Bank short-sellers deserve an apology

When UK bank shares began their torrid falls in October 2008, the baying hounds were calling for the heads of short sellers who had unjustly brought "strong and viable" banks to the brink of a collapse of confidence.

Yet as the details of the financial results emerged this week, with huge write-downs, the press coverage ironically seemed to chime with the views held by short sellers at the time - the bank balance sheets were stuffed with toxic debt. The only difference was the timing of their comprehension - short sellers realised long before and saw that it was not reflected in the over-inflated share price.

One might now justifiably argue that those who called the share price falls unwarranted were either incompetent or self-serving in attempting to maintain a bubble. As was often mentioned, market manipulation and trying to create a false market is illegal, but the guilty parties were those insisting higher prices were warranted and demanding measures to prevent price falls. Sadly, no prosecutions will occur.

This episode has re-enforced the importance of short selling. These investors put money behind the conviction that things aren't as great as some would have us believe. In doing so, they stand to lose a fortune if they are wrong, profiting only when hubris is dispelled and reality is restored. Unfortunately, it's only in the case of the Emperor's clothes that we admire the person that pricks the illusion.

posted by John Wilson @ 12:13 PM Permanent Link newsvine reddit


At 9:52 AM, Anonymous Roy Zimmerhansl said...

Hi John, I've linked to this post in my blog today.

At 4:39 AM, Anonymous Baltimore Investment Manager said...

I like your comparison to the Emperor's clothes, and I think it's a shame that it takes something like this to really drive the point home on short-selling.


Post a Comment

<< Home