Disclosures: The Long/Short Dual Standard

In Jesse Eisinger's column this month, he makes an interesting observation about David Einhorn in particular, and short-sellers in general:

Whenever a short-seller criticizes a company, the firm and the media go out of their way to disclose that the critic stands to gain financially. This is proper. Often, however, the disclosure serves to undermine the messenger and distract from the issues.

I asked Jesse why he thought such disclosures played such a central role. After all, Eliot Spitzer forced investment banks to disclose when they have a business relationship with the companies their analysts are rating - and all those disclosures are greeted with an enormous yawn, and generally ignored.

The answer, said Jesse, is that there's a world of difference between a disclosure that you're long and a disclosure that you're short. Investment-banking analysts tend to be biased to the long side: the corporate clients that the bank wants to attract are the same companies that the analysts are rating. Short-sellers, of course, are biased to the short side: since they're short the stock, they want it to go down whether it deserves to fall or not.

Now for some reason shorting "provokes a visceral reaction" - that's how Jesse puts it, anyway. It seems somehow un-American, and short-sellers are never treated as heroes in the way that other successful capitalists are. Indeed, they're often vilified.

It's silly, of course. If you want to buy a stock, you're going to have a huge amount of difficulty doing so unless you can find someone willing to sell it to you. That person might not be selling short, but the effect of the sale on the stock price is the same either way. You can't have buyers without sellers, and any market requires both in equal numbers.

But it's worth noting that the media are at fault here too. Yes, as Jesse, says, they properly disclose the fact that hedge-fund managers criticizing a company tend to be short that company. But they don't generally bother with repeating the disclosures found in analysts' reports, that the investment bank in question makes a lot of money by serving the company in question. If they did, perhaps the public would start treating longs with as much suspicion as they do shorts. And that would be a good thing.