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Disclosures: The Long / Short Dual Standard

by: Felix Salmon May 13, 2008    
Felix Salmon

Felix Salmon

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In Jesse Eisinger's column this month, he makes an interesting observation about David Einhorn in particular, and short-sellers in general:

Whenever a short-seller criticizes a company, the firm and the media go out of their way to disclose that the critic stands to gain financially. This is proper. Often, however, the disclosure serves to undermine the messenger and distract from the issues.

I asked Jesse why he thought such disclosures played such a central role. After all, Eliot Spitzer forced investment banks to disclose when they have a business relationship with the companies their analysts are rating - and all those disclosures are greeted with an enormous yawn, and generally ignored.

The answer, said Jesse, is that there's a world of difference between a disclosure that you're long and a disclosure that you're short. Investment-banking analysts tend to be biased to the long side: the corporate clients that the bank wants to attract are the same companies that the analysts are rating. Short-sellers, of course, are biased to the short side: since they're short the stock, they want it to go down whether it deserves to fall or not.

Now for some reason shorting "provokes a visceral reaction" - that's how Jesse puts it, anyway. It seems somehow un-American, and short-sellers are never treated as heroes in the way that other successful capitalists are. Indeed, they're often vilified.

It's silly, of course. If you want to buy a stock, you're going to have a huge amount of difficulty doing so unless you can find someone willing to sell it to you. That person might not be selling short, but the effect of the sale on the stock price is the same either way. You can't have buyers without sellers, and any market requires both in equal numbers.

But it's worth noting that the media are at fault here too. Yes, as Jesse, says, they properly disclose the fact that hedge-fund managers criticizing a company tend to be short that company. But they don't generally bother with repeating the disclosures found in analysts' reports, that the investment bank in question makes a lot of money by serving the company in question. If they did, perhaps the public would start treating longs with as much suspicion as they do shorts. And that would be a good thing.

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This article has 4 comments:

  •  
    May 13 06:00 PM
    oh my god!
    one of the most stupid articles on the subject ever written.
    instead of whining about a too negative approach towards short sellers and complaining about unequal treatment you could have saked an interesting question: why is it, that someone holding 10% or more of a company's stock has to disclose these holdings and counts as an insider. Whereas a shortseller having shorted 10% or more has ZERO disclosure obligations?
    Even more importantly: why dioes abuyer have to deliver the money - while many shortsellers are NEVER EVER delivering the shares sold?
    WHY CAN NAKED SHORT SELLING GO ON UNABATED DESTROYING HUNDREDS IF NOT THOUSANDS OF GENUINE AMERICAN COMPANIES - and yet you do not even think about questioning the motive of the oh-so-sober naked shorters?
    Reply
  •  
    May 13 10:41 PM
    The article talks about 'short selling', not 'NAKED short selling'. There's a huge difference. Naked short selling is illegal and involves selling shares you not own and have not 'borrowed' from a broker.

    There is nothing wrong with short selling and a short seller is as much a capitalist as any long buyer... and probably richer as he or she is likely making money on both sides of the market. ;)

    I also agree that people should be more skeptical of analyst recommendations. There is always an ulterior motive.
    Reply
  •  
    May 13 11:05 PM
    short sellers are as american as apple pie...the bet that something is not quite right at a company, and then speculating that it should be lower in value, does an important service...weeding out non-performance and saving many people from losing money in the long run...but spoiled CXO's complain rather than perform, because performance at the CXO level (or rather non-performance) tends to be blamed away on anything or anyone other than the decision makers....get a clue fxtrader, dont kill the messenger, get the answers from those glorious management teams, raking in as much as they can in quarterly option grants until the market turns those options underwater....i say god bless the shorts, and we need more...if they are wrong, the markets will correct any short term imbalance upon discovery
    Reply
  •  
    May 14 09:53 PM
    One of the main differences is that being long is LONG because you are in it for the long term...being short is SHORT term meaning you are in it to make a quick buck. You aren't investing you are wagering, in essence. I'd like to know which camp the guy giving me advice is in.
    Reply
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