September 28, 2014
Don’t worry folks, this is a family-friendly blog. The issue is that Steven Pearlstein takes great offense at the possibility that people are manipulating the stock price of a biotech company by shorting its stock on a massive basis. Pearlstein is right to be angered about stock manipulation, he is wrong to imagine it bears any direct connection to shorting stock.
The issue here is that short sellers of Northwest Biotherapeutics (people betting against the company’s stock) are supposedly spreading rumors to push down its price. This could be true, and if so, the perps should be nailed and jailed. But people often spread false stories to push up the price of stocks as well. This is every bit as pernicious. It means that suckers could pay high prices for stock that may have little or no value. This could deprive people of large portions of their savings. It also diverts capital from companies that may actually have worthwhile products to companies that don’t.
It is much easier to manipulate the stock price of a small company than a large company, but this is true on both the short and long side. Shorts can serve a valuable function. Imagine that the investment banks had been shorted in a massive way in 2004 just as the housing bubble was really going crazy. It might have stopped the bubble in its tracks. There is nothing inherently pernicious about shorts. It is wrong to make an automatic connection between shorts and stock manipulation. There is none.
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