Short Sellers Got No Reason to Live?

Katherine Mangu-Ward | September 22, 2008

Everyone hates a know-it-all, which may be why the world is ganging up on short sellers right now.

By definition, people who were shorting companies that subsequently crashed were totally right. To dramatically oversimplify: Short sellers are broadcasting signals to the market that the companies they're shorting suck. When they're right and big companies come tumbling down, you'd think everyone would rally 'round and ask, "How did you know? Tell us your secret?" Instead, we blame them for the financial troubles of the less prescient:

Short sellers—not management—defended honesty in the pricing of shares by demanding accountability. Short sellers openly warned about the problems at Enron, Tyco, Fannie Mae and Freddie Mac before their meltdowns. And when it comes to investigating corporate fraud, it's the short sellers who are the detectives, while all too often our regulators practice archaeology.

In fact, in times of financial crisis, short selling has gotten the short end of the stick pretty frequently:

Short selling has been misunderstood and maligned throughout history. In the 1630s, England banned short selling after tulipmania collapsed in the Netherlands to prevent a similar fallout in England. More recently in Malaysia and Pakistan, short sellers have been faulted for stock-market busts.

Right a wrong—go find someone who sold Fannie and Freddie short and give him a hug.