer fund-raiser who runs ComVest Investment Partners, a $1.4 billion fund-of-funds. ‘When you find an investment that’s really special, you’re supposed to bet more on that one if you really understand it. This is a guy who is really special-and you try to back the guys who are really special.'”

Allying yourself with the wealthiest and most powerful people in your state, many of whom (as Deep Capture is demonstrating) are scofflaws, while donning the mantle of a reformer: that’s some gig.

Governor Spitzer: Tous ca change

Politically astute American know the initials “AG” do not, in fact, stand for “Attorney General”, they stand for “Aspiring Governor”. When New York Aspiring Governor Spitzer set out on the utterly predictable course of turning himself into New York Governor Spitzer, his “hedgie” friends were there for him. As The New York Times put it:

“ALBANY, Jan. 25 – Eliot Spitzer has not angered everybody in the business world.

“In fact, Mr. Spitzer, New York State’s attorney general and the front-runner in the polls for this year’s governor’s race, has taken contributions from some of the biggest names in hedge funds, venture capital, real estate and commodities in building a $19 million war chest for his campaign nine months before the election.

“That figure exceeds the $16.3 million that Gov. George E. Pataki had raised at this same point in 2002, when he enjoyed the formidable fund-raising powers of incumbency. In Mr. Spitzer’s case, his campaign finance filings suggest the influence of his actions as attorney general on political donations in the race for governor.” (Danny Hakim, “Filings Show Spitzer’s Allies in Big Business,” New York Times, January 26, 2006)

Then, less than two weeks later, The New York Times explained that “Spitzer Campaign Getting Money From Sources Spitzer Disavows” (Michael Cooper, February 7, 2006):

“ALBANY – In his run for governor, Attorney General Eliot Spitzer has called for ending the ‘pay-to-play culture that exists in Albany’ and pledged not to accept contributions from anyone with business pending before his office. But in Albany, where campaign donations gravitate toward power, Mr. Spitzer’s early lead in the polls has translated into contributions from lobbyists and special interest groups in amounts that are usually not seen except when incumbents are running.

“When Mr. Spitzer held a gala fund-raiser that added $5 million to his campaign in December, the invitation, which listed some big donors along with members of the host committee, read in places like a who’s who of powerful Albany lobbyists…. The contributions highlight the sometimes blurry line that the campaign is trying to walk as it claims to hold itself up to a higher ethical standard in the area of campaign finance while still raising millions of dollars in a state where lobbyists and special interests are among the most reliable donors.”

Again: allying yourself with the wealthiest and most powerful people in your state, many of them scofflaws, while being portrayed as a reformer. Some gig indeed.

The Comeuppance of the Slowhand

As I said at the outset, I am not going to dwell on the Client #9 aspect of this story. I object to our society’s stigmatization of women such as “Kristen.” I was once friendly with a truly fine woman who was, she revealed in time, a high-price escort. One day she showed me her Rolodex (and she did, in fact, have a Rolodex, an old-fashioned, sit-on-the-desktop Rolodex). It had thick paper stock cards that were intended for individual entries. I would estimate that to 60-75% of them were stapled business cards of Managing Directors of upper-crust Wall Street financial firms, along with a smaller number of cards discretely embossed with the names of the white-shoe law firms which service such financiers (discretion precludes me from mentioning the names of any of these firms, but the ones that jump to the mind of the reader conversant with Wall Street are, in fact, the ones I mean). Incidentally, this was true even though the gal lived and worked a long way from New York.

Thus, Wall Street’s Spitzerschadenfreude strikes me as hollow and disingenuous as… most everything else about our financial Power Elite. If anything, women such as “Kristen” should be embarrassed at being exposed entertaining men of standing in “polite society” while “polite society” mouths hypocritical platitudes about them.

Instead, I will burden the reader with two requests.

