http://bits.westhost.com/idioms/id269.htm

Idiom Meaning
got you by the short hairs has a painful hold on you, has an advantage, gotcha
Example
“What can I do about a bad credit rating?” “Not much. They’ve got you by the short hairs.”

http://www.phrases.org.uk/meanings/by-the-short-hairs.html
Meaning
To be ‘caught/got/held by the short hairs’, or in the UK equivalent, ‘… by the short and curlies’ is to be trapped by an opponent, in a position one can’t easily escape from.
Origin
Few people would doubt that the short hairs/short and curlies are the pubic hairs and that this phrase is of vulgar origin. Such an assumption would be incorrect. The short hairs in question are the hairs of the neck.

http://www.geocities.com/informalenglish/H.html
have/get sb by the short hairs(v) :to have (sb) in a difficult position that he can’t do anything but accept to do what one wants. _I had him by the short hairs after I saw him together with another girl, that’s why he has to do whatever I want, or else I go and tell it to Susan.
http://duggmirror.com/comedy/The_Bizarre_History_of_10_Common_Sayings/
‘By the Short Hairs”
Now Means:
Being in such a strategically advantageous position that you can bend another person to your will. As in, “Once Hannah Montana’s lawyers file suit, Disney’s really going to have Cracked by the short hairs.”
Most say it came from …
The history behind “By the short hairs” is a strange one as the phrase (as it’s used today) really has no history. One day somewhere in the world someone must have thought it would be funny to grab a dude by his pubes and refuse to let go–completely ignoring the poor fellow’s yelps for mercy and womanly crying.
The grabber probably then realized that by putting this person in such a painfully precarious position he could then force them to, say, shovel the snow on the side walk, pay a long overdue debt or maybe just scream like a man having his pubes yanked like it was an S&M-themed tractor pull.
So is that true?
No. We made that one up because, as we stated, the reference to pubic hair has no history. When ‘By the short hairs’ was first coined it was referring to hair a bit north of the proverbial “junk.”
The earliest documented usage of the phrase can be found in a novel written by the man that brought us The Jungle Book, Rudyard Kipling. His short nonfiction story, The Drums of the Fore and Aft had this quote:
“They’ll shout and carry on like this for five minutes. Then they’ll rush in, and then we’ve got ‘em by the short hairs!”
It’s explained elsewhere in the story that the hair being pulled is the hair on the back of the neck.

http://en.wiktionary.org/wiki/have_someone_by_the_short_hairs
[edit] English
[edit] Verb
to have someone by the short hairs
1. (idiomatic) To have someone in a difficult situation in which he or she is without alternatives and can be controlled.
 2002, Martin Peretz, “Power Trip,” The New Republic, 7 Jun.,
The Saudis know that as long as we consume 7 billion barrels per year (4 billion of them imported from abroad), they have us by the short hairs.
[edit] Synonyms
have someone over a barrel