German regulators are widening the ban on naked short selling despite cries of heresy from financial markets. While many Euro zone governments and the U.S. authorities oppose an extensive ban, the Germans are on this one point demonstrating the backbone governments need to show to arrest financial markets.
As this blog reported previously, those opposed to a ban on naked short selling have provided no good rationale why this practice of counterfeiting securities and destabilizing speculation ought to be legal. (See Germans Ban Naked Shorts - Wall Street Hyperventilates; Germans Ban Naked Short Selling: More Reaction; Let Me Go Naked: More On German Naked Short Selling Ban at http://trivcap.wordpress.com). A German law is pending that would extend the ban on naked short sales to all stocks, as well as Euro zone government debt (and credit default swaps on such debt). The German law would not extend the ban to corporate debt, but there is no reason they should not do so.
Opponents of Germany's naked shorting ban too often still continue to conflate regular short selling, which no one is proposing to ban, with the proposed ban on naked short selling, a nefarious financial market practice whose effects and operation are intentionally cloaked behind veils of secrecy maintained by the financial industry. And the damage to bond issuers and investors is perhaps far more damaging than to equity investors, yet it is the latter that received the most attention until the Germans felt their hand was forced and took action.
At the very least, the Germans have the support of George Soros, the man who made his bones by breaking the British pound.
We can also note that the U.S. bans naked short selling of shares (although the regulations are riddled with loopholes), as do Austria, the Netherlands, Austria, Japan, India (to various limited extents). Most countries also banned regular shorting temporarily during the depths of the financial crisis.
If naked short selling bans are beneficial for the stock market, why not for the bond market too? The answer is that some financial market participants benefit potentially to the tune of tens of billions of dollars (and perhaps more, for no comprehensive study has ever been done) by their ability to essentially manufacture counterfeit securities and sell them into the market at will. In any other market such a practice would be deemed fraud (selling something you do not deliver), illicit and illegal.
The U.S. financial reform bill appears to be gutted. Perhaps the remaining hope for true financial sector reform is if the Germans continue to take a hard line.
Financial sector reform is on the agenda for next month's G7 and G20 meetings, but many participants do not seem entirely ready to follow the German lead. Canada, the host, has dispatched its finance minister and other officials to several G20 members ahead of the meeting to build support against a global financial transactions tax ("FTT") which the German's support (although Canada has proposed an interesting alternative). The U.S. is also opposed to the FTT. What we may end up with is a bifurcated settlement - reform light in the Anglozone (plus G20 minus Europe) and something more in Europe if the Teutons are able to pull the Euro zone with them.
The argument may be much ado about nothing. The banks, European and American, are insolvent wards of the taxpayer in any case (or governments are wards of the banks...that is truthier).
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