Naked Shorts: Germany Attempting To Stem The Tide

Our droll friend from London, Robert Peston, succeeds at explaining the sorts of trading practices the Germans wish to curtail.

The German ban is three-pronged: on short sales of eurozone government debt unless the investor has first borrowed the stock; on the use of credit derivatives to bet on a fall in the value of the debt of a eurozone government, unless the investor owns some of the relevant debt; and on short sales of the shares of German banks and insurers, unless the investor has first borrowed the shares.

Lots of talk and opinion out there about the wisdom/efficacy of this approach.

OS is dubious of guv'mints intervening in markets, but in this case, he may wish to rethink. After all, he prefers to drive in cities where the traffic signals work, go to hospitals and restaurants that adhere to sanitation standards, appreciates knowing how long that package of chicken breasts has been on the shelf, etc.

It seems the relevant question is, Does the person engaging in the transaction have any skin in the game? If so, he should be able to participate at a level appropriate with his resources. If not, he should leave the room. Otherwise, we're all mired in a deep pile of moral hazard, and the IBG/YBG (I Be Gone/You Be Gone) types can mop up and leave before anyone knows what happened. And poor schlub taxpayers and citizens end up, one way or another, bearing the cost of the moral hazard cleanup operation.

Here's an OS translation of the attempt at imposing some rules:

If ya'll don't own it, ya'll can't sell it. That's what we call fraud 'round heah'.

If'n you want to bet on a horse, use your own cash.

If'n you want to bet on a horse-race, you can't hobble the other horses. That's called cheating. It's also cheating to bribe jockeys.

If ya'll play by the rules and win, good on yah'. If'n you lose, well you lose, and we ain't gonna make yer house payments for yah'. Don't gamble with the mortgage money, bubbah.

You can't buy fire insurance on your neighbor's house, 'cuz it provides incentive to burn it down.

If you decide to cheat anyway, remember the classic Tennessee Defense, used successfully in murder trials to this day: He needed killin'.