Shorter Still
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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