The Next Debt Danger: Second Lien Loans

We keep reading about bonds being misvalued and how hedge funds don't know what they own. The confusion over this issue is manifold.

So let's look at what's causing the misvaluation. First, let's understand that everything has a value. There's a price for all merchandise. The price is what you get when it trades.

When you buy a "structured" product you are buying a made-up product, something put together by a broker, typically one of these pieces of paper that was slapped together by a Bear Stearns (BSC - commentary - Cramer's Take) or a Lehman Brothers (LEH - commentary - Cramer's Take) or a Merrill Lynch (MER - commentary - Cramer's Take). Many firms attempted to sell me structured paper in my years at my hedge fund. I always said no because of rules I put in place years and years before that came from an opening where I had people coming in and out of the fund.

When I did such an opening I had to figure out the value of everything. I had one of these structured products and the firm that I bought it from was reluctant to tell me the value of the security unless I SOLD it. It was always priced at the price I bought it at and I thought that might be unrealistic. Just so you know how confusing all of this stuff can be, I thought it was up from where I bought it--par--and they had led me to believe it was up and they were being conservative marking it on my sheets at par.

I wasn't happy with such an amorphous price so I asked for a written piece of paper valuing it. I got one: 90.

Ninety!

I was furious. But that's what they said I would get if I sold it because they didn't have any buyers for it. I said how could their be no buyers? They said that nobody else wanted it besides me.

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At the time of publication, Cramer had no positions in stocks mentioned.

Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. Outside contributing columnists for TheStreet.com and RealMoney.com, including Cramer, may, from time to time, write about stocks in which they have a position. In such cases, appropriate disclosure is made. To see his personal portfolio and find out what trades Cramer will make before he makes them, sign up for Action Alerts PLUS. Watch Cramer on "Mad Money" weeknights on CNBC. Click here to order Cramer's latest book, "Mad Money: Watch TV, Get Rich," click here to order his book, "Real Money: Sane Investing in an Insane World," click here to get his second book, "You Got Screwed!" and click here to order Cramer's autobiography, "Confessions of a Street Addict." While he cannot provide personalized investment advice or recommendations, he invites you to send comments on his column by clicking here.

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