The first request is that the the reader consider the possibility that the career of Eliot Spitzer reveals more to us about the topsy-turvy, Alice-in-Wonderland world we inhabit than we are likely to see for a long time. Mr. Spitzer became AG due in large part to the guidance and financial support of Jim Cramer and his hedge fund cronies. As Attorney General, Spitzer made a name for himself pursuing conflicted research on Wall Street while never touching Cramer, who embodies the most clear-cut, deepest conflicts between journalism and money management that the financial world has ever seen. Spitzer augmented this reputation pursuing insurance companies like AIG and MBIA over deeply ambiguous financial arcana worthy of Talmudic debate, but never touched the hedge funds who regularly, on a day-to-day basis, as their very business model, manipulate stock prices, rob Americans of their chance to invest in a fair capital market, and (in the case of one) openly brag about it in books and on TV. Spitzer ran for Governor on a campaign of, “The Sheriff of Wall Street is going to put an end to the pay-to-play ways of Albany,” while to his gubernatorial campaign were donated greater funds than his “pay-to-play” predecessor had raised as an incumbent, and in that campaign Spitzer’s strongest support came from the hedge fund cronies to whose industry Attorney General Spitzer had given hall passes.

Did I miss anything?

Thus to me, Spitzer’s downfall is the least interesting part of his story. The career of Eliot Spitzer was always a sluttish thing. The real question with which it confronts us is: what is the state of our public discourse that it would ever see Eliot Spitzer as admirable? Even as he pursued clear evils (such as conflicted analysts on Wall Street) were there any who doubted he did so out of ambition and a desire for headlines? Is Eliot Spitzer what a righteous man looks like to our present age?

In sum, how shabby has our public discourse grown that Eliot Spitzer could be outed over a secret tryst with “Kristen”, but not over the many with whom he slept around openly, for years, in the bordello of New York financial circles?

The second request is that the reader please remember the name, “Jim Chanos”.

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Eliot "Slowhand" Spitzer & His Many Sugar Daddies

This is not another tirade against Eliot Spitzer, the man who slunk out of the New York Governor’s Mansion to the sound of champagne corks popping up and down Wall Street. As I said at the time in an interview with Neil Cavuto on Fox Business News, I am familiar enough with the culture of Wall Street to know that if we said, “Let he who is without sin pop the first champagne cork,” it would be a dry town.

Instead, it is a tirade against Eliot Spitzer, the man who sacrificed principle to get into to the Governor’s Mansion, a fellow who always acted from ambition and not integrity.

To ease into this, I will pose the reader a question. I note that the crusade for which Eliot Spitzer first made his name was a campaign to root-out conflicted research on Wall Street. Jim Cramer has often written (with no detectable irony) of this heroic Spitzerquest. For example, Cramer wrote in his 2002 book, You Got Screwed!

“The actions taken by the federal government subsequent to the prodding by elected officials such as Eliot Spitzer, the attorney general of New York, who got the ball rolling, certainly helped clarify conflicts, and even shed harsh light on the most revolting of them.”(You Got Screwed!: Why Wall Street Tanked and How You Can Prosper, Simon & Schuster, 2002, page 5).

In keeping with his tough-guy-looking-out-for-you shtick, however, Cramer added that “…within weeks of those actions, the complex of interests that kept you in the dark about how the stock market really works was right back in action.” (You Got Screwed! Page 5.)

Similarly, in Cramer’s latest book, he writes:

“Eliot Spitzer, the New York State attorney general, ended that game when he determined that analysts were no more honest than movie critics who are employed by the movie companies themselves.” (Jim Cramer’s Real Money: Sane Investing in an Insane World, New York, Simon & Schuster, 2005, page 134).

The odd thing about these statements is that, as should be obvious from the post “Jim Cramer is a Complicated Man“, Mr. Cramer is the single most conflicted journalist-money-manager in the history of Wall Street. In fact, the concept of “journalist-money-manager” was invented to describe Jim Cramer, as before his rise to prominence US financial journalism still had editors with integrity. Yet while Spitzer “got the ball rolling” looking high and low for conflicts, “and even shed light on the most revolting of them,” he overlooked Jim Cramer and everyone in Cramer’s circle, without exception. Why is that?

The short answer is that Eliot Spitzer has had a unique relationship with Jim Cramer for three decades. It started when they became roommates and friends at Harvard Law. It continued throughout Spitzer’s subsequent career. Through it all theirs has always been much more than a casual schooldays’ friendship: Cramer has worked hard to aid Spitzer, both financially and professionally, and it appears that this good will was reciprocated.

