Germans Restrict CDS and Short Selling

Coming hot on the heels of the EU’s restriction on hedge funds because of the role they played in the financial crisis (though this role was in fact pretty minimal) comes the latest European attempt to deal with nasty financial market participants. The German government has released the following statement, translation thanks to the FT’s Alphaville column:

The Federal Financial Supervisory Authority has on Tuesday temporarily banned naked short sales of debt securities issued by eurozone countries for trading on domestic stock exchanges in the regulated market. It has also temporarily banned so-called credit default swaps (CDS) where the reference bond and liability are from a eurozone country, and which does not serve to hedge against default risk (naked CDS).

In addition, BaFin has banned naked short sales in the following financial sector companies: 











These bans apply from 19 May 2010, 00:00, until 31 March 2011, 24:00, and will be reviewed.

BaFin justifies these steps given extraordinary volatility in debt securities issued by eurozone countries. Furthermore, credit default swaps on the credit default risk of several countries in the eurozone has increased significantly. Against this background, massive short sales of the affected debt securities and the conclusion of naked credit default risk on eurozone countries had led to excessive price shifts, which could have led to significant disadvantages for financial markets and have threatened the stability of the entire financial system.

Faced with these circumstances, BaFin has also banned naked short sales within the selected financial institutions.

The FT notes that “BaFin had previously introduced a ‘transparency system for net short selling positions‘, and found ‘no evidence of massive speculation against Greek bonds‘ in the CDS market.”

Let’s be clear about this. Short sellers are not the cause of the European sovereign debt crisis anymore than they were the cause of the Irish banking crisis.

As an aside, it’s worth noting that this announcement appears to have triggered a pretty serious downward run on the euro. Now I happen to think that this is a good thing in our current economic circumstances but perhaps the “ve must protect ze currency” crowd might remember that much of the demand for the currency comes from people who use it to purchase financial assets. If you keep mucking around with the rules of the games for financial assets denominated in euro, eventually investors pack it in and your currency loses value.

This shouldn’t be too complicated a point to understand. For example, I teach my undergraduates about how a currency’s value depends on the supply and demand for the assets denominated in that currency.

127 replies on “Germans Restrict CDS and Short Selling”

The most effective counter-cyclical economic policy the Eurozone has come up with in the past few months has been the unintended consequence of (a) a combination of Greek dishonesty and European dithering (b) now this latest populist gesture.

I suppose Ireland will benefit more from the weakening euro than the average Eurozone member, in that we trade more with non-EMU members than our partners. So, this is good news for us. But it is a depressing reflection on the quality of European political leadership. Jean Quatremer had a piece on the subject that was extremely downbeat, even for him, here:

As an aside on German (and others’) desires for a strong currency: I share with Karl his lack of confidence expressed the other day in interpreting the reasons for why exchange rates move the way they do. But over the past few days the weakening euro seemed to be linked to fears about a weakening Eurozone economy, which in turn were linked to the fiscal contractions underway in several peripheral economies without any countervailing stimuli in the core.

All of which suggests that those who want a strong euro (not me) should try to figure out ways of stimulating eurozone growth through non-monetary means. Otherwise the markets will continue to bet on monetary loosening in the future.

Greek restructure in 3..2..1?

German Banks don’t have to honour sovereign CDS positions.

French Banks do.

Over to you Mr Sarkozy.

What banning naked shorts and CDS does is eliminate the bets leveraged at rates higher than you would find on rank outsiders at Leopardstown. In trading circles they are talking up the move in terms of what does the German gov’t, the ECB and the EU as whole have hidden that would collapse under a spate of higly leveraged trading. No doubt the move impinges on trading profits so the negative comments are self serving and expected. We are going through a period of high volatility in just about all markets whether they be currency, commodities, stocks, bonds. In my opinion the fragility of the recovery and the political risks associated with that are dampening the enthusiasm one would normally expect at this stage in the cycle. Will China go into a marked economic decline in the next few months and if they do will they sell US$ in large amounts?

