Morgan Stanley and Goldman love shorts...and hate them

By Dan Wilchins - Analysis

NEW YORK (Reuters) - Morgan Stanley and Goldman Sachs blamed short sellers for their problems this week, an interesting twist for two investment banks known for making money from short sellers and even betting on weakening shares themselves.

Shares of Morgan Stanley and Goldman took a real beating in the middle of this week. The market activity seemed to threaten Morgan Stanley's survival, forcing the investment bank to consider selling itself. If Goldman's shares had fallen long enough, it could have looked at similar measures.

But while pursuing capital, Morgan Stanley Chief Executive John Mack also lobbied the government for relief, which arrived on Friday, when the Securities and Exchange Commission took the highly unusual step of banning short-selling in 799 financial stocks, including Morgan Stanley and Goldman.

The overall market cheered the move, but some investors were not pleased.

"I did not hear the big Wall Street banks complaining until short sellers began shorting the financial stocks," said Harry Strunk, partner at Treflie Capital Management, which invests in hedge funds that short, among others.

Morgan Stanley and Goldman Sachs believe there is a difference between the shorting of their shares, and the shorting they facilitate for clients.

Both banks believe they are the victims of "bear raids," where short sellers gang up on a stock to try to push its shares lower, rather than having a considered investment thesis. Short sellers bet a company's shares will drop.

"What's happening out there? It's very clear to me -- we're in the midst of a market controlled by fear and rumours, and short sellers are driving our stock down," wrote Morgan Stanley CEO John Mack in a memo obtained by Reuters on Wednesday.