Ro had moved offices since the last time we met. She was in the same building. She had a suite with the same footprint. Only it was seven floors higher. I suspected she’d made the change because she liked to walk up the stairs and wanted more of them. But I was reluctant to ask in case I was right. It was the kind of thing my father would have done, and I didn’t want the images of the two of them merging in my mind. That’s the kind of thing nightmares are made of.
An assistant showed me in and I saw right away that Ro had streamlined her furniture in the course of her move. That was quite a feat, as she had only two items to start with. A treadmill and a standing desk. Now she just had a treadmill desk. It was over by the window, where she was plodding resolutely away, wearing a sky blue velour tracksuit and keeping one eye on a FaceTime video chat with a roomful of Asian women and the other on her view over Bryant Park. The people below looked even tinier than they had from her old office, but they were still tinged with blue by the coating on the glass. When Ro saw me she clicked off her call, waved a greeting, ran her fingers through her spiky white hair, and increased her pace.
“You couldn’t even get a chair?” I stood in the center of the room and stretched my arms out wide. “Not even one? You could keep it in the closet and bring it out for special guests. This place is worse than my house.”
“Nope.” Ro grabbed a water bottle from a holder at the side of the desk and took a swig. “Get a chair, people sit. They sit, they get comfy. They get comfy, they stay longer. Things that should take five minutes end up lasting an hour. You never get anything done that way.”
“At least let me perch on the windowsill.” I walked over to an empty bay and balanced on the edge. The one nearer her desk was taken up with a neat line of shoes, a purse, and a suit carrier. Ro always did like to be prepared.
“What’s up with your house, anyway?” Ro reached over to put the bottle back in its place. “Marie Kondo been over?”
I shook my head. “Turns out I have a problem with furniture. I’ve never bought any before. It’s more complicated than I thought.”
“What about your other house? In Westchester. Take some from it.”
“I could, I guess.” I glanced out of the window. “But Mrs. Vincent’s there. It would feel wrong to strip the house around her.”
“How long were you in Eastern Europe, Paul? Did you catch socialism while you were over there? Should I get you tested?” She winked. “Seriously, the stuff is yours. Use it if you want to. I’m not saying you should empty the place, but look at it this way: Re-using is good for the environment. It’s certainly better than making a whole bunch of new chairs and beds and couches.”
“Maybe. I’ll think about it. But I’m not here to talk about home makeovers. I need some information.”
Ro reduced speed, reached down for a Peninsula Spa towel from the floor, wiped her face, and nodded. “Now we’re talking. What do you need to know?”
“I need you to explain a stock market thing. Shorting.”
“Short-selling?” Ro sucked in a breath. “I can easily bring you up to speed. But it’s a dangerous game to play. You should think twice. What shares do you have in mind?”
“None. I’ve never bought or sold a share in my life, and that’s not about to change. This is just for research. I need to know what this thing is, how it works, and why people do it.”
“OK. Well, to understand short-selling, you need to take a step back and start with regular investing. That’s where you buy shares and hope that their value increases so that if you sell them again, you make a profit.”
“Buy low, sell high. Everyone knows that. Even me.”
“Good. Because shorting works the opposite way around. You sell high, and then you buy low.”
“That makes no sense. How can you sell before you buy?”
“It does make sense if you start out by borrowing the shares instead of owning them.”
“You borrow them?”
“Right. What happens is that you borrow a certain number. You sell them at what you hope is a high price. Then later you buy the same number of shares at what you hope will be a lower price, and return them to the owner. If the price did fall, you keep the difference and that’s your profit.”
“I don’t understand.”
“Try thinking it through with numbers. Imagine Slimeball Inc.’s shares are selling for a hundred dollars each, and you think they’re overpriced. You might have done some analysis. It might be a gut feel. Maybe you read the tea leaves. But whatever the reason, you borrow a thousand of them. You sell them immediately, and make $100,000. A week later the price falls to seventy-five dollars. So you buy a thousand, which costs you $75,000. You return the shares, and pocket $25,000.”
“That’s fine. I get the math. But why would someone lend out their shares in the first place? Especially to a person who just wants to sell them? Doesn’t selling drive down the price? Wouldn’t that hurt the owner’s investment? The whole thing sounds like financial suicide. And if selling’s such a good idea, why not just sell the shares yourself? Why let someone else benefit?”
“Wow, slow down, Paul! There are lots of things to pick apart here. First of all, if you want to borrow shares so you can short them, you don’t go directly to the shareholder and ask them. You go to a broker. You’ll have to pay a loan fee, so straightaway there’s an incentive for the broker to facilitate a deal. Next up, the shareholder might not even know his shares are being loaned to someone else. And even if he finds out, he might have no choice in the matter.”
“I’m sorry, Ro, but this is getting more ridiculous by the minute. You’re saying I could buy shares only for my broker to lend them out behind my back?”
“He wouldn’t be going behind your back, exactly. It would depend on the type of brokerage account you have. The ones with the lowest fees generally give the brokers the right to do things like that. It’s in the small print. No one’s breaking any rules.”
“It still seems underhanded.”
“If you say so. But that’s not the only scenario. Here’s one you might like better. Say an investor thinks some shares he owns are likely to take a short-term hit, but has faith they’ll eventually bounce back. In the long run, he’d gain by holding on to them. Plus he’d be picking up whatever dividends the company might pay in the interim. So, he allows them to be loaned out. He takes a fee. Maybe he charges interest. Then he gets the shares back in due course, and he cashes in when their price rises again. It’s a way for him to have his cake and eat it. And avoid undue risk.”
