American Consequences - August 2017

To understand short-selling, start by visualizing a share of stock as a physical certificate. If Express Scripts is trading at $74, you can trade in your certificate for $74. Now imagine you want to bet against the price, because you believe it will drop to $69 tomorrow. You go to someone who already owns a certificate, and you borrow it. For the privilege, you pay the lender a fee. Instead of holding onto your certificate, though, you turn around and sell it. Now you have $74 in cash. A day passes. The stock declines. You go to the market and buy the certificate you owe for $69, returning it to the person who lent it to you. That $5 difference, minus the fee, is your profit. Now imagine doing that with tens of thousands of shares at a time. At any given moment, someone, somewhere, has a short position in whatever stock you can think of – 99% of all stocks in the world, by some estimates. Blue-chip stocks like Apple and Google are being shorted. Shake Shack is being shorted to an unhealthy degree: Almost half its shares are borrowed. Almost uniquely among Wall Street maneuvers, short-selling entails what traders call infinite downside. While potential profit is constrained by the distance between the current share price and zero, the potential loss is not, because the shares, once borrowed, can rise in price indefinitely, which means the cost of returning them can, too. It’s unsurprising that short-sellers tend to be aggressive men who are convinced that they see what other people miss and are comfortable with – or addicted to – risk.

million shares so far.” Left’s tweet appeared in the corner of the screen. In the office, the atmosphere went taut. We watched as the stock came down, dollar after dollar, from 75 to 74 to 73; 72, 71, 70. Left wrote two more tweets, including a promise to appear on television with further revelations. Soon, the phone started ringing – reporters calling. Linette Lopez from Business Insider texted for quotes. CNBC booked him for 2 p.m. that day. “The question is,” Left told a journalist from Bloomberg, “is the new administration serious? He’s going to rein in drug pricing. OK, Mr. Trump, here’s my advice: I know the industry. Go after Express Scripts.” “Do you have a short position?” the reporter from Bloomberg asked. “Yes, I do,” Left said. “Express Scripts, as we’re talking, continues to drop,” the anchor on CNBC said. In 15 minutes, $6 billion of market capitalization vanished. (Five months later, the stock price is still down 13%.) Left considered the circus around him. “See,” he said, “some guys know this stuff better than me. But I know how to put it in [expletive] tweets.”

74 | August 2017

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