Peering Through the Gloom, Part 1

Click here for the latest from James J. Cramer.

Editor's note: This is the first installment of a multipart series. Please check in later to read Parts 2 and 3!

---

I remember quite vividly the first time I took someone's house. No, I didn't move in. I just took the mortgage. For my old firm. What else was I supposed to do? Because all of the client's stocks cratered, all of those call options went to zero, and all of the collateral just went away. Overnight. And it was in a bull market, yet. She was a respectable sort, thought herself to be a real good business person, and she thought margin was an investment tool. She used it because she was illiquid, with too much invested in her private company that was about to go public.

It never did. The markets closed to that kind of stuff then, just as they did now. She just plain ran out of money. The writing was on the wall before it happened. I remember getting calls from American Express about the client's bills. They were worried, too. They wanted to be sure that they were going to get paid. That's when I asked for the mortgage. I needed collateral that badly. Worse than American Express needed it, for sure. I didn't want to be on the hook for her losses. That's the way it worked at my brokerage house. Someone was on the hook. Me. It was my account.I had brought it in.

Oh everything worked out in the end. For me. She found some money, got closed out, paid off the margin. Never heard from her again. Lost everything from what I hear. At the time I felt bad, real bad. I vowed that I would, if I ever got a chance, work hard to explain to people the evils of margin. I have preached against margin ever since, allowing that only professionals should be using it, and then only in certain instances when the moment is right. Leverage is a scary thing when stocks go bad.

But then times got easy. People started making all kinds of money in the market. And the margin flowed like wine, like that cheap Almaden wine that they used to serve at parties when I was a journalist, or maybe that undrinkable Soave Bollo. If you kept talking about the evils of margin you sounded like one of those William Jennings Bryan types, arguing against the cross of a gold standard, or Pitchfork Ben Tillman, talking populist gibberish. Crazy stuff. Lunatic conservatism. All spring I could barely read my email, because so much of it accused me of wrecking the bull and seeing risks when they weren't there, etcetera. People even told me that I had gotten rich and now I wouldn't let others get rich. I just didn't want the brokers to take their mortgages.

All year I have been saying, get off margin. All year I have been saying that those mutual funds that seem so safe because they are all tech all of the time could bring you tremendous harm. When times were good, I stressed that you had to take something off the table, get liquid, stay liquid. I preached cash, which is one of those assets that pays the broker nothing and the mutual fund less!

Well, now it is happening. Now the unraveling is occurring. Right here, right now. In record time and speed. Before our eyes. And who is now doing the selling? Guys like me in the '80s. Brokers who are selling people out of stocks because they don't want that call from American Express and they don't want to mess with your mortgage if they can help it. Because all of that margin debt was taken on when the Nazz was at 2300 going to 5000, not 5000 going to 2300.

And who took down the margin? Executives who should know better, at companies that they purport to be able to run even as though they are as stupid as plywood. Oh, by the way, borrowing against stock to finance a lifestyle or a major investment, after the stock has run up big or has a gigantic market cap, is the type of thing that shows me you shouldn't be allowed to have a checking account, let alone run a company. And the people who do it scare me. They shouldn't be in any position of responsibility at their companies because if you can't run the financial show at home, what they heck are you doing running my money as a shareholder? I have no respect for them. Oh heck, I laugh at them. And I scorn them. They know nothing about money.

---

James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund had no positions in any stocks mentioned. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at [e-mail].