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Currently there is a confluence of issues swirling around financial speculation and the short selling of financial instruments. The SEC in late February announced its long-awaited short selling restrictions, imposing an uptick rule on short selling once a 10 percent stock decline triggers a circuit breaker. And in early March the European governments began mounting a charge to ban "naked" short selling of credit default swaps (CDS) and clamp down on financial speculation.
Short sellers have never been loved -- they are the perennial naysayers, the guys in the corner saying, "That will never fly," "They're nuts" and "The business model is broken." They are generally not much fun. But that said, many do very good work in spotting products that won't fly, the guys who really are nuts and the firms that don't have sound business models.
Maybe I am painting a bull's-eye on my forehead, but I believe that short selling and financial speculation are a public good; it is usually the person -- or, in this instance, the government -- crying foul that is most likely to be in the wrong.
Take the short-selling rebellion poster boy, Patrick Byrne, the CEO of Overstock.com. Mr. Byrne has been up in arms about the short sellers who were hammering down his stock price. In 2005 he was quoted widely and embarked on a significant campaign to get the SEC to rein in short sellers. The one problem: Overstock.com has never generated one penny in annual profit since going public in 2002, and from a high of approximately $70 per share in late 2004, it has been on a pretty steady decline to a low of about $9 in 2009. Today it has settled at about $15.While I would love to say that the only person complaining about short selling was some CEO of a profitless company in Utah, a number of investment bank CEOs were making the same claims during the height of the credit crisis. But while the stocks of many investment banks tanked and a number failed (or came close), it wasn't the short sellers that created the problems. Did the short sellers buy boatloads of toxic debt? Did they create a bad business model? Did these banks fail because of the shorts? I would argue "no" on all accounts.
In fact, it was the short sellers who did their homework that discovered how bad these firms' balance sheets actually were. The shorts were the ones with the guts to put their money on the line and actually point out that the Emperor had no clothes.
Just because investors and/or speculators are either hedging their sovereign risk or buying CDS in the attempt to (dare I say it?) profit from worsening Greek credit spreads, it doesn't mean that these people/organizations are bad or that they are doing bad things. Would they be nasty human beings if they felt Greek credit spreads were narrowing and bought Greek debt or sold the CDS? What is the difference?
When will the world (and its leaders -- both political and business) learn that it takes two points of view to trade? For each and every trade, someone believes the asset is underpriced and someone believes it is overpriced. Whether the seller was long and reducing its position or flat and going short, the issue is the same: The seller always believes that the value of the product is headed south. Otherwise, why sell?
Why are politicians blaming the messenger because the business can't make money, the financial institution is loaded with toxic debt or the government is fiscally irresponsible? Eventually, even governments need to balance income with expenditures.
The best way to kill the shorts is not by banning them -- it is by running an enterprise properly. Then asset values go up and short sellers, well, take it in the shorts.
Larry Tabb is founder and CEO of New York-based TABB Group, a financial markets strategic advisory firm. ltabb@tabbgroup.com
