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Germany’s Ban on Short Sales and Derivatives Contracts: A Cry for Solidarity Among National Financial Market Regulators

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3 Responses

  1. Frank Pasquale says:

    Very informative post–thanks!

    I think the fundamental problem here is leaving capital allocation to institutions that are essentially a form of legalized gambling. The “quants” at such places have zero sense of social obligation to invest in the types of initiatives (like green energy and infrastructure) that would actually increase long-term economic growth and stability.

    I tend to agree with Uwe Reinhardt’s suspicion of the pro-CDS crowd:

    “Spreads on purely speculative naked swaps can indeed serve as a useful sentinels of brewing asset bubbles or of excess leverages. They can also be used as a genuine hedge on assets for which direct hedges are not available. That will always make it difficult for regulators to distinguish between the truly speculative naked and the quasi-clothed swaps, if it is the purely speculative swaps bets they wish to curb.

    But “mature” and “socially responsible” are not adjectives that spring to mind when one thinks of the financial markets.

    We are dealing, after all, with institutions whose reckless swaps trading contributed significantly to the systemic risk that ultimately dragged taxpayers to the rescue.

    We are dealing with institutions that hid the perilously high leverage on their own balance sheets with cleverly designed repurchasing agreements or off-balance sheet, offshore structured investment vehicles that fooled both the Federal Reserve and the Treasury into a false sense of normality, until the financial houses of cards the financial institutions had built collapsed and, as teenagers in trouble run to Mommy, the bankers ran to government for a bailout.

    Finally, we are dealing with institutions that exported their clever expertise of hiding debt to the very same countries whose debt they now bet with credit-default swaps will default, such as Greece.”

    http://economix.blogs.nytimes.com/2010/05/28/nudity-and-the-financial-markets/

    Given their track record, I doubt the “13 Bankers” described by Kwak and Johnson should have much credibility in policy circles.

  2. …so Germany’s “line in the sand” doesn’t really amount to much. In other words, just political posturing to make it look like government is doing something. How inspiring.

    What some lawyers and government economists consider to be of social utility is not where I’d like to leave the decision process on such matters. As long as there are willing buyers, sellers and market-makers (emphasis on the word “willing”) I tend to see at least some social utility in the transaction. The only problem with naked short selling is if a contract is not honored but that’s the same risk entailed when you buy a future delivery of a car, an August grain future or next fall’s semester at law school. As to roiling the markets; if the underlying product is a good one, the short-seller can be burnt; if not, then the short-seller is performing a service by alerting the rest of us to a potential problem.

    …and for a trip down memeory lane, let’s remember the naked short sale ban on Freddie and Fannie stocks from two years ago. ‘Cause those types of sales were clearly causing all the problems for those 2 companies.

  3. Nate Oman says:

    Correct me if I am wrong, but don’t naked shorts also eliminate the problem of short squeeze risk when lots and lots and lots of people use a short to hedge risk than goes bad? For my money, the German regulatory response looks like an attempt to demonize financial markets as the cause of the Euro’s current distress. The problem is that financial markets are NOT the cause of the Euro’s current distress; that honor goes to generous but fiscally irresponsible welfare states.

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