short sellers

Cramer: How the shorts decimated banks

Jim Kim — Tue, 14 Oct 2008 20:32:01 -0400

There has been a lot of talk about whether the blame being shoveled on short sellers was misguided. Jim Cramer does not think so. In his inimitable way, he makes clear his view that short sellers coordinated their attacks that devastated bank stocks--and darn near put Morgan Stanley out of business. In his view, short sellers used the credit default swap market and put options to put lots of pressure on some stocks, which costs investors "trillions." He argues the government action has put a stop to the short seller gravy train by taking away the threat of failure. This is a memorable rant: He says big shorts buy CDSs, which he likens the process to buying insurance on a house and then burning the house. He also accuses shorts of resorting to "rumors and article" to drive stocks down, a serious issue that the government is looking into. The goal is to get a pile-on effect, which would cause counterparties freak out and cut their ties and cause rating agencies to go nuts. At that point a company like Morgan Stanley could actually be forced to its knees.

For more:
- here's the video

Short sellers vindicated?

Jim Kim — Mon, 13 Oct 2008 13:37:35 -0400

There are lots of people who will argue that regulators made short sellers a convenient scapegoat in the recent financial gyrations. They are not without evidence. As Business Week notes, the Standard & Poor's 500-stock index fell 22 percent from Sept. 19, before the temporary short selling ban took effect, through its last day, Oct. 8. The KBW Bank Index fell 33 percent. You could point to individual issues to argue the other way. As soon as the ban was lifted, the likes of Morgan Stanley took a big tumble. But given the rumors, that wasn't necessarily the result of extreme shorting. All in all, it remains unclear exactly how responsible short selling was. This will not be the last word on this.

For more:
- here's the article

Short sellers getting inside info on CEO share sales?

Jim Kim — Tue, 22 Jul 2008 13:26:25 -0400

These days, one mark of success as an academic in finance is whether your work will form the basis of an enforcement action. We've seen several studies lead to big investigations. The most recent example is options backdating. This goes all the way back to order handling rules in the 1990s. Are we set for a reprieve with short sellers? MIT and University of Toronto professors have found that short sales spike before public reports of large sales by insiders, according to Financial News Online. They suggest that front-running by short sellers is the main reason. The short selling starts in earnest about two days before the report is due to be made public. Several scenarios are suggested: executives telling friends and family of the impending event, traders jumping ahead of CEO trading instructions, and traders tipping of hedge fund clients as a favor.

For more:
- here's the Financial News Online article

How to grapple with short sellers?

Jim Kim — Thu, 17 Jul 2008 14:26:04 -0400

Short sellers, who seemed so out-of-favor just a few years ago, have had a great run recently. There certainly have been plenty of targets. The Financial Times raises a timely issue: How do you deal with short sellers if you have been targeted? Lehman Brothers took the let's-talk approach when Greenlight Capital decided to take its famous short position. But then-CFO Erin Callan, who has since decamped for Credit Suisse, couldn't answer some questions to the satisfaction of David Einhorn. The rest is history. But what's the alternative? Hiding behind Reg FD? You ignore the shorts at your peril. Most would likely agree that dialog is the preferred route. Of course, you cannot prepare too much. If your answers are rock solid, you might find an audience willing to close its position and move on. If they still do not get it, good luck. The FT notes one targeted company, Kinder Morgan, put its detailed budget online and mocked the shorts. It worked.

For more:
- here's the Financial Times article

SEC to take hard line on rumor spreading

Jim Kim — Mon, 14 Jul 2008 07:53:25 -0400

As soon as Jamie Dimon went off on short sellers (see next item), the SEC took the unusual step of issuing a warning that it is taking hard look at rumor mongering to manipulate securities prices. This is not necessarily news. We all knew various probes were underway. One settlement had already been announced. The move was likely intended as a warning, notes the New York Times. The SEC intends to begin the probe this week. It will look at policies in place to prevent false rumors from being spread. This is an inherently tricky area. Can you really police rumors? But it does put people on notice, and may deter coordinated attempts to spread false information.

