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Kass: Stop Pointing Fingers at Short-Sellers

Doug Kass

"We have met the enemy and he is us."

-- Walt Kelly, Pogo

Not surprisingly, certain corporate managements and several members of the media have sought out scapegoats to rationalize their own fundamental mistakes. Rather than looking in the mirror and 'fessing up to their own managerial errors (i.e., their lax due diligence, increased corporate misdealings and operational shortcomings), short sellers have recently been the repeated targets of many.

Bear Stearns' BSC senior management, days before it almost failed, was quick to accuse short sellers as conspiring to accelerate the company's downfall. During that period, Lehman Brothers LEH CFO Erin Callan chimed in as well and called on the SEC to investigate the abusive tactics of short sellers, who she claims were responsible for the continued pressure on Lehman's share price. And in early March, Ambac's ABK Michael Callan ridiculed the short sellers and continued the refrain of accusing short sellers for the fall in his company's share price, which was down by nearly 50% this week.

In the media, Ben Stein and CNBC's Dennis Kneale, seemingly acting as shills for the bullish cabal, have been at the epicenter of the blame game against short sellers.

I have long felt that finger-pointing is a giant waste of time, and, quite honestly, the only thing that might be more of a waste of time is commenting on it.

Yesterday, CNBC's Dennis Kneale, who I happen to generally respect and like, suggested that the SEC should have imposed a larger financial punishment against a trader, Paul Berliner (who was employed by the Schottenfeld Group), for spreading a false rumor that the Alliance Data Systems ADS/Blackstone Group BX takeover was in jeopardy.

I agree with Denny the K, that it was a good thing that the SEC nailed Berliner, but I strenuously disagree with the finger-pointing against short sellers for the following three reasons:

1. As I have often written, investors and policymakers should have taken a cue from the early read by short sellers in their analysis of the housing, subprime, rating agencies and credit issues, which substantially presaged the problems before they surfaced. A lot of money would have been saved. As has been documented in numerous academic studies, stocks with high short interest ratios, typically underperform the market dramatically, as it is often a sign of systemic problems. Consider Overstock OSTK, Ambac, MBIA MBI, MGIC Investment MTG, Biovail BVF and many others.

2. For every stock that is rumor-mongered to go down, there are a hundred that are rumor-mongered to go up. When will the SEC go after the latter?

3. And what about corporate executives (especially of a tech kind) who routinely cheerlead and then dump shares? Shouldn't the SEC address this as well?

Doug Kass is the author of The Edge, a blog on RealMoney Silver that features real-time shorting opportunities on the market.