This essay will explore the implications of their bond.

The Thug Also Rises

Cramer’s cronies have always been Spitzer’s biggest contributors. Nick Maier describes a fundraiser Cramer threw when Spitzer first pursued the Attorney General’s office:

“We invited every broker who covered us to that party, kept track of who came, and, most important, noted who contributed to Eliot’s campaign. The smart brokers made sizable donations and were rewarded for it. (Trading with the Enemy, page 33).

Early on, this connection between Cramer and Spitzer proved troublesome for Cramer. According to Cramer, from 1995 to 1997, Cramer & Co. yielded consistently high returns for investors. In 1997 Jeff Berkowitz was invited to be partner, and the fund became Cramer Berkowitz. 1998, however, was a crisis year for the fund. The melt-down of Long Term Capital Management had led to double-digit declines in the fund’s positions.

“Then, one day in early September, I got a call from one of my biggest investors, Eliot Spitzer, who was making his second bid for New York State attorney general. When Eliot studied with me at Harvard Law he had seen how driven I was and how much I loved the stock market. When I set up the fund he had come in as a partner early on and I had made the man a ton of money. Now the papers were saying that Eliot might be violating campaign finance disclosure laws by getting hidden money from his family. That was a total crock and I knew it, as I had made a boatload for Eliot. But there was only one way to refute his charge and it was to open up the fund. It was an emergency.” (Confessions of a Street Addict, page 186).

Cramer opened up the fund so Spitzer could withdraw. Many of Jim’s other investors chose the opportunity to withdraw as well. With help from Karen the fund did finish up for the year, but still disappointing relative to the averages.

Yet such occasional hiccups could not outweigh the great synergy that existed between the financiers in Cramer’s orbit and the Attorney General of the state where they did business. After Spitzer was elected to the position of Attorney General in 1998, he pursued a variety of targets. He started with conflicted researcher, but expanded his efforts to take on immensely powerful targets, such as AIG and Hank Greenberg, Marsh & McLennan (there targeting Hank’s son Jeffrey), and bond insurers such as MBIA and Ambac. As I will explain, however, Spitzer did not “take them on” in a way that would have been recognized as legitimate in any previous era.

The misdeeds upon which Spitzer focused were generally industry practices that extended beyond living memory. Some of these were obvious evils (e.g., conflicted research on Wall Street). Some were arcane probable-evils (e.g., the way Marsh Mac created insurance quotes for D&O insurance). And some were “evils” worthy of Talmudic dispute: for example, if in some negotiation the firm on the other side of the table offers you highly attractive terms, and you accept, is it your responsibility to approve of, or even know, the accounting method that other company uses to reflect the deal on its own books?

Novel were the misdeeds were for which Spitzer pursued his quarries, and more novel yet was his method. It is a truism that, as former New York Chief Justice Sol Wachtler put it, a good prosecutor “could get a grand jury to indict a ham sandwich.” It is also a given that no financial firm can withstand a criminal indictment: individuals of a financial firm may be indicted, but since it is the business model of financial firms to say, “Give us X now and trust us to give you Y in the future,” a criminal indictment is more or less an order to shut their doors.

Put these two facts together, and it means that it is within the power of every prosecutor to wake up on any given morning and destroy any financial firm in his jurisdiction. How? Here is one of several ways: at the end of each quarter every financial firm has to make thousands of estimates, estimates which in the light of hindsight may prove to be on balance accurate (or even conservative), but some of which will surely prove to be in error. Thus, if a prosecutor can indict a ham sandwich, think how easy it is to indict a firm whose books will, at any given time, always contain estimates some significant fraction of which are false. There are others ways, but its all basically the same idea: financial firms are uniquely ill-suited to be recipients of criminal indictments, and if a prosecutor looks hard enough he can indict …. the proverbial ham sandwich.

