Recently we've been treated to what is known in journalism as "man bites dog" moments. There have been two, both related to that most despised of creatures, the short seller. In recent weeks, short sellers who wagered against the housing boom have been heralded as heroes, feted with a literary ticket tape parade in the form of Michael Lewis's best-seller The Big Short. And then -- wouldn't you know it? -- the second man-bites-dog moment cancelled out the first one.The Great Goldman Sachs ( GS) Fiasco -- a Securities and Exchange Commission lawsuit that took everybody by surprise -- has returned shorts to their accustomed role as the Hannibal Lecters of Wall Street. The SEC claims that Goldman schemed with short-seller John Paulson to rook investors in some toxic-waste mortgage derivatives. Paulson hasn't been charged, and Goldman maintains that it is as innocent as a newborn mouse romping in the hay. On Saturday, Goldman emails emerged from Capitol Hill showing the bank was romping in greenbacks by joining in the "big short" of mortgage securities. Make no mistake: This is the worst blow to short selling in memory, much worse than the last short-selling fiasco, when Anthony Elgindy was nabbed for bribing FBI agents a few years ago. What makes this all a crying shame is that, gawdawful as it surely is, the Goldman scandal doesn't negate--not even by one corpuscle--the positive role shorting has played in recent years as a check on Wall Street abuses, including those committed by the big banks. One of those short-targeted big banks was Lehman Brothers, whose fall has been widely and falsely attributed to shorting. Only a few days ago, while Goldman hogged the headlines, the House Financial Services Committee held a hearing on the Lehman collapse starring Dick Fuld, the disgraced former CEO. Fuld squirmed and evaded, his credibility shredded by the Lehman bankruptcy examiner, who contradicted his claim that he didn't know about Lehman's Repo 105 book-cooking scheme. It was a fitting epilogue to Fuld's famous display of chutzpah on Capitol Hill in October 2008, when he blamed his firm's demise on the discredited bugaboo of "naked short sellers." Last week, when asked to describe why Lehman collapsed, he was at a loss for words. He hemmed and hawed, and couldn't bring himself to raise that phony excuse, which has been shown up as hokum by academic researchers.
Fuld visibly curdled when the name of his nemesis David Einhorn was broached during questioning. Einhorn, who runs a hedge fund called Greenlight Capital, epitomizes the short seller as good guy--morally outraged, articulate, and willing to share his views with the markets. Paulson epitomizes the short as a more typical Wall Street player, not whistleblower but profiteer, not morally outraged but clinically detached. Paulson was such a quiet short back in 2007 that it wasn't widely known that he was shorting. Skeptics such as Jeff Matthews have pointed out that Paulson was viewed at the time of the Goldman derivatives deal as an arbitrager and not as a short-seller. That's true, and it may help Goldman's case a bit, but it's not helpful in the battle for public opinion. See, at bottom the Goldman disaster is not predicated on whether Goldman tripped over Rule 10b-5. It's question of morality, not legality, and so is the debate over short selling. Short-selling may not be the most enchanting of activities, any more than working as a mortician does not exactly reek with glamour. Yet shorting fulfills a vital function, enhancing market liquidity and providing a skeptical viewpoint in the pricing of securities. The emails that were released on Saturday don't make Goldman look bad because it was short. They make Goldman look bad because it was going short while it was pushing mortgage deals on its supposedly beloved clients. As for Paulson, a lot of people believe that there is an ethical issue with quietly betting that the world is about to go to hell, placing one's bets and then going home and watching television. It may be perfectly legal, but something about it bothers people. There is something in the American spirit that seems to call for folks to stand up and yell at times like that, just as they should if there was a forest fire. As I suggested when I profiled Paulson a year ago, there was an uncomfortable moral dimension to Paulson's quiet wagering on doomsday. Now, the problem with being the other variety of short seller is simple: It causes people to hate you. That happens to prophets. I'm sure Jeremiah had people attacking him, way back when. Einhorn and other vocal shorts like Jim Chanos, the nemesis of Enron, have plenty of moxie, and they deserve our admiration. But they have gotten pushback, some of it downright nasty, from stellar companies like Allied "Let's Get Einhorn Investigated" Capital ( ALD)
True, waging war against short-sellers can backfire. Warren Buffett cited Fuld's short-blaming in deciding not to buy the ailing bank, according to the Lehman examiner. But on balance, I'd say it's a smart strategy. Hell, if I were a CEO, I'd probably do it. Short-sellers have been blamed for "attacking" and "manipulating" companies ranging from the scandalous and despicable to the benign and indifferent. In addition to being sued by the short-hating managements of Overstock.com ( OSTK) and Biovail ( BVF), they've been subjected to attacks by managers/shareholders/rabid fans of a lengthy list of companies, ranging from Bear Stearns (now part of JPMorgan Chase ( JPM) and Apple ( AAPL) to Prepaid Legal Services, the subprime train wreck Novastar Financial, and a sewer-full of ratty penny stocks, of which Eagletech Communications and CMKM Diamonds are the most notorious examples. As a rule, the smaller the company, the more likely it is that griping about shorts will come from the executive suite. Lehman and Bear were two notable exceptions. Like all conspiracy theories, the anti-short narrative has some basis in truth. Some shorts are indeed scalawags. But short sellers are not a monolithic juggernaut. Some are good people, some bad, while others are indifferent. My hunch is that further revelations of the Paulson-Goldman variety, such as the Magnetar deal revealed by ProPublica, are likely to belch forth further short-seller nastiness. The public needs to keep such things in perspective, and balance out the good with the bad. They need to remember the positive role short-sellers play, yadda yadda. They should--but they won't.