John Paulson, Proud Short

Gary Weiss has a profile of John Paulson in the February issue of Portfolio which I misread when I first came across it. He talks a bit about Paulson being "unrepentant" about the money he's made during the market crash and making "no apologies" for it. And as if to answer the question of what Paulson has to apologize for, he adds this:

Left unexamined is the uncomfortable moral dimension of Paulson's achievement. If he saw all of this coming, was it right for him to keep his own counsel, quietly trading while the financial system melted down? Do traders who figure out a way to profit from our misery deserve our contempt or our admiration, however grudging?

My feeling is that Paulson is exactly the kind of person we want more of: someone who makes big directional down bets when he sees a market getting overheated. Enough of those, and the market might be able to self-correct, rather than implode. Far from having anything to apologize for, Paulson is one of the heros of this crisis, all the more so for actually putting big money on the line rather than simply waxing bearish in the financial media.

Weiss cleared this up for me: "I don't think Paulson did a thing wrong, morally or legally or in any other way," he said. In fact, Weiss is quite the fan of short selling, as he's explained on his blog and in his book:

Short selling is the only market force that can impede the inflated pricing of hyped stocks. Countless studies of short selling have proven that shorting improves the liquidity of the market, and is the only means by which negative information is incorporated in stock prices.

Weiss also gets an anecdote from short-seller Jim Chanos, who says that he was put under some pressure by Bear Stearns CEO Alan Schwartz to go on CNBC and defend the bank, the day before it went under. "That fucker was going to throw me under the bus," says Chanos; Schwartz's people deny the whole thing, but the denials, coming as they do only from an anonymous person "who has spoken to Schwartz," are unconvincing.

There are precious few heroes in the story of this financial crisis, but if there are any then Paulson should probably be counted among them. Don't hate him for his money, or for his hubris: there are lots of proud rich fund managers, and most of them have avoided receiving the kind of opprobrium which has been aimed at Paulson. As Jesse Eisinger says in his own column this month:

We need more dissidents. We need to make the world a safer place for short-sellers to criticize companies. Regulators should publicly praise short-sellers, rather than periodically ban their activities. Critics and whistle­blowers, no matter how self-motivated, should be regularly consulted about suspicious companies, not dismissed as cranks once they expose wrongdoing.