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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