Thus every Attorney General is always in a position to destroy any financial firm in his or her jurisdiction. Most people who reach the level of Attorney General have the maturity not to abuse that vast power. Spitzer exercised it with abandon. For example, he went public with allegations of criminal misconduct against Hank Greenberg, the legendary CEO of AIG. Spitzer refused to negotiate with AIG until Greenberg stepped down from the company he had built. Given the dynamic described above, that demand is extraordinary: it is a negotiation where Spitzer was able to force the other side to cave without having anything on him. Spitzer’s power to end Greenberg’s career came not from any legal acumen, but was simply intrinsic to his position as AG: he threatened the destruction of a financial firm by bringing a criminal indictment, thus giving a good leader only one alternative. If you ever wanted to know what a thug would look like as an Attorney General, that’s it. That’s what one would look like.

Months after Greenberg stepped aside, Spitzer’s criminal allegations against Greenberg quietly fizzled out.

The previous example is not, alas, a one-off. In fact, the hallmark of Attorney General Spitzer’s reign was precisely the kind of headline-making bullying that would make the US Chamber of Commerce describe Attorney General Spitzer’s methods as, “the most egregious and unacceptable form of intimidation we’ve seen in this country in modern times.” That “form of intimidation” often bore the flavor of someone who had seen too much TV.

An example of that came in Spitzer’s dealings with the John Whitehead, the former chairman of Goldman Sachs, one of the most highly respected men in modern Wall Street history, and in my view, the kind of man the industry ineeds (that is, heavyweight players who keep the game straight, or at least reasonably straight, by keeping Young Turks in check: other than a few old-school guys like Ken Langone, such men are in short supply these days on Wall Street). John Whitehead had the temerity to write a Wall Street Journal op-ed (“Mr. Spitzer Has Gone Too Far“) that made the simple point that in America, people are innocent until proven guilty. That included Hank Greenberg:

“Something has gone seriously awry when a state attorney general can go on television and charge one of America’s best CEOs and most generous philanthropists with fraud before any charges have been brought, before the possible defendant has even had a chance to know what he personally is alleged to have done, and while the investigation is still under way.”

The day this editorial appeared, Spitzer called Whitehead (a retired octagenerian) and said:

“Mr. Whitehead, it’s now a war between us and you’ve fired the first shot. I will be coming after you. You will pay the price. This is only the beginning, and you will pay dearly for what you have done.”

Whitehead’s account went unchallenged by Spitzer.

The Many Sugar Daddies of Eliot Spitzer

Jim continued to support Spitzer in his re-election campaigns, even after he (Jim) left Cramer Berkowitz. For example, this 2003 New York Post article describes a huge fund-raising event for Spitzer that Cramer helped to organize (I beg the reader to please read this closely, as I will suggest two mental notes about this paragraph):

“Among some of the biggest donors to the day’s event were: hedge fund giant James Chanos, president of $1 billion hedge fund Kynikos Associates; Titan Advisors fund-of-funds chief George Fox and Jeff Berkowitz, manager for the hedge fund Cramer Berkowitz (co-founded with Street.com’s Jim Cramer); real estate mavens Edward and Howard Milstein; developer Donald Trump; class action attorney Melvyn Weiss… Weiss, whose own work in pursuing financial fraud has been bolstered by Spitzer’s prosecutorial zeal, was quick to point out that Spitzer’s work has made him more than a few enemies on Wall Street.” (Jenny Anderson, “Fundraising for a Fund Crusader,” New York Post, December 12, 2003).

The first mental note concerns this: “Among some of the biggest donors to the day’s event were: hedge fund giant James Chanos, president of $1 billion hedge fund Kynikos Associates.” Please stick a pin in the name, “James Chanos.”

The second mental note concerns the absence of critical thought exhibited by the New York Post in publishing this sentence: “Weiss, whose own work in pursuing financial fraud has been bolstered by Spitzer’s prosecutorial zeal…” How do we know that Melvyn Weiss’ work has been, “pursuing financial fraud”? Because Weiss said so? In fact, three years later, Melvyn Weiss was charged by the US Department of Justice with taking part in a now-notorious $200 million kick-back scheme involving one of the most powerful law firms in the United States, Milberg Weiss Bershad & Schulman (as of a few days ago, all three of Weiss, Bershad, and Schulman are convicted felons, as is their former partner, Bill Lerach) Thus, with the benefit of hindsight (or critical thought) it would have been more accurate for the New York Post to say, “Weiss, whose own work in practicing financial fraud…”

However, that would have been poor form of the New York Post, the piano player in the bordello that is the New York financial industry. That is why, as I will demonstrate in a later piece, the New York Post is for folks who move their lips while reading People Magazine.

