In the inglorious history of the financial markets, Napoleon stands out—not for his retreat from Russia, not for the Napoleonic Code, but for his hatred of a species of speculator known as the short seller. The emperor had no use for cynics who felt that his regime and its bonds faced a dim future, and who bet against him. Shorts were “enemies of the state,” he reputedly said.
Short sellers borrow stock or other securities and then sell them, hoping to profit from a price decline by buying the same issuer’s shares or securities in the market later for less to cover their borrowings. In the 200 or so years since Napoleon griped about shorts, he has been joined by dubious securities issuers from Boca Raton to Vancouver, as well as heads of some of the most overextended banks ever to belly-flop into insolvency.
Enron’s CEO Jeff Skilling blamed short sellers for his company’s collapse in 2001. Bear Stearns CEO Alan Schwartz and Lehman Brothers CEO Richard Fuld also griped that shorts, not poor decisions by managers—heaven forbid—torpedoed their shares in 2008. Earlier this year, Citigroup CEO Vikram Pandit renewed the blame-the-shorts mantra. Looking back at his bank’s near-death experience in 2008, Pandit said that fear overtook the markets, “and that’s the tool that short sellers need to make money.”
The problem with the anti-short crusade is that the shorts are rarely the cause of widespread fear and panic. The shorts like to portray themselves as truth tellers who expose excessive valuations, fundamental weaknesses and blatant fraud in companies.
