Short!

The last refuge of financial scoundrels is to blame the short-sellers.

That’s what I thought when I read about Greece, once again, blaming traders in Credit Default Swaps (CDS) for blowing up their debt. That’s what I thought when I read all the vitriol leveled at John Paulson for having the temerity to make money for his clients by betting against the sub-prime mortgage market. That’s what I think every time some corporate suit rails on a financial analyst for asking an aggressive question during an earnings conference call.

Short sellers and CDS buyers serve a valuable purpose. They help discover the clearing price. This balances the interests of buyers and sellers. Our institutions are designed, though, to encourage overpricing. It’s much easier to go long a stock or a bond than to go short. That tends to push prices higher than they should be and encourage bubbles.

Short-selling allows investors to speak truth to power in the financial markets. If CDS hadn’t been around to prick the housing bubble, home prices might still be inflating. Even more excess houses would have been built, meaning the crash would be even worse. Thank goodness the market fell as soon as it did.

Shorts allow us to burst bubbles early in the process. Folks like Paulson are critical, not criminal.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

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By | 2017-07-17T12:35:19+00:00 April 23rd, 2010|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. –
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