April 16, 2008
One of the more perverse practices on Wall Street and the financial markets generally is the widespread practice of selling short a stock or financial asset in the expectation that the price will drop below the contracted for price entailing big profits for the short seller benefitting from the misery of the long buyer who usually is experiencing big losses.Bets against the prospects for sub-prime bonds and financial derivatives played a big role in the collapse on Wall street. Bloomberg today has published an article about one such trader a 35 year old who earned millions for Goldman-Sachs and for himself while trading against some of the very derivatives that Goldman-Sachs had created in the sub-prime markets. This kind of practice ought to be carefully investigated and subject to careful review and regulation.Because of it the ordinary retail investor and the tax-payers who finance the bail-out and the original home buyer all pay a big price when the short seller wins big.
Short selling of this kind appears to have little to do with market efficiency and much more to do with simple greed.
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