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The Spicy History Of Short Selling Stocks


Our Planet Money team is exploring the world of short selling. Shorting a stock is the opposite of buying a stock. Instead of profiting when the company does well, you make money if the stock price drops. On Morning Edition today, our Planet Money team shorted the entire stock market just for fun to see what it was like. And now they bring us a story from long ago of the very first person to short a stock. It doesn't go well for the guy. David Kestenbaum reports.

DAVID KESTENBAUM, BYLINE: The first person to short a stock was apparently a man named Isaac Le Maire. He lived almost 400 years ago in the Netherlands. I can't read 17th century Dutch, so I got some help.

LUDWIJK PETRAM: My name is Ludwijk Petram. I'm an economist and historian from the Netherlands.

KESTENBAUM: The historical record is thin, but Ludwijk says Isaac Le Maire seems to have been a guy who when he did something, he did it big. For instance, he had 22 children.

PETRAM: Which is, well, quite something special. He obviously was very wealthy. I mean, if he can support 22 children, you have to have a lot of money.

KESTENBAUM: So that's the man. Now for the stock, the company he would eventually short. Turns out there weren't a lot of choices.

PETRAM: At the beginning of the 17th century, there was only one stock. It was the first stock, you know, so it's obvious that there was only one.

KESTENBAUM: That's right. The first short was on the very first stock. The Dutch East India Company - think big wooden boats, big sails, very dangerous trips across rough seas.

PETRAM: Many ships didn't return.

KESTENBAUM: And what were they risking their lives for, to bring back?

PETRAM: Spices - pepper, also nutmeg, mace.

KESTENBAUM: Isaac Le Maire started out on the inside. He was one of the directors of the Dutch East India Company, but there was some dispute over money that got ugly. The details are unclear, but the upshot was that Le Maire was cast out of the company and banned from the spice trade. Le Maire apparently wanted revenge. He hatched a plan to take down the Dutch East India Company. And even better, make money at the same time by placing a bet that the stock price would drop. The bet itself - the short - was fairly easy to do. Back in those days, you could bet that, say, the price of grain would drop. Le Maire did the same with shares of the Dutch East India Company - bet they would drop in value. Of course, there was no stock market back then. Financial transactions happened on this bridge in town. Apparently, trading was very physical. To negotiate a price one guy would put his hands out, palms up, shout out an offer, someone else would shout a counteroffer and slap his hands.

PETRAM: So there was this hand slapping, you know, so people shouting prices and another man coming in between and shouting another price. And this just went on until they got to an agreement.

KESTENBAUM: So it's like an elaborate game of patty-cake.

PETRAM: That's it.

KESTENBAUM: Then, as today, shorting was perfectly legal. Economists says it's even a healthy thing to have in a market, but what Le Maire did next would be considered unethical today, and it was 400 years ago. He lied. Le Maire started spreading rumors, things that would drive the stock price down

PETRAM: He said things like, oh, we heard a ship sunk somewhere off the coast of Cape Good Hope or something, or we heard that there's a ship with a load of pepper, but there's some leakage in the ship, you know, so the pepper is a really bad quality. Stories like that.

KESTENBAUM: Today, the company would tweet no, no, that's not true. Back then, financial information moved more slowly.

How long would it take if you wanted to fact check one of those rumors?

PETRAM: If we had sent a ship to East Asia, that would take you eight months and then eight months back, so that's 16 months in total.

KESTENBAUM: (Laughter) After the rumors, the stock price began to drop, so the Dutch East India Company did what a company today might do - it launched a counterattack. It called for a ban on short selling; saying short selling was hurting society's most vulnerable.

PETRAM: And their reasoning is that there was a large number of widows and orphans who had invested all their money in the Dutch East India Company.

KESTENBAUM: Was that true?

PETRAM: Well, there was (laughter) there were maybe - maybe a few widows and orphans.

KESTENBAUM: The Dutch government did issue a partial ban on short selling. And Isaac Le Maire was barred from accessing any of his shares. His plan to short the company was a failure. According to one historian, Le Maire and his henchmen - he had some partners in this scheme - lost what today would be 10 or $20 million. Le Maire left Amsterdam, basically went into exile. He died in a small village by the water. The writing on his tombstone kind of sums it all up.

PETRAM: Here lie (foreign language spoken).

KESTENBAUM: Translation - here lies Isaac Le Maire, a merchant for more than 30 years, blessed by the Lord, he gained a lot of money and lost it all, except for his honor.

PETRAM: (Foreign language spoken) The sad thing, of course, is that he was probably the only one who was convinced that he actually kept his honor because all other people, well, found him a disrespectful man.

KESTENBAUM: Quite a thing to put on your tombstone.

PETRAM: It certainly is.

KESTENBAUM: Isaac Le Maire's short would have eventually paid off. The Dutch East India Company did die, but only after a really, really long time - 200 years later. Timing is everything. David Kestenbaum, NPR News. Transcript provided by NPR, Copyright NPR.

David Kestenbaum is a correspondent for NPR, covering science, energy issues and, most recently, the global economy for NPR's multimedia project Planet Money. David has been a science correspondent for NPR since 1999. He came to journalism the usual way — by getting a Ph.D. in physics first.
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