Only a fool will blame us short-sellers

Simon Cawkwell is a short-seller, a stock market trader who has made a great deal of money of late out of plunging share prices. In one version of the current financial horror story, he and his kind are the bogeymen. Watch them chortle as companies fail. See them cackling all the way to the collapsing bank.

Here and in New York, the "shorts" are coming in for terrific stick. Many blame them for not only exacerbating the present crisis but also for helping to bring it about. The Financial Services Authority has just taken the unprecedented step of banning the short-selling of stock in publicly quoted financial companies, after a crisis meeting with Chancellor Alistair Darling and Mervyn King, the Bank of England governor.

Their concerns were expressed by ­Hector Sants, the FSA's chief executive. He said that while short-selling was legitimate in "normal market conditions", recent events had created ­disorder and the FSA acted "to protect the ­fundamental integrity and quality of markets". In America, the Securities and Exchange Commission also took measures against aggressive short-selling while Andrew Cuomo, the New York attorney-general, announced an ­investigation into short-sellers who hammered Lehman Brothers and other banks.

So, is Cawkwell feeling the heat? If he is, he's not showing it. By his own ­estimate he has made around £750,000 from his short trades during the present turmoil.

"There's nothing new in short selling," he said. "The Phonecians probably did it. To blame short sellers for what's ­happening now is nonsense. If a man running a bank can't finance his business, he is the one to blame, not me."
Many of those running the banks don't agree. Richard S Fuld, head of Lehman Brothers, blamed shorts for the downward spiral of his share price that ended in bankruptcy. Regulators have become increasingly concerned about hedge funds that have circulated critical or pessimistic material on companies in which they hold short positions. There is concern that short-selling is becoming a self-fulfilling prophecy because of the way it can alter market sentiment.

All this leaves Cawkwell unmoved. He says short-selling is an integral part of the way markets work and thinks rules aimed at curbing it are "pointless". He said of the regulators: "They don't know what they are talking about." The fact that the FSA's measures have been restricted to public financial institutions and have been brought in as a temporary measure tends to support his view that short-selling will survive this crisis.

He works alone from a desk at his home in Kensington, a Falstaffian figure who weighs 25 stone and has a taste for fine Burgundy. His wine ­merchant, he says, calls him his best customer. He is an accountant by training, a gambler by instinct.

It's a trait shared by most shorts. The daddy of them all is David Einhorn, head of Greenlight Capital, a $6 billion hedge fund. Einhorn proved his gambling ­credentials when he won $660,000 at the World Series poker tournament. His winnings from shorting Lehman Brothers were far higher — ­£1.7 billion according to informed estimates. His company is one of those under investigation.

Cawkwell prefers horses to cards. "I'm happy to have £25,000 — or more — on a horse, but I don't gamble on thin air when it comes to short-selling," he said. "You have to have a strong argument for believing a share will go down. I make pen portraits of the companies that interest me and I learn precisely what they are about. Then I try to make the right judgment."

One of his early successes was in 1991 when he bet against Maxwell Communications, the company run by Robert Maxwell, the former Labour MP turned publishing tycoon who died when he went overboard from his yacht off the Canary Islands as his business ­collapsed. Cawkwell detected weaknesses in Maxwell's company and believed that the shares would go down. He borrowed a tranche and sold them at the prevailing price. When the shares slumped, he bought back the same number and ­delivered them to the lender. The ­difference between the bought and sold price made him a quarter of a million pounds.

Sometimes he gets it spectacularly wrong. A few years ago he lost £3 million when he short sold shares in Regus, the workplace specialist. The shares ­doubled in price.

In a rare departure, he went long on HBOS shares on Tuesday and had an anxious moment when they lost more than half their value before ­recovering to give him a comparatively modest profit of around £2,500.

"I've always been short because the psychology of it suits me," he said. "I tend to disagree with the view of other people. There's a feeling that short ­sellers are somehow responsible for ­collapsing companies and people losing their jobs.

"But look at it logically. We had this huge bubble of credit which was ­engineered by the government. It suited Gordon Brown to have all this money around. It produced lots of taxes which he was able to use to finance political schemes. That bubble has now burst. Jobs are being lost. Not because I have shorted shares but because those ­workers have been let down by policies that couldn't be sustained."