“What do you mean, risk?”
“A degree of risk always comes with an investment. Say you buy shares in the regular way, hoping they’ll rise. What if you’re wrong? Worst-case scenario, the company goes broke and your shares become worthless. Your whole stake is wiped out. You take a one hundred percent loss. That’s bad. But it can’t get any worse. You know going into the deal the extent of the risk you’re taking. If you’re smart, you don’t invest any money you can’t afford to lose. But with shorting, the danger is much, much greater. You sell a bunch of shares you don’t own, so you’re legally obliged to replace them within a certain timescale. You bet the price goes down. Now, if you’re wrong, and it actually goes up, it’ll cost you more than you made to buy the shares back. And here’s the sting. The price might double. It might triple. There’s no limit to how high it could rise. Your losses are potentially infinite. The promised land of quick profit can easily turn out to be the graveyard of bankruptcy. Which is why it’s not a game for amateurs. It’s best left to people with the experience to spot the warning signs, and pockets deep enough to take the odd hit.”
“So you mean there’s a chance people might lose some money? Maybe have to sell a yacht? I guess I have a different concept of risk.”
“You seem very prickly about all this, Paul. What’s eating you?”
I shrugged. “I don’t know. This whole thing just rubs me wrong. Look, I’ve got nothing against people getting rich. My father made boatloads of money. But he brought me up to believe you have to earn it. You have to make something useful. Provide a worthwhile service of some kind. What you’re describing sounds fake. Like alchemy. Dishonest, even. No offense.”
“None taken. I don’t necessarily disagree. That’s why shorting’s illegal in some countries. It’s controlled here from time to time, when the economy’s struggling. I’m just describing the game. I don’t make the rules. And don’t forget, these transactions keep people in jobs. Generate taxes. Help pay for roads and schools. And soldiers.”
“That’s fair. But here’s another question. Can shorting be used as a weapon? Could you use it to attack a company?”
“Sure.” Ro sipped some more water. “It happens. There are cases where a high-profile investor doesn’t like a CEO, for example, so he hits the share price to drive the guy out. Or he may think the dividends they’re paying are too small, and shorts the stock to punish them.”
“One investor could do this?”
“It depends on the size of the company. How big of a stake the investor has, or can borrow. How much clout he has in the industry. And he could also add some unsavory tactics into the mix.”
“Unsavory, how?”
“Well, say you want to make sure a certain share price falls, and you get the ball rolling by selling your stake. Then you help build momentum by having a quiet word in the right ears. Not necessarily a truthful word, if you know what I mean. It’s not legal. But it happens.”
I stood up. “This could be it. How we nail him. Thank you, Ro. You’re an angel.”
“Wait a minute.” Ro stopped moving. “Who are we nailing now?”
“Some asshole. Apparently he shorted some stock, and that ruined a guy I met. I quite like the guy, but now he’s in a heap of trouble. Evidently some retaliatory fire-starting occurred, which has taken all the attention away from what the asshole did in the first place.”
“Does this asshole have a name?”
“Jimmy Klinsman, I’ve been told.”
“Oh. Well, that’s interesting.”
“Do you know him?”
“Not personally. Apparently he’s known as Jimmy the Jester. That’s partly due to the unpredictable trades he has a habit of making. And also because people who’ve met him say they feel like he’s laughing at them, even when he’s not.”
“Like I said, he’s an asshole.”
“He most likely is. But have you considered that maybe he didn’t do anything wrong? Maybe he had better instincts, and was right to bet that the price would go down?”
“No.” I shook my head. “The price shouldn’t have gone down. Something made that happen. I thought it was him, dumping shares. Now I’m wondering if he helped his cause by spreading a few lies.”
“How can you be so sure about the price, Paul? Have you been going to business school on the sly?”
“As if. No. But I know that the company whose shares Klinsman shorted makes sensitive equipment for telecom networks. It was about to announce that the government had disqualified its only rival—a big Chinese corporation—from bidding for a bunch of huge contracts. Its ship was coming in, big.”
“And your friend—the guy who got ruined—he knew about this impending announcement? And he bought shares based on commercially confidential information?”
“He’s not a friend. Just a guy I met.”
“Whatever your degree of bromance, you know what this means? Your guy definitely broke the law. We don’t know if Klinsman did or not.”
“We don’t know. But I’m going to find out.”
“Why do you care?”
I shrugged. “Look. Here’s a guy trying to scrape two bucks together to keep his own business afloat. He wound up losing his house because of something Klinsman did. And to what end? So that the guy could build an even bigger heap of cash. Buy more expensive wine that he probably won’t ever even drink.”
“None of that’s illegal.”
“Maybe not. But it seems like there’s wrong on both sides. It’s not fair that only one guy’s getting punished.”
“I can see that. I think you’re on a hiding to nothing, though. But still, let me know how you get on.”
“Will do. Thanks for your help, as always. And when I come back, I’m bringing a chair. I’m serious.”
Ro stepped back from her desk. “I have an idea. You don’t like the way I’ve set up my office. So how’s this? I’ll pull my old treadmill out of storage. Put it next to the new one. And next time, you can keep pace with me. I’ll talk as long as you walk. Then visiting me will be good for your body as well as your mind.”
“No, thanks.” I shook my head. “I’m not a fan of treadmills. I knew a guy who had a nasty accident on one once.”
“An accident? On a treadmill? Really?”
“Well, not really. But we sure made it look that way.”