For more:
- here's the New York Times article

Related Articles:
The art of the rumor
Rumors slam conduits and SIVs

Dimon goes off on short-sellers

Jim Kim — Sun, 13 Jul 2008 08:26:19 -0400

One could argue that Jamie Dimon and JPMorgan Chase benefited from the implosion of Bear Stearns. They got the bank on the cheap, giving some good talent and entry into some new businesses. Nevertheless, as noted by the New York Post, Dimon waged a mini-campaign against short sellers last week, telling Charlie Rose, "I think the Securities and Exchange Commission should investigate it, OK. I think if someone knowingly starts a rumor or passes on a rumor, they should go to jail...This is even worse than insider trading. This is deliberate and malicious destruction of value and people's lives." Dimon is certainly connected these days. He may be onto something. People assume that the federal probe of rumor-mongering is still active.

For more:
- here's the article

Surprise: Short sellers fare well

Jim Kim — Thu, 10 Jul 2008 15:29:15 -0400

Dedicated short sellers--those who do nothing else--are something of a dying breed on Wall Street. There just aren't that many left. But there is more short selling going on than ever before, reflecting in part the rise of 130/30-type hedge funds and the near-bear market. Shorting right now is as challenging as ever; finding shares to borrow is often a real pain. However, so far this year, shorting has really paid off, notes Financial News Online. Hedge Fund Research's HFRI short bias index is up more than 12 percent for the year. In June, it was up 8.6 percent vs. an 8.7 percent decline for the S&P 500. You would have to think that popular short targets, like Bear Stearns and Lehman Brothers, played a role. But things will get tricky from here. Staying short will get you burned as bear markets end. We may be in for some rotation.

For more:
- here's the Financial News Online article

Lehman takes a big swing at the shorts

Jim Kim — Mon, 09 Jun 2008 08:36:08 -0400

Speculation was heavy that Lehman might make some sort of early earnings announcement, and the embattled firm did just that, confirming Monday many predictions that it would lose money for the first time since it went public. It announced it will lose $2.8 billion in the second quarter, largely a result of sluggish bond operations. It also announced it will raise up to $6 billion in capital, which is more than most expected. Also, the firm will raise the capital via common and preferred share offerings--another surprise. Many were expecting a deal with a sovereign wealth fund, a private equity fund or some other investor. You have to wonder what sort of roadblocks it ran into on that front. The firm has made some recent progress by delivering and cutting exposure to various assets. The announcement was intended, no doubt, as something of a knock-out blow to short sellers. We'll see how they take the punch.

For more:
- here's the announcement

Where have all the shorts gone?

Wed, 21 May 2008 06:59:54 -0400

When Douglas Kass, in an interview with Barron's, calls short sellers "an endangered species, like the dodo bird," you have to draw a distinction. He's talking about short sellers who do nothing else. The number of short-only funds indeed has dwindled since the heyday of the Feshbach Brothers and others, but now it seems there are more shorts than ever. It's just that most of the shorting is coming from long-short type funds. Indeed, 130/30 funds are all the rage. It makes sense to do both. As for Kass' new partners, he's faring well, proving himself to be anything but a dodo. His Seabreeze Partners short fund has generated a 16.5 percent gain vs. a 5.6 percent loss for the S&P 500, according to Barron's.

For more:
- here's the Barron's article via MarketWatch

How a bear raid might work

Tue, 22 Apr 2008 06:59:56 -0400

There has been a lot of talk--and probably a government investigation--about whether short sellers powered Bear Stearns out of existence, barraging it with rumors and innuendo that took on a life of their own. It's unclear what the answer is. The extent to which bear raids take place is unclear. There are many who believe that short selling hedge funds work to gang up on a company, especially if it has negative information. The Biovail incidents come to mind. Two academics have weighed in suggesting a way that bear raids might occur and actually harm a company. We'll see what the government turns up. It may be that some traders spread rumors. They likely want a quick pop, not the destruction of the company.

For more:
- here's the article from TheStreet.com

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