Editor's note: On Monday in Reston, Va., Jim Cramer spoke at the Friedman Billings Ramsey 4th Annual Technology Investor Conference. We'll be running the text of the speech in four parts. Here, the third installment. Catch up with installments one and two.
Now, here is the real rub. Here is what the old-line guys really don't get. The public
this game. It has replaced sports as the national pastime. Why not? Sports are just a bunch of overpaid millionaires often just going through the motions, and you have to pay the equivalent of 10 trades to go see them play. The public feels completely empowered by the e-brokers and scorns the old have/have-not model. The low-fare guys,
, the Net in general has put them in the game, on the playing field, having the times of their lives.
Amazingly, in something that is too coincidental to be called a coincidence, the public has decided that it can do a better job than the brokerage firms and the mutual funds. And the public is right. Because there are a couple of dirty little secrets of the business that no brokerage house really talks about. First, the off-liners can't prove that they have consistently beaten the market with their picks. If they did, they would have been able to say that these e-trader campaigns are a pack of misleading half-truths and outright lies. But they haven't.
Second, all they really want is the biggest, most-carriage-trade clients. At the same time, the 85% of the country that has enjoyed this incredible, recession-free period has stashed oodles of cash and stocks and feels incredibly slighted by the lack of attention they receive anyway. They don't want to entrust it to an overpaid broker when they now know they can do it themselves and not be ripped off. They don't get the whole idea of paying by a number of shares because these e-broker ads that run around the clock tell them that doesn't matter. Which brings us to the final dirty little secret.
The individual now knows that the Net reduces the cost of that transaction dramatically and it doesn't want to pay the freight it used to pay now that it knows the truth. It just doesn't cost much to process a trade. The high commissions have been rip-off gravy for the off-liners.
Now, let's talk about the real destruction that the Net has wrought. In this model that I have described, the one thing that is most sacrosanct is the underwriting process. As long as the companies start with the major off-line underwriters, that juicy junk of fees will still be the brokerages' to milk.
But I have seen the other side. The public, when massed in the form of electronic clearinghouses, overwhelms the traditional guys. In fact, they have started to become irrelevant. They put on these giant road shows, city to city, with one-on-ones and meetings with all of the important pools of capital, and what happens? Something nobody wants to talk about out loud: The companies come public and all but five or six of them lose every one of those institutions the first day because the online buyers have taken hold of the process and they aren't letting go.
For almost nine months now, the penetration of first trades has been going inexorably toward the
and away from the
should be doing the road shows and we, the issuers, should be paying them! They place all of the stock anyway. They, not the old-fashioned guys, know who the owners are. And the issuers could have socked away millions more if they had simply avoided the high-priced brokerages.
I know that we all want institutional coverage and institutional ownership of our companies, but the process we are using now only buys half the bargain. Maybe it should cost half the price?
Yes, the whole underwriting process has become somewhat of a sham.
These new buyers have gotten all of their information from online services and television and don't even have anything to do with the issuers or their brokerage houses. How much longer will issuers tolerate such a ridiculous process? How much longer will they allow the people they pay to
have a handle on the IPO day? When will they wake up and realize that the old-line guys have lost total control over the backend of underwriting -- the trading itself?
It gets worse. How about that research coverage that these issuers pay so much for and the brokerage houses bid among themselves to keep? Here's another sham process. These days, with streaming audio and video and cheap news services like the one I founded, who the heck needs a research department? It is a needless, expensive appendage. The public values only what can't be bought: editorial judgment and analysis by people who are unbiased. The public wants to be sure that the people critiquing the show don't have anything more at stake than their own integrity.
We would never tolerate these symbiotic, if not master-slave, relationships in any other walk of life save finance. Can you imagine if
put on a show and paid the critics to review it? Can you imagine the pressure they would be under? Or how about if
issued its own reviews of its own productions? Only those who are specifically paid to be impartial can really have any credibility. That's what we accept in all but underwriting. I think that's about to change, and for the better.
Look for the final installment later today.
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long Goldman Sachs. 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