Buy the Paper Tigers

The re-evaluation of the financials continues. What's behind it this time? Sometimes what you have to do is look at the clients of these firms, the real clients. That's the giant funds that are on the buy side, not the mergers-and-acquisitions guys, even though they bring in a gigantic amount of revenue.

Right now these funds are desperate: They want paper, short-term company debt. They want high-yielding paper. They want residential mortgage paper. It was Ellington Capital, one of the best players, buying Fremont's (FMT - commentary - Cramer's Take) loans, and Farallon, another big, smart player, buying Accredited's (LEND - commentary - Cramer's Take) loans. They want something to put in their accounts. Their voracious appetite for paper makes all of these private-equity and residential mortgage buys so easy.

We are so often caught up in the equity side -- are they paying too much for stocks? can it continue? -- but the real interest is in providing merchandise, and fixed-income merchandise is a fabulous business. When there is paper of disparate value -- high-yield and high-risk mortgage loans -- you can charge a gigantic amount of vig, of credit, of commission. You can't do much when you are selling plain-vanilla corporates, but junk? Remember how much notorious Junk Bond King Michael Milken made for Drexel before the regulators took it down?

I was a small institutional/high net worth broker at Goldman (GS - commentary - Cramer's Take). I made good money selling equities, but my fixed-income commissions always dwarfed my equity business.

In the late 1990s, that switched and the equity guys were the breadwinners.

It has switched again, as the thirst for a higher yield is insatiable for the large pools of capital anxious to meet their obligations.

Of course, the shorts really blew this; they didn't think that anyone wanted toxic paper. They were so wrong; you can divvy up toxic paper into high-yield and equity tranches and sell them for much, much more than you could sell any other kind of paper.

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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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