In Defense of Short Selling

Friday, August 22, 2008 | 11:55 AM

Doug Kass gives us this morning's must read slice of market history:

"Short-selling runs deep in financial history. Perhaps the first case dates to 1609 when the Dutch trader, Isaac Le Maire, targeted the shares of the shipping company Vereenigde Oostindische Compagnie (the Dutch East India Company). VOC was the first multinational corporation in history and had broad powers. Nonetheless, Le Maire, concerned about threats of attack by English ships, sold VOC’s shares short. After learning about Le Maire’s tactics, the stock exchange governing VOC’s trading banned short-selling (although the ban was later revoked).

In the early 1630s, the Dutch economy fell into a depression following a speculative peak in the trading of tulips. Again, short-selling raised the ire of regulators, many of whom saw it as magnifying the effect on the Dutch economic downturn. As a result, England banned short-selling outright.

Almost 420 years later – in the late 1920s – short-sellers warned of the consequences of speculation. But in the aftermath of the Wall Street crash of 1929, many blamed them and the uptick rule – which banned short-selling on downticks – was instituted (and stayed in effect until 2007). More regulation governing short-selling came into force in 1940, with a ban on mutual funds from short-selling (though that law was lifted in 1997). In early 2005, the SEC again sought to restrict the practice.

Interesting history . .  Thanks, Doug.

UPDATE: August 25, 2008 12:26pm

More from Doug:

Blame Game Is Dishonest
Doug Kass
08/25/08 - 11:59 AM EDT

This blame game is short on logic
Douglas Kass
FT, August 21 2008 20:02

Friday, August 22, 2008 | 11:55 AM | Permalink | Comments (21) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post



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In most cases, blaming a short seller for bringing a company down is like blaming a tree for smashing up a car rather than the drunk behind the wheel. If I was a CEO on a roadshow, I would tell my bankers to set up meetings with people short my stock. Short sellers are natural buyers at some point so why run away from them?

Posted by: Lloyd | Aug 22, 2008 7:33:09 AM

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