Chanos: Probe How Much Banks Shorted Each Other

Short-sellers have largely been blamed for the downturn in the financial sector and the collapse of firms like Bear Stearns and Lehman Brothers, but legendary investor and short-seller James Chanos, founder of Kynikos Associates, says the blame belongs elsewhere.

“Given that it was the bank CEOs and broker CEOs who went to Washington calling for the ban, the question I would have loved to seen asked of (Lehman Brothers CEO Richard) Fuld or anyone going forward at the hearings…would have been ‘Mr any point was your proprietary trading desk short the shares, long puts or long CDS contracts on other banks and brokers between February and September of this year?’”

Chanos believes the banks were short each other and wants to see their actions investigated.

“Short-sellers figured out the balance sheets of those entities a long time ago—a couple of years ago—and were pretty public and vocal about it," he said. "It was really creditors, depositors, prime broker clients who were beginning to get nervous about their exposures.” (See the accompanying video for more from Chanos.)

Chanos said he was bothered by the “arbitrary” nature of the short-selling ban, which expired today, and the government’s failure to consult the short-selling industry before it enacted the ban.

“It’s troubling to us and to me personally to see the government come in so ham-handedly and say, ‘We just don’t like this, and therefore we’re going to do something about it.’ If you’re a market player, the market integrity, beyond just liquidity, begins to go out the window pretty quickly when that happens.”

Have financials hit bottom yet?

“It’s very clear the authorities want to stem the panic in the financials, and the short-selling ban was one (way)," he said. "I see the press reports today about actually taking direct stakes, à la the U.K., into banks in the U.S. as a way...While that may ensure the survival of these entities, I’m not so sure the common shareholders might profit."

"With these things down 90 percent, 95 percent, for my clients, I’ll leave the last 5 percent for somebody else," he added.

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