Lehman report: Short sellers were on target ALL BUSINESS RACHEL BECK

Remember when everybody blamed short sellers for the demise of Lehman Brothers?

Short sellers were immoral. Their greed brought capitalism to its knees. What they were doing was downright un-American.

Well, a new 2,209-page report goes into excruciating detail about the collapse of the Wall Street firm that helped trigger the financial meltdown.

Want to know who did in Lehman? Lehman, that’s who. Lousy management. Misleading accounting. Faulty oversight. Just like the shorts said all along.

The report is vindication for Lehman investors who bet on its stock price falling. They had questioned Lehman’s finances months before its collapse, claims that were aggressively challenged by the investment bank’s management.

Investors who short stocks borrow a company’s shares from a lender, sell them and then intend to buy them when the stock falls. When they return the shares to the lender, they pocket the difference in price. They lose out if the price rises.

Here’s what troubles the masses about short sellers: Rooting for the market to go down is foreign to our nature. Sure, sometimes short sellers do nefarious things. They’re motivated by greed, just like anybody else. But they also do something all too rare in a day when many companies, like Lehman, will do anything it takes to make their numbers.

“Shorts are ruthlessly honest people. We are telling people they have an ugly baby, and no one wants to hear that,” says Jeff Matthews, who runs the hedge fund Ram Partners LP and shorts about half his portfolio.

The Securities and Exchange Commission has helped advance the view that short selling was a cause of the 2008 financial crisis, even though its regulators found no empirical evidence that the shorts contributed to the market turmoil.

Still, the SEC adopted a rule last month that will restrict short selling of a stock that has dropped 10 percent or more for the rest of a trading session and the next one.

In announcing the new rule, SEC Chairman Mary Schapiro said the commission recognized “short selling can potentially have both a beneficial and a harmful impact on the market.”

The investment bank had long been lauded as one of Wall Street’s best firms. How well Lehman had been doing caught the attention of hedge fund manager David Einhorn. The head of Greenlight Capital began digging into Lehman’s finances and accounting practices in late 2007. He didn’t like what he saw.

While some other Wall Street firms were booking big losses on mortgages and other credit-related assets, Einhorn noted Lehman had not. He also saw that Lehman was eking out profits each quarter that just topped Wall Street analysts’ expectations.

“That Lehman has not reported a loss smells of performance smoothing,” Einhorn said in an April 2008 speech.

Lehman, predictably, waged a campaign to discredit him. Lehman sent more than 20 complaints to the Securities and Exchange Commission and Federal Reserve Board of New York about market rumors and short sellers between March 20 and July 17, 2008, according to the examiner’s report.

Two months later, those complaints were an afterthought. Lehman was history, having filed for the biggest bankruptcy in U.S. history.

Shorts like Einhorn, it turns out, were just telling the truth. Sometimes it hurts.