Should you quake in fear if you find out you own some securities that Goldman Sachs (GS) is shorting? It's an interesting question. There are many who would assign a lot of significance to a large Goldman Sachs short position. The stature of the firm is such that many people--say issuers of municipal debt--can be forgiven for getting nervous when they hear about Goldman either shorting or recommending others short certain securities.

The issue cropped up at the AIG-Goldman Sachs hearings. The chairman of the Financial Crisis Inquire Commission, Phil Angelides, asked whether Goldman's bet against housing could have been affecting the market, through its position and also its valuation marks. "Look, you guys are net short, and you're driving down prices--are you guys creating a self-fulfilling prophecy?" Mr. Angelides said, as noted by the New York Times. "Were you in fact pushing the market down?"

Can a Goldman Sachs short position really end up being a self-fulfilling bet? If word leaks, people might assume the company knows something and piggy back or sell out of the bond to avoid a bloodbath. The psychology of it all would suggest that the firm could affect markets if this sort of information is leaked. I don't think there's any empirical evidence, however.

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