Short Sellers, Wrong Culprits

The other day I went for drinks and dinner with an old university friend of mine who now works in the corporate finance arm of Santander, the Spanish owners of Abbey National. He had an interesting perspective on the knee-jerk headlines in the tabloid press to what have variously been termed 'speculators' and 'spivs' - or more accurately, short sellers. No, not vertically-challenged grocers, but stock market traders who make a living betting against the market.

Put simply, they sell before they buy. How, you ask? Well they are allowed to by regulators, providing they buy back their shares when they are required to. Guess what – if the share value has dropped by the time they have to buy, they pocket the difference. Tidy, as they say. So as share values fall, they keep selling, and await the falling price. But of course the very act of their selling depresses the price even further and a vicious circle emerges. Sounds like an unmitigated evil. Except that it isnt’ always so. As my friend explained, short sellers serve a purpose as a useful ‘corrective tool’ for a market that is overvalued – as many markets we now know were. By betting against trends they help to stabilise prices. In fact they play a critical role in regulating the share price.

By going short during the current crisis, many hedge funds actually reduced the size of the bubble and therefore the subsequent crash. There was, I believe, an argument for stopping short selling when panic set in and share prices began to plummet. But guess what? When short selling was halted, the price dive continued. Not a very convincing case for the prosecution. As my friend was at pains to point out to me, there are no such thing as ‘speculators’. They don’t exist. It is a pejorative word used by those who want to believe that whoever is making money must be responsible for the current crisis.

Whenever there's a crisis you can always rely on politicians or journalists with an agenda to jump on a bandwagon. In Germany politicians were particularly hostile. So virtually every politician in need of a soundbite, and every tabloid wanting to shift a few copies has tried to blame the 'speculators'. Because it's easy. And because everyone (they think) must share their belief that if someone's doing well, it must be the cause of someone doing badly. Except that the truth is more complex, and unfortunately, more worrying than that.

Point the finger at greedy and stupid banks, but mostly blame stupid governments for overspending, for forcing banks to give out bad loans, for sustaining a credit bubble and then for being asleep while banks loans went bad. Governments and banks forgot – there’s no such thing as a free lunch.