>Defending the shorts
That even Einhorn, who is renowned for forensic dissection of balance sheets and earnings reports to uncover hidden truths or at least very tough questions for management, faces criticism of his strategy illustrates how much work he and the hedge fund industry needs to do to educate the media and everyday investors about the facts of short selling.
A starting point is stressing that shorts have more skin in the game than long investors. First, they must keep collateral and pay fees to borrow stock. Then they must return shares bought on the open market to the lender. Profit arises when they are able to repay the lender with shares worth less than the ones borrowed. Thus, shorts are as on the hook and economically vested as long investors. This fact gives them equal moral authority to advocate their position and engage in public debate about the merits of a company.
Second, as noted by UConn law professor Steven Davidoff in the New York Times’ DealBook blog, it is not illegal to “talk your book.”
The opinions of equity analysts are considered part of the way the game is played on Wall Street. But doesn’t a downgrade send the same message to the market as a short position? Just today, analysts at Goldman Sachs urged investors to “underweight” U.S. financials. It should be realized that short-sellers signal the market in similar ways, except they put their money where their mouth is.
As we witness the depth of the credit crisis and await action from the Fed and the SEC on the future of financial services regulation, what we need is more debate in the market, particulalry when it comes to accounting, reporting and governance issues, not less.
Fortune reviewed Einhorn’s new book, Fooling Some of the People All of the Time, which recounts his battle with Allied Capital.