Coming hot on the heels of the EU’s restriction on hedge funds because of the role they played in the financial crisis (though this role was in fact pretty minimal)

The Fed’s interest rate decisions in 1998 played a pretty minimal role in the current financial crisis? That does not appear obvious.

Some of the biggest market declines in history have happened shortly after short selling restrictions were foisted on the market, in this case it is going to drive the Euro through the floor.

@Robert Browne
You are right because they were imposed as the panic was under way. In this case it is a pre emptive strike in keeping with previous moves that make it risky for speculators to game the system. The Euro and the ECB are heavy weights on the world stage not the Thai Baht or Brit. Pound. At present levels the Euro looks attractive whether it be from a tourist or business perspective. I have more faith in the Euro than I have in the US$, the Europeans are dealing with their problems and cannot be held up for ransom. On the other hand the US is beholden to the Chinese who are entering stormy seas themselves.

Have the Germans gone a bit ‘loose cannon’ or is this some way of getting Sarkozy back for daring to make threats in the general direction of angel Angela? Why hasn’t there been a co-ordinated EU move on this if that’s the position (the EU/ECB?) think they should be taking?

Something odd going on?

I presume there will be fun and games on the market this morning.

Kevin O’Rourke
Have you evidence that the “unintended consequence” ie disclosures about Greece and Goldman Sachs etc were accidental or not calculated?

“latest populist gesture” That suggests that it is done as a sop to the voters? Does it not also fit into the scenario that they know what must be done and it will be, with fits and starts as traps to destroy foolhardy speculators?

We know that the only hope for sovereign debtors is fiat devaluation. So do those who want to make more money on the way down. Naked short selling is a potent weapon for them. What other counter-measures does the EZ have for those who wish to help the euro on its way? Co-ordinated reversals for a short but long enough time? Credit squeezes? Credit flow restrictions? Failure of optical fibre cables? Computer failures? Police raids? Given that this is going to take months, and also might have to take other fiat devaluations into account, there is scope for far stranger moves than this which is excellent as Rob Browne says!

This policy shows a complete lack of understanding of basic finance.
I expect whatever liquidity was left in the market will disappear today

This is bizarre. Short selling bans make sense when there is a genuine panic and people think the world is about to end (ie end 08/start 09). They don’t make sense when people simply think the world is gonna be a crappy place for the next few years (ie now). This has raised far more questions than it has answered, and hurt investor sentiment rather than stabilised the market. This is a massive red flag implying that Merkel is really worried about the German financial sector. As DE suggested, liquidity in a lot of markets has deteriorated markedly, and the EUR has been hammered again. With no short selling opportunities available now, the only way of shorting Europe is to short the currency. Expect EUR a lot lower, which although has obvious silver linings, will only cause the value of EUR-dominated assets to continue to fall. The German decision is genius in its insanity.

Its bad when DE, myself and Bond, Eoin Bond are all ad idem. WTF is going on ? A contagious outbreak of populism?

@ BL

this seems like a German move for power in terms of setting out how the markets are gonna work for the next decade or so. Its beyond being even “populist” – they could have just hit the CDS markets if that was the intention. Hitting the cash bond markets as well seems like overkill. Wouldn’t be surprised if Ze Germans eventually issue a “its our way or we’re out of the Euro” declaration of some sort.

Just to clarify, short selling is very much NOT the same as naked shorting. Naked shorting has been largely banned in stateside circles as well, except for a few large “trusted players”.

Short selling is selling shares that have been borrowed from a third party (usually a broker) with the intention of buying identical assets back at a later date to return to the lender. Naked shorting is where they don’t even bother to borrow the shares and just vaguely promise to borrow them in future.

Its completely insane.

When borrowers don’t follow through on their promises, this is called FTD, failure to deliver, and FTD rates were in the billions daily just before Lehman.

I’m actually quite surprised it was still allowed over here.

