In Jim Cramer's opinion, one would have to move heaven and Earth to create a more horrible portfolio than that of Third Avenue Focused Credit fund.
Third Avenue is the mutual fund that barred redemptions last week, prompting serious turmoil — and total hysteria for some investors — in the high-yield bond market.
There were two main events in the Third Avenue story that caused the turmoil to occur. First was the unprecedented decision by David Barse, the former CEO of Third Avenue, to stop redemptions of the mutual fund without even consulting the SEC.
This move shocked Cramer, because a mutual fund is not like a hedge fund with special lockup rules. When someone invests in a mutual fund, there is the notion that there is a posted price of what the fund is worth and that they will be able to redeem their shares and get a price when they choose. There are rules behind these things, and they must be followed.
"To me, this unilateral decision to cease redemptions on the spot is tantamount to a repudiation of the laws set up to protect investors in these kinds of vehicles. I don't know how the authorities can overlook this move," the "Mad Money" host said.
The second side of the shocking Third Avenue story was the junk that the fund bought. Cramer went through all of its hideous assets over the weekend and found that the vehicle was reminiscent of the funds put together in the peak of the junk housing credit boom in 2007.
"Put simply, Third Avenue Focused Credit was a collection of the worst pieces of garbage under one roof that I have ever seen," Cramer said.
So what does that mean for the rest of the market?
Cramer thinks that if there are a lot of funds that mirror this one, then he expects weeks or months where the prices of these mutual funds will be too high. Then it will be every man for himself to get out of them right now. Basically, they should never have been in them and investors must pay a high price to get out.
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In fact, when Cramer analyzed the more than 50 corporate bonds that the fund manager had on its sheets from this summer when the fund manager showed its holdings, he found that he would only invest in six with any conviction at all.
"The lack of judgment, the stupidity and the bad luck of the people who put this portfolio together is simply legion. If you asked me, they had no right to run a fund, because they simply couldn't have any knowledge of how badly these companies were doing and it would have always been foolhardy to believe that they could get out of this junk if things went wrong," Cramer said,
This is why Cramer could not believe that the fund had the guts to say it was down only 27 percent last week. He thinks the assets were so ghastly that in order to sell them, they would only be worth half of what they might be carried out. That was exactly why Cramer thinks Third Avenue had to close. Only a moron would have bid on those assets.
Ultimately, Cramer said that no fund like this should have ever been allowed to be marketed to individual investors.
"It is that much of an offensive tragedy to call this portfolio anything other than the Gowanus Canal of mutual funds, one that no one should ever be permitted to swim in," Cramer said.