Short Sellers: Villains or Victims of 'Witch Hunt'?
To the surprise of almost no one on Wall Street, the crisis in U.S. finance has poured gasoline on the always-smoldering fire of criticism against short sellers, investors who seek to profit when stocks plunge.
U.S. market regulators today issued an emergency ban on the short-selling of financial stocks. Yesterday, the U.K. Financial Services Authority imposed its own temporary four-month ban on shorting financial stocks. That was followed by similar moves in France, Portugal, and Ireland.
New York Attorney General Andrew Cuomo is vowing to investigate and prosecute illegal short selling, and European regulators are investigating similar allegations.
The practice of short-selling is generally legal: Investors borrow shares and then sell them, hoping to buy them back later when the price drops. They pocket the difference in price, when they guess right.
The nation's three biggest public pension funds in California and New York yesterday suspended lending stock of Morgan Stanley and Goldman Sachs Group Inc. to short sellers, after the shares of those two banks dropped dramatically.
Things heated up for the shorts this week when Morgan Stanley chief executive John Mack went on the offensive, blaming them for spreading false rumors that led to plunges in his bank's stock and threatened the company's ability to avoid the insolvency of the Lehman Brothers investment bank -- which declared bankruptcy on Monday. Other critics argued that the
But cooler heads suggest that angry investors are looking for scapegoats for a much more complex crisis. They point out that short sellers are responsible for a relatively small portion of stock sales.
The Economist magazine opines that some of the actions against shorts seem to be an "alarmingly piecemeal" response to the overall crisis. Columnist Floyd Norris of the New York Times blogs, "The real problem is that financial companies got themselves in deep trouble with bad decisions. The short sellers who figured that out before the rest of us made money, but it is hard to believe the shares would not have come down anyway."
And a writer for British newspaper The Guardian suggests the executives are too quick to point the finger elsewhere: "The disease is the mismanagement of the banks' directors; short-selling is simply a symptom."
Please email us to report offensive comments.
Posted by: Jennifer | September 19, 2008 3:31 PM
Posted by: g | September 19, 2008 4:40 PM
Posted by: Ralph | September 20, 2008 12:41 AM
Posted by: PDS | September 20, 2008 10:25 AM
Posted by: FranciaCordido | September 20, 2008 1:35 PM
Posted by: wjw | September 20, 2008 2:01 PM
Posted by: Eli | September 20, 2008 6:45 PM