Now that the you-know-what is hitting the fan, we’re hearing from everybody about how ruthless, evil short sellers are to blame for the market’s demise … or at least for the demise of many financial firms.
Personally, I have rarely in my life shorted anything. That doesn’t mean it’s a bad strategy, but the big money is made from buying exciting new winners early in a new bull market. And so that’s what I prefer to focus on, especially now, with panic in the air.
But the whole blame game rubs me the wrong way. While I do agree that the SEC should bring back the uptick rule (so you can only short a stock after it’s ticked higher during the day), and while naked short selling shouldn’t be allowed for any stock, don’t forget the root cause of this disaster: Greedy heads of banks and investment houses throwing risk aside, reaching for extra yield, and leveraging themselves to the hilt.
If these CEOs didn’t make a ton of bad bets, if they didn’t forget economics 101 (no market goes up or down forever, including housing!), then this downturn/slowdown/whatever you want to call it would be far milder. But all those poor decisions are catching up with them. Let’s not forget that Lehman was shopped openly this past weekend … and yet, after a bunch of suitors examined the company, none wanted to step up. Why? Because of all the bad debt!
Don’t get me wrong–there’s plenty of blame to go around. Something this complex isn’t caused by one single problem, just like it’s not being cured by a single solution.
But to blame short sellers for all the market’s ills, like many are doing on TV and in newspapers, is misleading. When all these shorts begin to cover their positions in the next bull market, driving the stocks rapidly higher, is anyone going to complain about them then?
The shorts aren’t innocent, but let’s not pretend they’re the cause of this.