Is Short Selling Dead? With Jim Chanos

Jim Chanos (0:00)

People's willingness to believe things that are too good to be true and look closely when everything is working and everything is making you money gets eroded in a bull market.

Bethany McLean (0:11)

I'm Bethany McLean.

SPEAKER_3 (0:13)

Did you ever have a moment of doubt about capitalism and whether greed's a good idea?

Luigi Zingales (0:18)

And I'm Luigi Zingales.

Bernie Sanders (0:19)

We have socialism for the very rich, rugged individualism for the poor.

Bethany McLean (0:25)

And this is Capitalisn't, a podcast about what is working in capitalism.

Bernie Sanders (0:29)

First of all, tell me, is there some society you know that doesn't run on greed?

Luigi Zingales (0:33)

And most importantly, what isn't?

Bernie Sanders (0:35)

We ought to do better by the people that get left behind. I don't think we should have killed the capital system in the process.

Bethany McLean (0:42)

So Luigi, did you know that in 1609, a merchant contracted to sell shares in the Dutch East India Company in the future?

That sent the company's share price into a plunge.

A year later, the authorities imposed what people think is the world's first ban on short selling.

Luigi Zingales (0:58)

Actually, I did not know, but I'm not that surprised because authorities don't like short sellers and they have been blamed for every financial crisis since the Dutch episode. During the US stock market crash of 1929, President Hoover actually condemned short selling in 1932 During the 2008 financial crisis, we have seen bans on short sells. We've seen CEOs of big Wall Street firms lobbying to have bans on short sells.

One declaration that I love is that short selling is un-American. We don't know why, but it's just an indication of how much these people are hated.

Bethany McLean (1:36)

It's probably worth spelling out what short sellers do, for those of you who aren't versed in the intricacies of finance.

Short sellers borrow shares from a broker and sell them in the market in anticipation that the price will fall. They then, if it works out, buy the shares back at the lower price, returning them to the broker, and they make a profit on the decline in the stock price.

Luigi Zingales (1:55)

The argument is that short selling creates a downward pressure on stock prices and therefore can become a self-fulfilling prophecy. But it's a kind of a chicken and egg type of argument. Short sellers will say that they get involved because the stock is overvalued or because they suspect fraud. And if the stock declines, it's not because they sold the stock short, it's because the stock was overpriced to begin with or the underlying business had some problems.

And by the way, short sellers even point out that when a stock has declined, they provide stability because they have to step in and purchase a share that they had sold short. And so that action of buying the shares provides stability to provide a bottom to the prices at the end.

Bethany McLean (2:40)

So my view of short sellers is of course informed by my history.

When I started at Fortune Magazine as a young reporter back in the mid 1990s, I was routinely, I'm gonna use the word assaulted by people who were long stocks, who wanted to see a stock go up. And at first, I wasn't skeptical. And I would write about the company taking the information I'd gotten from them only to sometimes see the stock go in exactly the opposite direction. And sometimes my phone would ring and it would be somebody who had been short the stock or who was short the stock saying, you idiot, don't you realize you're helping this management team inflate the stock and then sell their stock options and cash out? And don't you realize this thing is a fraud? And I started to think, huh, I need to understand the other side of the story. And so that's how I got to know a guy named Jim Chanos, who's one of the most well-known short sellers. He's been around for decades.

And that's what led me to write about Enron back in 2000, because Jim was short Enron stock. And so I've always thought that short sellers provide necessary discipline and truth telling in a market where most people are incentivized to see stocks go up.

The detestation of short sellers makes no sense to me because it's supposed to be a market. They're supposed to be buyers and sellers. And yes, short sellers can be manipulative and can put a story out there because they want to see a stock go down. But people who are along a stock can be manipulative and put a story out there because they want to see a stock go up. And that's what makes a market. And I've never understood why one side should be more detested than the other side. But Luigi, as an economist, what do you think?