If I Had to Listen to Congress Every Day I'd Short Treasuries Too

Repeat after me:  There is nothing wrong, immoral, evil, or even unsavory about short-selling.  No one gets mad at you for selling an over-valued security which you actually own, so there should be no ethical difference in selling an over-valued security you don't actually own.  Somehow people who are traditionally long in the market (e.g. corporate executives) have convinced the world that short-sellers should be vilified.  I don't understand it.  If you love the stock and short-sellers drive it down, you should treat it as a gift that the stock you love can now be bought more cheaply.

So I thought this was particularly awesome:

On Oct. 8 and 9, 2008"”as the Federal Reserve was bailing out American International Group Inc."”an account Sen. Isakson held invested more than $30,000 in ProShares UltraShort 7-10 Year Treasury and UltraShort 20+ Year Treasury, the records show. These are "leveraged short" funds, designed to gain $2 for each $1 drop in the daily value of U.S. Treasury bonds.

Isakson claims he was not actively managing the account, a claim that is probably true given the ethics rules in Congress (not that anyone follows those).  My response in his place would have been, "F*cking-A right I was shorting government bonds.  Haven't you been paying attention over the last 12 months?"

Unfortunately, Isakson falls out of my hero category into my "hypocritical goat" category for this:

In February, Sen. Johnny Isakson (R., Ga.) argued on the Senate floor that "we don't need those speculating in the marketplace to take unfair advantage of the values of equities that are owned by Americans all over this country for the sake of making a buck on a short sale."

Again this unaccountable bias that somehow people who are long are morally superior, and somehow more entitled, than people who are short.

Ht Radley Balko


  1. Tim Worstall:

    "My response in his place would have been, “F*cking-A right I was shorting government bonds. Haven’t you been paying attention over the last 12 months?"

    Umm, why? For you would have lost a fortune....yields on govt bonds fell so therefore prices rose, no?

    The real point is that the Good Senator isn't even competent at financial skullduggery and hypocrisy, surely?

  2. DKH:

    Since bonds sell so that their yield to maturity is positive, shorting them for a long period will generally be a losing proposition. But I could imagine particular events (like a vote to increase the future debt obligation through bailouts) lowering bond values in the short term. Maybe coyote means to target his shorting? Or maybe it would be better to buy credit protection against government bonds, since the Fed doesn't try to affect that market (directly).

    On another note, did Sen. Isakson vote for the AIG bailout? That seems to be a missing link before I would even consider an ethics violation.

  3. Methinks:

    Corporate executives are only part of the idiot problem. The rest of the anti-short crowd is comprised of very loud and very bored senior citizens who can't do math and are devoid of basic logic (which is probably why they can't do math).

    The risk profile of shorting is infinite while all you can lose in a long position is the difference between the price at which you bought and zero. Thus, shorts are always in the minority. A tiny minority can't drive down a stock substantially for any appreciable length of time. But, gramps - who knows absolutely nothing - is certain that evil NEKKED short sellers beat up his retirement portfolio and the witches must be hunted down and killed.

  4. mesaeconoguy:

    The punchline here is that the Ultrashort ETFs owned by Isakson are on the SEC shit list due to significant slippage caused by daily rebalancing, i.e. they rebalance frequently and do not track inverse prices well for time periods longer than 1 day. Disclosure: No idea what their performance was over that time period.

    (He likely lost a fair amount of money on them, hence wants them restricted or banned).

  5. Tim:

    Selling something you don't own is generally considered to be fraud.
    Don't know why stocks should be treated differently.

  6. DKH:


    Technically, the assets are borrowed from someone and sold. This might happen anonymously through a broker, but there's no fraud about it. If that person eventually wants to sell the assets, then the short seller will have to buy them back to close the loan.

  7. joe:

    I think as long as the current rules are enforced and naked short selling isn't allowed then there's no problem with it.
    Naked short selling is selling something you don't own.

    I tend to not do it personally for the same reason I'm squimish to bet the 'don't pass' line in craps.

  8. James:

    @ joe

    You mean you don't bet the "don't pass" line because you like giving the house a bigger advantage by betting the "pass" line? Congrats.

  9. Ron H.:

    @ Tim, Joe,

    If you are troubled by short selling, consider how banks operate in our current fractional reserve system. For demand deposits like checking accounts, only a small fraction of the money is actually held by the bank. The rest is not there. The bank promises every customer that they can have their money on demand, but if every customer demanded all their money today, it wouldn't be there. Is that fraud? You betcha, but we allow it.

  10. Tim:


    If a broker loans stocks without the express permission of the clients that own the stocks then the broker has violated his client's trust. IOW - it is just as bad for different reasons.

    Ron H,

    The fractional reserve system does have some of the elements of short selling, however, the owner of the asset (the central banks) is alloeed to keep a tight reign on the lending in order to ensure the price of the asset remains stable (i.e. no inflation). If you want to have a compariable system you would have to give companies the ability to restrict short selling in order keep their stock price stable which would defeat the purpose.

  11. Ron H.:

    @Tim, -

    I think you missed my point.

    You said: "Selling something you don’t own is generally considered to be fraud"

    I understood that to mean that you considered short selling to be fraud. I pointed out to you another example of "fraud", that we live with and accept every day, fractional reserve banking.

    The bank guarantees to give me my money on demand, but it can't give EVERYONE their money, because it's not there. Would you call that Fraud? There is no selling in this case, but there is a representation that can't be true.

    You then said: "however, the owner of the asset (the central banks) is alloeed to keep a tight reign on the lending in order to ensure the price of the asset remains stable (i.e. no inflation)"

    I assume the asset you are referring to is the money on deposit. This is MY asset, not the central bank's. The money belongs to me. And if their job is to "keep a tight rein" on lending and prevent inflation, they have failed miserably. Perhaps we should do away with the Fed.