Short Selling: Profiting From Others' Misery?
DEBORAH AMOS, Host:
This is MORNING EDITION from NPR News. I'm Deborah Amos.
STEVE INSKEEP, Host:
We're about to hear a defense of people whose work often drives the stock market down. They're investors who sell short. That essentially means they place a bet that a stock will drop in value. It's a practice the federal regulators want to restrict. Yet, short-sellers have their defenders. To understand why, it helps to know exactly what they do. NPR's Alix Spiegel begins with this example.
ALIX SPIEGEL: Enron, he concluded, was nothing more than a house of cards, but says Columbia Law Professor John Coffee, when he tried to explain his findings to other people, they simply didn't believe him.
AMOS: Originally, he got no support because Enron was then considered to be the most-admired company in America and to have the best corporate governance, according to Fortune Magazine.
SPIEGEL: But, Coffee says, Chanos persisted until finally a journalist named Bethany McLean in the spring of 2001 published an article titled, "Is Enron Overpriced?"
AMOS: And the fissures began to widen under Enron, and suddenly Enron began to plummet, and the person who started all this was a short-seller, performing really a function not unlike Woodward and Bernstein in Watergate in pointing out that there was something very suspicious going on in the White House.
SPIEGEL: One way to look at this behavior, says Coffee, is as a social good because short-sellers provide an alternative vision of what's going on.
AMOS: Managements tend to be overly optimistic. They tend to put out good information and deny bad information, and we need short-selling to have a fair, objective and unbiased market.
SPIEGEL: But for most of history, says Coffee, short-sellers haven't been seen as social do-gooders. They've been viewed with hostility and skepticism.
AMOS: Napoleon actually passed a law, it was part of the Napoleonic Code, against short-selling because he thought that it was somehow inherently fraudulent and deceptive.
SPIEGEL: Ever since, governments have periodically tried to squelch or limit short-selling one way or another. Why? What's wrong with being Woodward and Bernstein or exposing incompetence? Business professor James Angel of Georgetown University says people don't like short-sellers for a very basic reason.
AMOS: They're profiting from the misery of others.
SPIEGEL: Also, short-sellers are often accused of manufacturing false information in order to drive down a price. In fact, when a company's stock falls precipitously, management frequently tries to pin the blame on short-sellers peddling false rumors. But, says Angel, this is always hard to prove because rumors are spread in whispers and are difficult to trace.
AMOS: Clearly there is some, but exactly how much is really hard to tell.
SPIEGEL: In fact, if you ask Professor Angel, someone who studies short-selling for a living, to name one instance where it was absolutely clear that short-sellers brought down an otherwise healthy company, he pauses for a long time.
AMOS: I can't name one off the top of my head.
SPIEGEL: Still, the bad rep persists. It's part of the reason that the SEC moved against an extreme version of shorting, called naked short selling, a couple days ago. There's a fear that part of what's been driving down the stock price of companies like Fannie Mae and Freddie Mac are short-seller whisper campaigns. Time will tell. In the meantime, since the SEC took action on Tuesday, the stocks of Fannie and Freddie have risen. Alix Spiegel, NPR News, Washington.
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