Can someone clarify exactly who this ban is being imposed on? Is it only banks/desks in Germany?

If so, I know Germany is a big market, but if this is the cause of the Euro and markets being draged down, isn’t this a bit of an over-reaction? Surely there’s a million ways around this for German investors and only a co-ordinated response should be worrying.

“If you keep mucking around with the rules of the games for financial assets denominated in euro, eventually investors pack it in and your currency loses value.”

In that case let the mucking around continue. A strong Euro is a curse in present circumstances.

Incidentally, I have long thought that the most effective policy interventions are those which convince financial market players that the policy-makers are simply nuts. It’s not hard to construct models in which nuttiness pays.

@ PD: Do you share my gestating opinion that some persons do not really understand the predicament? Too much debt, insufficient current income, and even less prospective? That’s what????

Not to worry, just borrow another B or T – its only money, and we can fiat as much of that as we need (they even have plastic notes in Oz!). Debt on!

‘Populism’ lads, should read Neo-Realist Politics (or should that be Neo-Liberalism?). Its known in the trade as Covering-your-Ass. The politicians in state X are not voted into office by citizens in state Y. So state Y can shag off, in the best possible taste you understand.

B Peter

It was a stupid populist move by politicians. Achieved nothing since the large trading desks are in London and not in Germany so what has it achieved except frighten the markets into thinking the Europe has the CDS market in its sights. There is absolutely no evidence that there has been huge speculation in the soverign debt markets. As an investor now, why would I buy peripheral debt if I think I won’t be able to protect myself with genuine hedges. As mentioned above, the only way I can now hedge my risk is by selling the € like there is no tomorrow. Stupid, stupid stupid

Latest headlines on Bloomberg

@All – this move by the German government has little to do with what has and is going on in the markets and the understanding of it within the government and all to do with the outcome of the election in Northrhine-Westphalia. The CDU-FDP government have now lost the majority in the upper house (Bundesrat) and in order to get most decisions through concessions have to be made – this appears to be the first. The Social Democrats have been looking for these measures for some time and they are of course popular among the ill-informed public. Other peculiar decisions are perfectly feasible from now on for the same reasons.

All the media in Germany are full with stories about the Euro – lots of hysteria (not just in the redtops). Wirtschaftswoche has a cover “In Memoriam: A Stable and Hard Currency, Kohl gave it to us, Merkel took it away”. Lots more stories like “Endgame for the Euro”, “Is the Deutschmark Coming Back?”, and “Merkel’s Waterloo”.

Returning to the actual announcement, I am not so sure what value naked trades have to the real economy and so I am not that fussed about the ban on those.

Once again, banning naked shorting is a good thing.

What it does is multiply the amount of shares that are on the market, so say a company has a million real shares, there might in fact be four million shares in that company being bought and sold, and the market has no way to tell the difference between a real share and a naked shorted sale.

There are enough economists around these parts to do the maths on that.

An explanation….?


“The German 9-point plan announced this morning (to get the EU aid package through parliament) explains why BAFIN did what they did. One item in the plan is that “orderly insolvencies must be possible within the Eurozone”. This is of course designed to make the German lawmakers pass the 1 trillion package, but if they do so on the basis of the plan, it also becomes a German demand to the other countries. So if the other countries agrees to this, then in reality this means there are only two possibilities for a country like Greece, “orderly default” or messy default. If they don’t agree, then Germany can’t be part of the 1 trio. package. If this suggestion had hit the market without the short-selling ban in place, then precisely the 3 areas in the ban, EU Govvies, CDS and German bank shares, would have gone doolally.”