Cawkwell does not go in for naked short-selling, the practice in which a trader takes short positions without borrowing the shares first. This is what the SEC is trying to stamp out with its new measures. From yesterday traders in America will be forced to deliver securities on the settlement date. This is aimed at frustrating those who have been dealing in shares without buying them — or having the money to buy them — and merely taking a profit from the short-term price fluctuation. Cawkwell says moves to curb the activities of ­traders like him are a "sham".
"Only a fool would imagine short selling has any effect on these companies at all," he said. "The rules here are quite clear. If you go around telling lies about a company to weaken its position because you are short selling, you are breaking the law and you can be ­prosecuted. But if you tell the truth?" Cawkwell says getting to the truth about what is really happening in a company should be applauded, not legislated against.

David Einhorn would doubtless agree. In the current mood, when short-sellers are being described as "robbers in pinstripes", he is bogeyman-in-chief. He rarely wears a suit, however, and has been described as a "walking ad for Banana Republic".

Einhorn is 39 but looks like he just left college. He founded Greenlight Capital in 1996 with less than $1 million. It now has around $6 billion under management and its investors have made, on average, better than 25 per cent on their money every year since it started.
Einhorn already knows what it is like to feel the hot breath of the regulators on his neck. Six years ago he made a speech at a conference, slamming a financial company called Allied Capital.

There were suspicions he was shorting the company's stock and conspiring with other investors to drive it down. Eliot Spitzer, then New York's attorney-­general, launched an investigation. Allied, it emerged later, put their own investigators on to the case and, at one point, stole Einhorn's phone records.

No conspiracy was proved and Einhorn had the last word when he published a book, Fooling Some of the People All of the Time, which explored the issue and his philosophy of selling a company short. It came down to this: if a company's share price is overvalued, it is a legitimate target.

Einhorn has been hailed a hero by a large section of the financial community. Investors say he has campaigned for honesty and transparency while some companies, operating to the executives' own agenda, have obscured their true positions. Lehman Brothers was a perfect example of this, Einhorn's supporters say.

Einhorn's concerns about Lehman surfaced early this year. In April, he explicitly announced his company was shorting the bank. Einhorn and his ­analysts, who work out of a modest office near Grand Central, were unhappy with Lehman's own assessment of its financial position. The analysts tracked property deals — especially acquisitions — made by the bank and examined them against the company's figures. They didn't add up. Lehman seemed to be inflating the value of its real estate ­holdings by not marking them down to reflect falling values.

Enter Erin Callan, the very bright and highly attractive former tax lawyer who became chief financial officer at ­Lehmans. She had been in the job only six months but she was charged with tackling Einhorn head-on. Callan put in a conference call to Einhorn's office to answer his questions about Lehman's financial state.
It was a disaster. Einhorn taped the conversation and made it public. It reveals Callan stumbling over the precise interrogation mounted by Einhorn's team. Hard questions were not answered. She seemed to be bluffing.

Callan was removed from her post and the fallout hit Lehmans hard. Soon afterwards the bank admitted it had lost $2.8 billion in the second quarter and was raising $6 billion in extra finance. Wall Street saluted Einhorn. He had been right all along. But it wasn't over. His firm stepped up its shorting operation against Lehman shares.

When the bank finally succumbed to bankruptcy last Monday, it was ­estimated that Einhorn had made £1.7 billion. Now, US enforcers will attempt to discover whether he unfairly manipulated the market.

As Einhorn counted his winnings in New York, Cawkwell, here in London, sensed an opportunity in the HBOS/Lloyds deal. He calculated that HBOS shares would be marked down because Lloyds seemed to be the only buyer on the scene. He sold 200,000 HBOS shares thinking he would be able to buy them back much cheaper, a classic shorting move. But the share price did not dip as much as he thought. It will cost him around £100,000, he said.

"It's all very well having a go at short-sellers," he said. "But there are huge risks. Expenses. Does anyone feel ­sympathy when I get it wrong? I don't think so." Cawkwell, the quintessential gambler, must know that, at least, is a certainty.