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Friday, 3 October 2008
Witch Hunt is Unfounded, Says Short Seller
Wall Street chiefs blame short sellers - those who sell borrowed stock and profit when prices decline - for driving shares down as the credit crunch unfolded PDF
One of the stock market’s latest villains is a 32-year-old self-described “math geek” from a Minneapolis suburb who would not move to Wall Street unless they let him wear flip-flops.
Matthew Paschke, who manages the US$165 million Grizzly Short Fund at the Leuthold Group, said short sellers like him had become scapegoats for the financial crisis that had wiped out US$20 trillion from stocks and brought down Bear Stearns and Lehman Brothers Holdings.
Wall Street chiefs blame short sellers - those who sell borrowed stock and profit when prices decline - for driving shares down as the credit crunch unfolded. After bets against Morgan Stanley, Merrill Lynch and Citigroup surged to records, the Securities and Exchange Commission last month banned short sales of almost 1,000 companies.
Mr Paschke said that was the wrong move.
“The whole witch hunt is unfounded, and it’s frustrating,” said Mr Paschke. Moreover, the ban might prolong the downturn by propping up companies that borrowed heavily and took on too much risk, he said.
The Grizzly fund has returned 41 per cent this year. Until August it almost tripled the average gain for hedge funds specialising in bearish bets.
James Angel, a finance professor at Georgetown University in Washington who studies short selling, said the 400-year-old practice might have accelerated some companies’ declines by undermining investor confidence.
“There was a financial panic going on,” Mr Angel said. “[As a result, there was] the behaviour of crowds going, `Who’s next?’ It’s only human instinct to ask.”
At the same time, he said: “When the shorts are circling around, on average they are right.”
Bear Stearns was forced into a takeover by JP Morgan Chase after its shares tumbled 62 per cent in March, causing clients to pull their accounts and creditors to demand more cash as collateral.
Lehman chief executive Richard Fuld told Wall Street executives he thought short sellers “actively colluded” to topple Bear, CNBC reported on April 1. Mr Fuld’s own firm collapsed five months later.
The SEC has extended its prohibition until lawmakers pass the proposed bailout package.
The ban should continue until the SEC stiffens the rules deterring naked short sellers, said Robert Brooks, professor of finance at the University of Alabama. Such traders never borrow shares but flood markets with sell orders, driving down prices.
“Short selling is out of control,” Mr Brooks said. “There should be a huge economic cost to the hedge fund who decides they shouldn’t borrow the shares.”
Short sellers such as David Tice, who runs the US$1.08 billion Prudent Bear Fund, and James Chanos, the president of the US$7 billion hedge fund Kynikos Associates, said their funds did not engage in naked shorting. Mr Paschke said his company did not either.
Working at Leuthold, which advises two-thirds of the biggest US money managers, allows Mr Paschke to wear shorts and sandals to the office and spend weekends wakeboarding with his family on a lake near his home. “The dress code is worth a great deal,” he said.
In the week leading up to the ban, Morgan Stanley and Goldman Sachs, the last two independent securities firms on Wall Street before they converted into deposit-taking banks, had the biggest one-day drops.
Mr Paschke says it is unlikely short sellers alone caused the declines. He notes that almost two-thirds of the companies on the SEC’s banned list have fallen below their closing price on September 18, the day before the restrictions were put into place.
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Witch Hunt is Unfounded, Says Short Seller
Bloomberg in New York
3 October 2008
One of the stock market’s latest villains is a 32-year-old self-described “math geek” from a Minneapolis suburb who would not move to Wall Street unless they let him wear flip-flops.
Matthew Paschke, who manages the US$165 million Grizzly Short Fund at the Leuthold Group, said short sellers like him had become scapegoats for the financial crisis that had wiped out US$20 trillion from stocks and brought down Bear Stearns and Lehman Brothers Holdings.
Wall Street chiefs blame short sellers - those who sell borrowed stock and profit when prices decline - for driving shares down as the credit crunch unfolded. After bets against Morgan Stanley, Merrill Lynch and Citigroup surged to records, the Securities and Exchange Commission last month banned short sales of almost 1,000 companies.
Mr Paschke said that was the wrong move.
“The whole witch hunt is unfounded, and it’s frustrating,” said Mr Paschke. Moreover, the ban might prolong the downturn by propping up companies that borrowed heavily and took on too much risk, he said.
The Grizzly fund has returned 41 per cent this year. Until August it almost tripled the average gain for hedge funds specialising in bearish bets.
James Angel, a finance professor at Georgetown University in Washington who studies short selling, said the 400-year-old practice might have accelerated some companies’ declines by undermining investor confidence.
“There was a financial panic going on,” Mr Angel said. “[As a result, there was] the behaviour of crowds going, `Who’s next?’ It’s only human instinct to ask.”
At the same time, he said: “When the shorts are circling around, on average they are right.”
Bear Stearns was forced into a takeover by JP Morgan Chase after its shares tumbled 62 per cent in March, causing clients to pull their accounts and creditors to demand more cash as collateral.
Lehman chief executive Richard Fuld told Wall Street executives he thought short sellers “actively colluded” to topple Bear, CNBC reported on April 1. Mr Fuld’s own firm collapsed five months later.
The SEC has extended its prohibition until lawmakers pass the proposed bailout package.
The ban should continue until the SEC stiffens the rules deterring naked short sellers, said Robert Brooks, professor of finance at the University of Alabama. Such traders never borrow shares but flood markets with sell orders, driving down prices.
“Short selling is out of control,” Mr Brooks said. “There should be a huge economic cost to the hedge fund who decides they shouldn’t borrow the shares.”
Short sellers such as David Tice, who runs the US$1.08 billion Prudent Bear Fund, and James Chanos, the president of the US$7 billion hedge fund Kynikos Associates, said their funds did not engage in naked shorting. Mr Paschke said his company did not either.
Working at Leuthold, which advises two-thirds of the biggest US money managers, allows Mr Paschke to wear shorts and sandals to the office and spend weekends wakeboarding with his family on a lake near his home. “The dress code is worth a great deal,” he said.
In the week leading up to the ban, Morgan Stanley and Goldman Sachs, the last two independent securities firms on Wall Street before they converted into deposit-taking banks, had the biggest one-day drops.
Mr Paschke says it is unlikely short sellers alone caused the declines. He notes that almost two-thirds of the companies on the SEC’s banned list have fallen below their closing price on September 18, the day before the restrictions were put into place.
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