The Sub-Prime Lending Riddle, Solved

The negative guys never challenge their theses. They get their theses in their heads -- housing crash, sub-prime lending cataclysm, dollar plummet -- and they never test it or back down from it.

I never have that luxury. As someone who is trying to make money for charity with Action Alerts PLUS, I am in there wondering if I am wrong and what I have to do to change if I am wrong so I don't lose money.

Which brings me to CarMax (KMX - commentary - Cramer's Take). Did you see that quarter Wednesday? That was such a blowout, one of the best of this fall. I could not believe how strong the used-car market is.

But then I got to thinking, "Wait a second, who buys used cars?" Answer: sub-prime consumers. If the sub-prime consumers are so stretched, why the heck are they buying the more upscale, newer used cars that CarMax sells?

If you challenge your thesis with that, here's what you do. You find yourself thinking, "Maybe the sub-prime lender 'problem' isn't a credit problem at all. Maybe it's a margin problem." Because there is so much money to be made in packaging and selling mortgage bonds, many of the major brokerage houses have bought prime and sub-prime lenders and cut the margins to shreds because they just want the mortgages not the profits.

In order to compete and be in the sub-prime business by itself, you have to cut margins, too. Which is what I think is really going on, or you would not have had this strong CarMax number.

If you don't do this kind of thinking, you are going to get hung on your thesis. I had been ruminating on the sub-prime problems, but this one throws me over the top. I believe it is margins, not credit that are the issue here, and I thank CarMax for putting my thinking over the top.

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

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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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