Am I dreaming? Did I step out of the wrong side of bed today? The links we saw earlier – in German – on the Bafin website with all the technical details on how the short selling is to be implemented now seem to have been removed from the Bafin press page on its website. eg. from Pressemitteilungen page
You can still find archives of the original links at
I never saw anything over the past few hours of interest in English on the Bafin
Anyway rest assured, Frau Dr Merkel has a plan to save the euro;2583703
I really like her line on “orderly default”. This isn’t a new element – she has talked about the same on several occasions.
Frederic Mishkin however speaks it like it is – for those with a Bloomberg{ NSN L2NJZJ6N9EDE } Europe Should Have ‘Let Greece Go,’ Not Save It, while FRANCE FIN MIN LAGARDE SAYS REGRETS UNILATERAL DECISION BY GERMANY

Am I dreaming? Did I step out of the wrong side of bed today? The links we saw earlier – in German – on the Bafin website with all the technical details on how the short selling is to be implemented now seem to have been removed from the Bafin press page on its website. eg. from Pressemitteilungen page (multiple links banned from this blog)
You can still find archives of the original links at
(multiple links banned from this blog) and
(multiple links banned from this blog)
I never saw anything over the past few hours of interest in English on the Bafin
Anyway rest assured, Frau Dr Merkel has a plan to save the euro
(multiple links banned from this blog)
I really like her line on “orderly default”. This isn’t a new element – she has talked about the same on several occasions.
Frederic Mishkin however speaks it like it is – for those with a Bloomberg{ NSN L2NJZJ6N9EDE } Europe Should Have ‘Let Greece Go,’ Not Save It, while FRANCE FIN MIN LAGARDE SAYS REGRETS UNILATERAL DECISION BY GERMANY

@ Ronan

in theory you are right. However in practise the amount of shorts out there is usually a very small percentage of the overall outstanding stock. Like 10 or 20% on a heavily shorted stock (as opposed to 400% per your example). On less liquid but large outstanding securities like Sovereign Debt, the amount of shorts even on Greece would have been probably 5% or so. Shorts, naked or otherwise, create pressure, but they very rarely, on large outstanding stocks/securities, can generate enough by themselves to cause a collape. Real money buyers have to exit the trade before that occurs. If they are so spooked by some mild shorting pressure, than it probably means that there is a real underlying problem, as is now quite evident in the Greek situation.


@ Eoin, nope, naked shorting was prohibited by the SEC in 2008 for the very reasons I outlined. Its been directly connected to the collapse of Lehman, see here

and I’ve no doubt there are equally good reasons to ban it here.

I’d like to emphasise the difference between naked shorting and shorting. Shorting is a good way to get more efficient (read profitable) markets, naked shorting was always a disaster waiting to happen. I don’t think anyone should be alarmed at this move.

I am just a stupid macro economist, who doesn’t know a thing about finance, but a ban on short selling won’t solve the problem. maybe i am wrong, but if you want to go short on, let’s say AIB, buying main index futures and buying all other stocks you don’t want to go short on according to their weights in the irish main index should yield the same cash flow. So banning short selling doesn’t end going short. It only raises transaction costs. So why not introducing a tobin-type tax in the first place, given that anyone is so keen on bringing down short selling?

@ Ronan

the SEC decision was made in 2008. What do you think the reason was for it then – that confidence in the financial system was evaporating, and the “end of the world” was nigh in terms of the financial system being close to collapse. There is no similar situation happening now. Certain particular countries are having difficulty raising cheap funding, and so they can either aggressively chop spending or consider eventually defaulting. They wont go bust just because someone is shorting their bonds. They aren’t going to run out of cash in the next few days/weeks like Lehmans was. The Irish and Spanish Treasuries managed to raise the cuts of 8bn yesterday alone for God’s sake. When we brought in the short-selling ban here in 2008 Anglo was trading around 7 bucks. Clearly the ban stopped that share from collapsing, right? Better transperency on short trading, combined with on-exchange trading of CDS would’ve been far more beneficial than this big fat and clumsy measure which, designed to bring stability to the markets has actually created chaos. Even the French are against it!!! (Dutch, Swedes and UK too)

Have to echo what Ronan is saying – and what I said yesterday on the Morgan Kelly thread – the insanity is allowing naked short selling – not banning it. I too was under the impression it was already illegal just difficult to detect. It is a recipe for chaos. They are not banning normal shot seling.

