Short sellers – the “canary in the mineshaft”

19 July, 2009

In The Financial Times on July 15 2009, Anthony Bolton of Fidelity International had some interesting things to say about short sellers, those notorious pantomine villains (hiss! boo!), whose activities were actually restricted by law last year, during the banking crisis.

“The shorting of bank shares was … a symptom rather than a cause of the financial crisis. Now we know what the banks were up to, it is clear that the ones that failed required no assistance in destroying their businesses. They did a perfectly good job themselves…. The financial crisis was a consequence of poor management, inadequate regulation, over-stimulative monetary policy and deficient analysis by ratings agencies….. If hedge funds profited from this combination then it is only because they saw it earlier and more clearly than other market participants….. Short sellers claim, with some justification, that their activities play a useful role in making markets more efficient. By seeking to profit from the over-optimism of investors who have driven prices too high, they oil the markets’ price-setting mechanism……Even those who do not wholeheartedly share this view, would probably acknowledge that hedge funds were the canary in the mineshaft in 2007.”

Short sellers have a nasty habit of identifying over-valued companies, particularly ones whose management has been taking excessive risks with their shareholders’ money.  They are naturally seen as savage barbarians by such management and their cheer-leaders.  Shane Ross tells a revealing story about meeting a “hotshot Dublin businessman” in April 2009, shortly after Anglo-Irish Bank’s share price had been hammered, with the undoubted assistance of short-sellers:

“….The hotshot revealed that a group of his well-heeled cronies were determined to set up a revenge fund to punish all those short-sellers who had targeted Anglo. These guys had a sense of ownership: his friends were going to defend ‘their’ bank at all costs. Those standing in the way would be swept aside by the flood of money. Enemies of Anglo would have their fingers badly burnt…..”

The rest is history.

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