[...]... fall of 2008 CEOs blamed short sellers for spreading rumors about their firms and demanded their arrest CFOs blamed short sellers for distorting their conference calls and the market valuations of 8 • DON’T BLAME THE SHORTS assets on their balance sheets In doing so, they adopted the populist rhetoric as old as the country itself: that shorting was un-American However, short selling is as American as... if short sellers are correct in their positions on the value of a company, they remain a walking target on account of their own wealth and their influence on the wealth of others Then as now, Wall Street firms that short in their proprietary trading (and profit from the liquidity and fat profit margins from executing and clearing short trades for their clients) blamed the shorts for their ills in the. .. world Market regulators—prompted by appeals from the very CEOs they were meant to regulate blamed Lehman’s collapse on a third party: they blamed the shorts As Markets Plummet, History Repeats Itself To be fair, short sellers have made very convenient scapegoats for nearly a century, since, by definition, they profit from the losses of others Short sellers are the investors who borrow stock shares and. .. dried up liquidity and the credit markets and, like today, sent the economy into a further tailspin The crash of 1929 is the most studied period of American financial history How did we get the immediate reaction to the crisis so wrong and repeat many of the mistakes that were made in the aftermath of the crash? How does a country make the same mistake twice? Because it is in our roots The American reaction... public forum, shorting is an essential part of our financial system It provides the all-important xiv • Preface liquidity the market needs, and it is the linchpin for why certain capital markets even exist When Great Britain’s departure from the gold standard further roiled the markets in 1931, the New York Stock Exchange briefly banned shorting Market- makers had no ability to provide liquidity for transactions,... brokerage departments At the outset, a short seller must get permission from a broker that the broker has shares the short seller can borrow and deliver to a buyer In order to borrow the shares, the short seller must pledge collateral, in the form of cash, high-quality bonds, or equities, to secure the borrowing of the shares There is an interest rate charged for borrowing these shares, and it can be very... built into how we regulate short sales is rewarded handsomely by investors So handsomely, in fact, that it has redefined wealth as we know it (This wealth seems to be another reason why the public distrusts short sellers. ) The ability to short and to buy securities on margin (use leverage) are the main differences between a hedge fund and a mutual fund Shorting is the main justification for the compensation... solve the mortgage crisis in 2008 by limiting stock borrowing in the financial sector, but nevertheless, that is what they did In July 2008, the regulators went after shorting the perceived enemy—by introducing new rules that curbed how sellers borrowed shares As the stock market continued to fall, this move led to an outright ban on shorting financial shares (As of this writing, short sellers are coming... $50 If the stock fell to $40, for example, and the short seller deemed that was enough of a return to justify the risk taken, he or she would buy, or “cover,” the shares at $40 and book a $10 profit minus the interest rate charges to borrow the shares The short seller would also return the borrowed shares to the broker and redeem the pledged collateral Despite the reputation it has received in the public... investors short stock by borrowing the shares from their brokers and selling the borrowed shares to other investors with the promise of buying back the stock and returning it to the brokers in the future In the 1930s, regulators in this country made shorting more difficult to execute, which is exactly why hedge fund managers get paid so handsomely: anyone who can run the gauntlet of all the upward . DON’T BLAME THE SHORTS This page intentionally left blank DON’T BLAME THE SHORTS WHY SHORT SELLERS ARE ALWAYS BLAMED FOR MARKET CRASHES AND HOW HISTORY IS REPEATING ITSELF ROBERT SLOAN New. 97 8-0 -0 7-1 6368 7-2 MHID: 0-0 7-1 6368 7-0 The material in this eBook also appears in the print version of this title: ISBN: 97 8-0 -0 7-1 6368 6-5 , MHID: 0-0 7-1 6368 6-2 . All trademarks are trademarks of their. the 1979 oil crisis, and I was looking for an intelligent comment to make about the market. Somehow Joe Kennedy, the first head of the SEC, came to mind, and I recounted how he shorted the market