Short Sellers Vilified But Vindicated

They may be vultures, but it's not their fault banks are in trouble
By Jason Farago,  Newser Staff
Posted Sep 19, 2008 3:36 PM CDT
Securities and Exchange Commission Chairman Chris Cox after leaving a meeting with congressional and financial leaders Thursday, Sept. 18, 2008 on Capitol Hill in Washington.    (AP Photo/Lauren Victoria Burke)
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(Newser) – In a memo to Morgan Stanley employees, CEO John Mack fumed that the investment bank was being attacked "by fear and rumors, and short sellers are driving our stock down." Today, following similar action in the UK, the SEC banned short selling of 799 financial companies to stem sliding prices. But while short sellers may be vultures, they aren't fools: generally, writes Time, a company's stock get shorted when it's already in trouble.

Short sellers bet that share prices will fall, meaning they profit when others fail. Lehman Brothers, to take on example, collapsed because of mismanagement and undercapitalization—though a debate is raging about whether short sellers hastened its demise. As one MIT professor said, "The question is, Can the short seller take a firm down? The answer is no. Not by themselves."