Oh Sith! Chanos’ Fairfax Problem Could Hurt The Shorts


Today’s stories about Jim Chanos allegedly getting a heads-up on an analyst’s report about Toronto insurer Fairfax Financial before the rest of us is bad news for the famed short-seller. It could be even worse news for the rest of the shorts.

(Read Henry’s breakdown here)

Fairfax, you see, is not just any company that becomes a target to the shorts. It’s special because its chairman, Prem Watsa was mentored by Jack Byrne, whose seed had several decades before created Patrick Byrne, who is the eccentric boss of Overstock.com. (Full disclosure: I once publicly referred to the younger Byrne as a “second-rate CEO of a third-rate company” or maybe I called him a “third-rate CEO of a second rate company,” I don’t remember which, but I did smile when I said it.)

But back to the main issue: the younger Byrne has been on a crusade against short sellers — naked and otherwise — and many members of the business press for about four years now. He has gone on the record to detail a wide conspiracy against his company, guided by a short-selling “Sith Lord” rumoured to be everyone from Carl Icahn to Mike Milken.

Fairfax chief Watsa bought about 10% of Overstock a few years back when the company’s stock was in the toilet.

So how’s it bad for everyone who bets against stocks? Byrne has a friend in Utah Sen. Orrin Hatch, who has laid siege to short-selling in Washington in the past.

As an ill-educated and grandstanding Congress continues to look for scapegoats on whom to blame the financial crisis, the claims about Chanos and SAC Capital may again expose the shorts to blame.