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Shorter Still

Date: March 15, 2010

Following my last blog on people complaining about hedge funds shorting Greek bonds, the Economist expressed exactly my sentiments (though better of course) in their leader pages. How can you sell if no one buys? If someone buys willingly, then why should they complain when they lose money? It is the risk they take.

There was similar foolish complaint about John Paulson who famously made $20 billion by betting that the CDO market would collapse after frothing so much. Some people claimed that he profited from other people’s misery but this is ridiculous. He did not cause their misery. He did not take out their mortgage. He did not sell them a mortgage they could not afford. He did not bundle 100’s of low grade mortgages together to magically produce an investment grade bond. He did not offer AAA ratings for CDOs that were patently not as safe as sovereign debt or high quality corporate debt. Nor did he sell these CDOs to income seeking banks from Europe. The only thing he did was to spot that the King had no clothes and put his investors’ money to work on his belief that everyone else would eventually spot this too and the price would fall.

If anything, Paulson’s investments at least ensured that he was a buyer of these assets as everyone else became a seller. Without people like him, the market would probably have fallen even further before brave souls decided to return to buyingSome people say that if he knew he should have said something and that it is immoral to “keep it to yourself”. Well there were a lot of people saying that everything was overblown, but no one was listening and no one ever will, so that is fatuous. In fact if he had said anything then people would say that he
was doing it to help cause the market to crash and thus profit. Wall Street is always full of rumours that short sellers talk down various assets to try and panic investors into dumping their assets. Whilst this certainly happens, the truth is that it is a very brave investor that shorts a market for over a year (as Paulson did) because whilst the market might fall temporarily on a rumour the fall will not be sustained if it is false and the short seller can be squeezed badly as a result.

The CDO market, the Greek bond market and various other Alice in Wonderland markets cause their own problems and the participants take their risks if they let it go too far.

Shrewd investors will always spot over-sold or over-bought assets and take the opposite view.

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