Connections among Spitzer and Cramer’s cronies, such as Marty Peretz, no doubt proved calming on what may have been otherwise bleak and unhappy occasions. For example, in 2003 Spitzer’s office opened an investigation into an ailing hedge fund controlled by Gotham Partners Management. Shortly thereafter, Gotham closed down the fund, and no charges were filed. The fund’s principle investor was Marty Peretz. (Henny Sender and Gregory Zuckerman, “New York Examines research by Gotham Partners on MBIA, The Wall Street Journal, January 10, 2003.) In fact, in a turn-around which has become a standard operating policy against any who try to expose this group, Spitzer began an investigation in MBIA.

By 2005 this coziness between the Attorney General Crusader and hedge funds was an open secret. For example, The New York Observer eloquently explained in January, 2005):

“The ‘hedgies,’ as they’re sometimes called, love Eliot Spitzer. While Wall Street bankers have tended to steer clear of his campaign – in part because of a state law prohibiting contributions by any corporations that sell bonds to the state, in part because they’re still peeved about his crusade against corrupt stock analysts – hedge-fund managers seem to have Spitzer headquarters on speed-dial. Some of these guys, like Kynikos Capital’s James Chanos, always pop up on Democratic host committees (what else are they supposed to do with their $10 million year-end bonuses?). But others, like Stanley Druckenmiller… are genuine converts to the Spitzer cause.

“And why not? While the Attorney General brought his prosecutor’s wrath down on Canary Capital – a hedge fund tied up in the mutual-fund market-timing scandal – he has, thus far, left hedge funds largely alone. As the hedgies are fond of saying, Mr. Spitzer seems to ‘understand’ hedge funds. After all, some of his best friends are hedge-fund managers, and for many years he was a loyal hedge fund investor, reaping what his good friend James Cramer described in his book, Confessions of a Street Addict, as a ‘boatload’ of money from the Cramer-Berkowitz fund.

“But, perhaps most compelling, Mr. Spitzer’s tactics have been good for hedge-funders’ wallets…

“And, like so many of their breed, the hedgies know a good investment when they see one. ‘It’s a lot like investing,’ said Keith Rosenbloom, a Spitzer fund-raiser who runs ComVest Investment Partners, a $1.4 billion fund-of-funds. ‘When you find an investment that’s really special, you’re supposed to bet more on that one if you really understand it. This is a guy who is really special-and you try to back the guys who are really special.'”

Allying yourself with the wealthiest and most powerful people in your state, many of whom (as Deep Capture is demonstrating) are scofflaws, while donning the mantle of a reformer: that’s some gig.

Governor Spitzer: Tous ca change

Politically astute American know the initials “AG” do not, in fact, stand for “Attorney General”, they stand for “Aspiring Governor”. When New York Aspiring Governor Spitzer set out on the utterly predictable course of turning himself into New York Governor Spitzer, his “hedgie” friends were there for him. As The New York Times put it:

“ALBANY, Jan. 25 – Eliot Spitzer has not angered everybody in the business world.

“In fact, Mr. Spitzer, New York State’s attorney general and the front-runner in the polls for this year’s governor’s race, has taken contributions from some of the biggest names in hedge funds, venture capital, real estate and commodities in building a $19 million war chest for his campaign nine months before the election.

“That figure exceeds the $16.3 million that Gov. George E. Pataki had raised at this same point in 2002, when he enjoyed the formidable fund-raising powers of incumbency. In Mr. Spitzer’s case, his campaign finance filings suggest the influence of his actions as attorney general on political donations in the race for governor.” (Danny Hakim, “Filings Show Spitzer’s Allies in Big Business,” New York Times, January 26, 2006)

Then, less than two weeks later, The New York Times explained that “Spitzer Campaign Getting Money From Sources Spitzer Disavows” (Michael Cooper, February 7, 2006):

“ALBANY – In his run for governor, Attorney General Eliot Spitzer has called for ending the ‘pay-to-play culture that exists in Albany’ and pledged not to accept contributions from anyone with business pending before his office. But in Albany, where campaign donations gravitate toward power, Mr. Spitzer’s early lead in the polls has translated into contributions from lobbyists and special interest groups in amounts that are usually not seen except when incumbents are running.

