Too Big to Fail [56]
If Wall Street had indeed been taking on some aspects of a Shakespearean tragedy, Cramer would likely serve as the comic relief. Voluble and wild-eyed, he spoke in his TV appearances so quickly that it often seemed as if his head might explode from the sheer effort of communicating his ideas. But for all his carnival-barker antics, people on Wall Street knew Cramer was no fool. He had managed a hedge fund and founded TheStreet.com, an early and influential investing Web site, and had a keen understanding of how the market worked.
Fuld and Cramer had come to respect each other as no-nonsense street fighters, despite their pronounced differences in character. Cramer, a media star, was solidly Harvard, had once worked at Goldman, and counted as one of his best friends Eliot Spitzer, the bane of Wall Street. Fuld, for his part, tended to despise Ivy Leaguers, liked to think of himself as the anti-Goldman, and had never been much of a communicator. Still, he appreciated the fact that Cramer had always been an honest broker, willing to speak his mind, however unpopular his opinions might be.
After one of Lehman’s wait staff had taken food orders, for the group, Fuld walked an attentive Cramer through his talking points. Lehman, Fuld said, was working hard to reduce the firm’s leverage and restore confidence among investors. Though they had raised $4 billion in new capital in the first quarter, Fuld was convinced that a “cabal of shorts” was preventing the stock price from being properly reflected. The franchise was undervalued.
Cramer nodded his head energetically. “Look,” he said, “I think there is definitely a problem with the shorts—they’re leaning all over you.”
Fuld was gratified to see that he had a receptive audience. As he was well aware, his short-seller predicament touched on an obscure issue near and dear to Cramer: the uptick rule—regulation that had been introduced by the Securities and Exchange Commission in 1938 to prevent investors from continually shorting a stock that was falling. (In other words, before a stock could be shorted, the price had to rise, indicating that there were active buyers for it in the market. Theoretically, the rule would prevent stocks from spiraling straight downward, with short-sellers jumping on for the ride.) But in 2007 the commission had abolished the rule, and to critics like Cramer, its decision had been influenced by free-market ideologues who were eager to remove even the most benign speed bumps from the system. Ever since, Cramer had been warning anyone who’d listen that without this check, hedge funds were free to blitzkrieg good companies and drive down their stock.
But until the current crisis, few had been willing to listen to his admonitions. Because their hedge fund clients wanted the rule eliminated, Wall Street firms were happy to accede—right up until the time that they themselves became the target of short-sellers and had to run for cover.
“You can be a great ally to me on this uptick rule crusade,” Cramer said.”
Fuld contemplated his guest’s enthusiasm as he silently weighed the advantages and disadvantages of lending his firm’s name to the cable news star’s crusade. Cramer was probably right about the rule’s removal hurting Lehman, but Fuld also knew that his firm’s own arbitrage desk had hedge fund clients who were selling short, and they made the firm a great deal of money. He certainly didn’t want to alienate them, and at the same time, he recognized that there was a legitimate debate about the issue. And however protective the restrictions