Don't Blame Us Politicians, It's the Short Sellers' Fault!

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berlusconiShoot the messenger. So now that Italy's stock market is tumbling and its bonds are being sold off in a growing European Debt crisis, what do Italy's powers-that-be do? Crack down on short sellers! In 1997 I began writing a short-selling column for the now defunct Individual Investor magazine (yup, I got bearish a few years too soon), here is how I described the persecution of short sellers: As mean-spirited newspaper reporters, like I once was. I used to say, in apologizing for my habitual attendance at accident scenes or contentious town council meetings, by saying, "Look, I don't wish anything bad to happen. But when it does, I want to know about it --- first." Short sellers, on the other hand, have a toughter time explaining their vocation: They actually want to profit on bad stuff happening.

This all was brought to mind by a blog I read this morning from the WSJ, "First Thing We Do, Blame the Shorts." Because short sellers have a vested interest in others' losing money--preferably, lots of it, is it any wonder that short sellers have been called liars, thieves, even traitors and worse? Retired money manager Peter Lynch likened shorting to "borrowing with criminal intent," and it was Napolean who said citizens shorting government securities were committing treason. Short sellers have been blamed for every kind of financial catastrophe, from the collapse of the East India speculative frenzy in Amersterdam in 1610 to the Wall Street crash of 1929. Governments have restricted it (see our own recent financial crisis in which the SEC limited shorting of financial companies) and even tried to outlaw it.

Of course, shorting is simply market hygiene --- the Securities and Exchange Commission was born out of the post Crash witch hunt on short sellers; Congress realized shorts didn't do it but unscrupulous touts and lack of disclosure was the primary mover for the Great Crash. Shorts do lots of sleuthing, throwing kleig lights on questionable business practices being touted by brokerages as the Next Big Thing Since Night Baseball. Remember David Einhorn's call on Lehman? He publicly called BS on Lehman before the crisis and was roundly criticized for it. But in the end, he won billions from his research that Lehman would shortly suffer a liquidity crisis.

As Mark Mark Gongloff writes this morning in his Market Beat blog, "You can always tell when a financial crisis is kicking into a higher gear: The powers that be desperately flail at the market messengers bringing them the bad news.

"Check out this Bloomberg story on how Italy is responding to signs the European debt crisis is gripping its markets with quick, decisive action — to clamp down on short sellers."

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