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Home Publications Blogs Beat the Press Shorting Herbalife Could be a Public Service

Shorting Herbalife Could be a Public Service

Monday, 10 March 2014 03:43

The NYT has a lengthy article on the decision by hedge fund billionaire William Ackman to do a large short of Herbalife, a nutritional supplement company,and then use political influence to undermine the company. While Ackman's efforts to manipulate the Securities and Exchange Commission are at least improper, if not actually illegal, they are not qualitatively different from the actions companies take all the time to advance their cause.

There seems to be a view that shorting a company, implying that its market price is over-valued, is somehow less legitimate than buying into a company. This is not true. There are many companies whose stock price is grossly over-valued.

For example, in the late 1990s many Internet companies had stock prices that had no basis in reality. In the last decade, the banks pushing bad loans in the housing bubble had grossly over-valued stock prices. In both cases, people shorting the companies would be a public service. It would make it more difficult for them to raise capital to use for counter-productive purposes.

In effect, shorting is comparable to exposing the existence of counterfeit money. Until it is exposed, people are prepared to assign the counterfeit currency real value. By calling attention to the false value, capital can instead be directed to more productive purposes.

This doesn't mean Ackman is correct in his assessment of Herbalife (I haven't a clue) or that it's good that rich people can manipulate government agencies. The point is that what he's doing is not different from what major companies and rich people do all the time to advance their companies.

Comments (9)Add Comment
written by Alex Bollinger, March 10, 2014 4:29
Hopping over to Herbalife's website and checking out the garbage they're selling (with disclaimers everywhere that the FDA hasn't evaluated any of their promises), I can't get too worked up about this company not being able to raise capital.
People Who Short Stock are UnAmerican
written by Last Mover, March 10, 2014 6:50

People who short stock are envious of the economic predators who made America great by taking risks to innovate and create demand for jobs.

Stop hating the predators of the 1% for what they have and praise them for what they gave you America, today's booming economy with the highest standard of living ever - by preventing prices from falling.

What America, you think prices for capital are supposed to fall like the price for labor does just because supply is greater than demand? Because free market competition actually works? On behalf of consumers and labor as well as producers and employers?

Think of it this way, the only thing that has been seriously shorted in America for the last 30 years is the price of labor, and that's because of those who took it from their original owners. The price of everything else went in the opposite direction.
One good effect doesn't make a thing good, necessarily
written by Steve Roth, March 10, 2014 7:43
Your point is well taken. But just because shorts can have this salutary effect doesn't mean shorts are good.

The death penalty has some positive effects. But most have decided that as inevitably implemented by imperfect humans and institutions, it is pernicious.

The same could be true for shorts; they may create inevitable incentives for bad behavior whose effects overwhelm any positives.

I'm not saying that's so, I don't have an opinion one way or another. But just pointing out a positive effect in isolation may not contribute a great deal to people forming sensible opinions.
Likewise, this post
written by Steve Roth, March 10, 2014 7:55
It serves the salutary purpose, I suppose, of positioning Dean Baker -- an important liberal voice -- as sensible and considerate. (What I call The Tyler Cowen/Mercatus Gambit.

But beyond that effect, by taking time from other things to add any voice defending this behavior -- it serves mainly to aid and abet the enemy ("wall street" as constituted), if only in a very small way.
Shorts & The NYTimes
written by David Cay Johnston, March 10, 2014 8:28
There is a strong bias in the financial press generally in favor of longs and against shorts, who are regarded with suspicion.

Shorts are seen by editors and many reporters as market manipulators, even though there is probably even more manipulation by the investors who are long in the market. When I was reporting for the NYT it had specific rules about being careful when dealing with shorts, but no such rule for sources who were long.

The piece today is valuable, well done and should be praised for showing how much official Washington can be used in the effort to game the stock market. This is a story worthy of repeated an extensive examination, but don't hold your breath.

It would be fascinating to read an account of how the same sort of influence is brought to bear on news coverage itself – with high-level editors told how wonderful reporters are when their stories help pump up the price of the stock and how awful they are when they raise the important questions investors need to have asked. Now that several financial news organizations rely on Wall Street and traders for much of their income – these news organizations sell their news not to the public generally but to these financial organizations - we have a deeply corrupted system. So far, at least, the NYT does not get paid for its news by Wall Street, but Dow-Jones, Reuters and Bloomberg do get paid.

There is also a deep skepticism throughout the financial reporting industry that corporate executives would do anything that's bad. Senior executives may make errors in judgment, but to many editors in financial news they would never be badly motivated, despite evidence that there have been badly motivated senior executives at a number of major corporations in the past few decades. The idea that the market turned against the executive, rather than the executive tried to manipulate the market, is much easier for editors to except, in my experience and out of colleagues with whom I discussed this issue.

Traders, especially hedge fund managers, are treated with a bit of suspicion, but are often lionized for above market results without asking about the integrity of the trading mechanisms.

Likewise there's a strong newsroom bias in favor of higher stock market prices, which are a good thing if you're a current owner but not so good if you are a buyer. Ditto home prices, where higher is almost always seen as a good thing and lower prices definitely are a bad thing in news reports. My Op-Ed in Sunday's Sacramento Bee (and probably soon and other McClatchy newspapers) addresses this issue.
It may not be "different" but should still be concerning
written by Jennifer, March 10, 2014 8:34
Corporations do manipulate government, and shorting stock can be of value. But Ackerman vs Herbalife appears to be an especially egregious case of basically one person trying to take down a company to make himself personally rich. Ackerman's war on Herbalife has been confined to the business pages as something of joke because of the personalities involved and because Heralife probably is snake oil. But far too many people are unaware of this level of government manipulation and it should remind people of just how out-of-control the money people have become.
written by JDM, March 10, 2014 8:57
The fact that people in the stock market see shorting a stock as less legit than being long in that stock strengthens the view of the market as a casino, because this is the exact view people have in craps.
Yes but...
written by Jesse, March 10, 2014 10:29
It is correct to say that shorting a stock is no different than buying a stock. Neither is inherently immoral or illegal.

The difference is in the execution of the act, in both cases. Does the act involve manipulation, deceit, breaking the rules, influence peddling, corruption, and so forth.

And where it does, both buying and selling can become illegal and immoral. And short selling has often been a means of defrauding the markets, because fear is a more potent catalyst than greed, and can be applied more efficiently to a situation. Rallies take time, but crashes are often precipitous.

But both are equally bad in their abuses. Rather than argue which is worse, perhaps the answer is to effectively regulate and reform the markets to wring out the fraud on both sides of the buy/sell, which is alas, concentrated too often in powerful insiders, and those considered Too Big To Prosecute.
Investigative reporting selected players distracts from govt. agency manipulation
written by jaaaaayceeeee, March 10, 2014 3:23
Dean Baker and David Cay Johnston list important questions for financial reporting.

I can only add another example. The nytimes reporters may be right that Ackman's efforts represent an extraordinary level of manipulating the govt for profit, a novel scale of fusing finance with the political system.

But the reporters seem to contradict themselves, reporting that his efforts (like hedgies shorting for-profit schools while lobbying for investigations in 2010) as merely more illustration of the, " ... expanding practice in the nation’s capital, with corporations, law firms and lobbying practices establishing political intelligence units to gather news they can trade on".

The aim of investigative reporting shouldn't distract from the trading mechanism problems, the player's story may illustrate. If political intelligence (the tracking of which was stripped from the Stock Act in 2012, then again quietly hobbled in April 2013) is the problem, where's the reporting?

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.