No Short Answers To Market's Long-term Problem

Sydney Morning Herald

Thursday September 25, 2008

The idea that short selling destroys wealth is an ignorant misconception. As a hedge fund manager, one of my roles is to educate investors in the use of strategies that are somewhat outside the norm. Without short selling and alternative asset products, an investor would become even more vulnerable to market direction.

Short selling is not responsible for the implosion of US investment banks or the creation of complex unregulated derivative products that destroyed global balance sheets. Excessive leverage is the problem.

The action of the regulator to ban covered short selling is a short-term fix for a longer-term problem. The ban has in effect removed a layer of liquidity from the market at the exact moment that liquidity is desperately needed.

A short stock position is not executed for the sole purpose of destroying value, but for legitimate investment strategies that offer investors protection from market direction, and, ultimately, positive returns in negative markets.

The fact that value has been destroyed is a natural function of an unregulated market. To the eyes of the international investor, the witch-hunt conducted by those in the ear of the regulator has destroyed the reputation of the Australian financial markets.

Tim McGowen Willoughby

Short selling shares is misguided and unsound because it aims to profit from a diminution in value, a negative, while the basic philosophy of investing is positive, based on the confidence or hope that something promising is worth supporting. Isn't it as simple as that? Financial engineers and "experts" try to justify short selling, but it can only be at the expense of genuine investors.

Sandy Paine Griffith (ACT)

In response to Peter Cain (Letters, September 24), commodity futures are reasonable if you own the antecedents to what you are contracting to sell, such as the farm where the crop is planted or the mine the minerals will be extracted from. Other futures trading is just as immoral as short selling shares, because you don't own what you are selling.

Bill Irvine Goulburn

Phil Teece (Letters, September 24) makes a "commonsense" argument for banning short selling permanently. Complex markets do not rely on common sense. Short selling plays a valuable role in identifying mistakes about company fundamentals or as a counterpoint to unjustified bullishness. We should not flex the regulatory muscle based on "common sense", but on evidence.

Mitchell Lawlor Elizabeth Bay

Investment in shares is supported by the Government and superannuation funds as a responsible way of providing funds for retirement. Irresponsible and unethical practices should be banned. There is a futures market for those who wish to indulge in gambling.

Richard Galwey Abbotsford

In March last year Henry Paulson said housing loan defaults would be contained to the subprime area (most Australian commentators agreed). Last September he said it was important not to overreact to the crisis. He would therefore seem an especially untrustworthy sponsor for any effective financial rescue.

Paulson's package uses money borrowed from an increasingly hard-pressed financial sector at inevitably increasing interest rates to bail out the most irresponsible or incompetent financial sector firms. By encouraging the closure of doubtful loans, it may actually increase the rate of housing loan foreclosure.

A little over a year ago, financial experts expected sharemarkets would break through to uncharted highs this year as a record $US2300 billion was reinvested in equities. Lehman and JP Morgan dismissed fears of a credit squeeze. Goldman Sachs - Paulson's old firm - suggested a "happy slowdown" in the middle of last year.

How little they really knew. How little Paulson really knows.

Roger Raven Maylands (WA)

© 2008 Sydney Morning Herald

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