“When Mr. Spitzer held a gala fund-raiser that added $5 million to his campaign in December, the invitation, which listed some big donors along with members of the host committee, read in places like a who’s who of powerful Albany lobbyists…. The contributions highlight the sometimes blurry line that the campaign is trying to walk as it claims to hold itself up to a higher ethical standard in the area of campaign finance while still raising millions of dollars in a state where lobbyists and special interests are among the most reliable donors.”

Again: allying yourself with the wealthiest and most powerful people in your state, many of them scofflaws, while being portrayed as a reformer. Some gig indeed.

The Comeuppance of the Slowhand

As I said at the outset, I am not going to dwell on the Client #9 aspect of this story. I object to our society’s stigmatization of women such as “Kristen.” I was once friendly with a truly fine woman who was, she revealed in time, a high-price escort. One day she showed me her Rolodex (and she did, in fact, have a Rolodex, an old-fashioned, sit-on-the-desktop Rolodex). It had thick paper stock cards that were intended for individual entries. I would estimate that to 60-75% of them were stapled business cards of Managing Directors of upper-crust Wall Street financial firms, along with a smaller number of cards discretely embossed with the names of the white-shoe law firms which service such financiers (discretion precludes me from mentioning the names of any of these firms, but the ones that jump to the mind of the reader conversant with Wall Street are, in fact, the ones I mean). Incidentally, this was true even though the gal lived and worked a long way from New York.

Thus, Wall Street’s Spitzerschadenfreude strikes me as hollow and disingenuous as… most everything else about our financial Power Elite. If anything, women such as “Kristen” should be embarrassed at being exposed entertaining men of standing in “polite society” while “polite society” mouths hypocritical platitudes about them.

Instead, I will burden the reader with two requests.

The first request is that the the reader consider the possibility that the career of Eliot Spitzer reveals more to us about the topsy-turvy, Alice-in-Wonderland world we inhabit than we are likely to see for a long time. Mr. Spitzer became AG due in large part to the guidance and financial support of Jim Cramer and his hedge fund cronies. As Attorney General, Spitzer made a name for himself pursuing conflicted research on Wall Street while never touching Cramer, who embodies the most clear-cut, deepest conflicts between journalism and money management that the financial world has ever seen. Spitzer augmented this reputation pursuing insurance companies like AIG and MBIA over deeply ambiguous financial arcana worthy of Talmudic debate, but never touched the hedge funds who regularly, on a day-to-day basis, as their very business model, manipulate stock prices, rob Americans of their chance to invest in a fair capital market, and (in the case of one) openly brag about it in books and on TV. Spitzer ran for Governor on a campaign of, “The Sheriff of Wall Street is going to put an end to the pay-to-play ways of Albany,” while to his gubernatorial campaign were donated greater funds than his “pay-to-play” predecessor had raised as an incumbent, and in that campaign Spitzer’s strongest support came from the hedge fund cronies to whose industry Attorney General Spitzer had given hall passes.

Did I miss anything?

Thus to me, Spitzer’s downfall is the least interesting part of his story. The career of Eliot Spitzer was always a sluttish thing. The real question with which it confronts us is: what is the state of our public discourse that it would ever see Eliot Spitzer as admirable? Even as he pursued clear evils (such as conflicted analysts on Wall Street) were there any who doubted he did so out of ambition and a desire for headlines? Is Eliot Spitzer what a righteous man looks like to our present age?

In sum, how shabby has our public discourse grown that Eliot Spitzer could be outed over a secret tryst with “Kristen”, but not over the many with whom he slept around openly, for years, in the bordello of New York financial circles?

The second request is that the reader please remember the name, “Jim Chanos”.

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