05/19/10 Beijing, China – It’s illegal to get naked in Germany…at least in your shorts…for now.
As of midnight last night, “naked short” positions – in which the seller doesn’t own the underlying security – in Germany’s 10 largest banks, European government bonds and sovereign credit default swaps have been banned.
This is an egregious attempt at a coverup. Something we’re getting used to here in Beijing.
The US tried it first in 2008. Greece tried it too, a year and a half later. But we know from those experiences, the Germans have, in fact, done nothing to protect their banks and bonds.
Greek and American shares plunged after their respective bans.
We’re sure the Bundestag meant well. But here’s what they’ve really done:
- Highlighted the 10 German stocks most likely to fail
- Changed the rules suddenly, without warning
- Alienated investors who have otherwise been willing to go along to get along.
And…confirmed most subscribers’ suspicion that euro bonds are vulnerable
“Here we go again,” our sell-side strategist Dan Amoss says with glee, “More ad hoc policy announcements from politicians who don’t like the consequences of their own actions. Have European politicians learned nothing from 2008?
“Restricting honest short selling (i.e., brokers locate and borrow the reference security that’s sold short in a reasonable time frame) sucks liquidity out of markets. After the US ban on selling short financial stocks in September 2008, we had a brief rally followed by a breathtaking free fall – mostly because the liquidity provided by ‘evil speculators’ disappeared.
“Maybe rampant ‘naked CDS’ speculation is, in fact, driving European sovereign bonds down to ridiculously low prices. I don’t know. But what I do know is that if prices were truly lower than the fundamentals justified, then value-seeking buyers would enter the market, and the short sellers would cover their positions.
“The bottom line is that if politicians don’t like market prices for their sovereign bonds, then they should take the action necessary to restore investor confidence and the liquidity that goes along with that confidence.”
Addison Wiggin
for The Daily Reckoning
Addison Wiggin
Addison Wiggin is the executive publisher of Agora Financial, LLC, a fiercely independent economic forecasting and financial research firm. He’s the creator and editorial director of Agora Financial’s daily 5 Min. Forecast and editorial director of The Daily Reckoning. Wiggin is the founder of Agora Entertainment, executive producer and co-writer of I.O.U.S.A., which was nominated for the Grand Jury Prize at the 2008 Sundance Film Festival, the 2009 Critics Choice Award for Best Documentary Feature, and was also shortlisted for a 2009 Academy Award. He is the author of the companion book of the film I.O.U.S.A.and his second edition of The Demise of the Dollar… and Why it’s Even Better for Your Investments was just fully revised and updated. Wiggin is a three-time New York Times best-selling author whose work has been recognized by The New York Times Magazine, The Economist, Worth, The New York Times, The Washington Post as well as major network news programs. He also co-authored international bestsellers Financial Reckoning Day and Empire of Debt with Bill Bonner.
The Daily Reckoning is your premier source for making sense of the news Washington and Wall Street generate. Each business day, The Daily Reckoning calls on its stable of world-class writers and thinkers to show you how to get ahead.
Start your 100% FREE subscription to The Daily Reckoning today and you’ll get a free research report, “How to Survive the Fall of Social Security.” Simply enter your email address below to get your free report and join over 495,000 worldwide Daily Reckoning subscribers!
We Respect Your Privacy and We will
Never Share or Sell Your Email Address
correct me if I’m wrong, but isn’t naked shorting basically fraud, in selling someone something you don’t own, and that you did not borrow? Is it okay to rail against that when it’s paper gold, but not when it’s bonds?
Hi Krak,
It’s a bet. Let’s say that I take fire insurance on my house; fine. Now I take fire insurance (maybe 5 policies) on your house. I have a motive to make sure my policies pay off.
In the case of naked CDS, I can make a trillion-dollar bet that Greece defaults. My counterparty is, of course, a too-big-too fail bank, which is bailed out by the govt when it loses the bet. This is what happened with AIG.
There were many dire predictions about Merkel’s move yesterday, but the world didn’t end, or even take much notice.
So much for the ‘depth’ of this author’s analysis; he risks becoming MSM.