@Ciaran Take the link and google cache. Even the Beamters can’t fight the net see below
FSA have been reported as saying that it only applies to German institutions in Germany. More trades for DB London methinks.

@ronan. what i wrote above should still apply. btw. given that deutsche börse AG makes a large share of her profits with selling these derivatives, i recommend going short on deutsche börse AG. 🙂

@ Ronan

well obviously the cost has come down, there’s a lot less people able to buy it, and liquidity has collapsed. But do you think its a good or a bad thing?

@Eoin, the thing is with naked shorting that those people who would have otherwise been buying may or may not have been in a position to actually buy, so I think once the ripples have calmed, not only has a bit more stability been introduced, potential future problems have been headed off.

“An explanation….?”
Yes, that might be it. There are going to be some disorderly events in the next few days!

On short selling, my understanding is that it has ‘always’ been disallowed for equities, but not strictly enforced. For bonds, the failure to deliver during the run up to Lehman’s amounted to huge dislocation in the bond market and effectively constituted a massive roll-over risk. The CDS restrictions are new, but likewise have been talked about for some time to prevent self-fulfilling prophecies being created.

I don’t see anything that should dislocate a normal market. Show me a normal market, though…

It will be interesting to see what Martin Wolf has to say. AFAIR he recommended a ban on naked CDS’s previously. It made sense to me at the time.

@ Zhou

whats bizarre about the BaFin decision is that they have only just announced that their investigation into Greek government CDS did “not find any evidence of credit derivatives known as Credit Default Swaps (CDS’s) being increasingly used of late to speculate against Greek government bonds”. So why ban it??

@ YM

it seems designed to maybe say “we’ll ban any speculative shorts on EZ govt’s, regardless of their actual impact on the markets, and regardless of what impact the ban will have on the markets we’re allegedly trying to protect”. Nose, spite, face.

@Eoin, I don’t think I’m really getting through here.

Its not banning speculative shorts, its banning naked shorting. The difference was explained a few posts up.

You would have to wonder what was the real point in banning naked shorts when you see the US hedge fund managers have their positions in place at apparently low cost.
from Bloomberg article today:

Managers who made short bets on U.S. subprime securities as the housing market was imploding in 2007 and 2008 see similar opportunities in Europe, said Nick Swenson, who manages Minneapolis-based Groveland Capital LLC and profited as mortgages tumbled. In March, he started buying credit-default swaps on Spanish, Italian and Irish government bonds, a sort of insurance that pays off in the event of a default or restructuring. For other managers, the potential profits from betting against Europe still outweigh the costs. Swenson pays 1.3 percent annually to put on his bet against Irish, Spanish and Italian debt.

For other managers, the potential profits from betting against Europe still outweigh the costs. Swenson pays 1.3 percent annually to put on his bet against Irish, Spanish and Italian debt.

@ Ronan

no, you’re getting through, you’re just not reading my comments – they’re talking about CDS being banned, without really explaining why, and while at the same time admitting that CDS did not increase notably during the Greek sovereign debt collapse.

Now you’re gonna say that CDS shorting (sic) if you do not have a cash bond position (ie uncovered CDS) is the same as naked shorting, but i dont see how it is given that its a derivative and it doesn’t directly affect the volume of bonds in circulation (unlike your example of naked equity or bond shorting). If i can still short the Bund via a future (exempt from the ban, but which, due to the incredibly clumsy way this was all announced was only confirmed mid-morning), then whats the point in banning a different type of derivative?

@ Edgar

i understand where you are coming from on the internal politics side of this, but its seems like massive overkill, delivered in an incredibly clumsy and haphazard way. I mean, i thought the Germans were all about efficient and well thought-out delivery??? 🙂

@Eoin – Merkel had maintained up to the last minute that unilateral action (like this) was not going to be effective and might harm Germany (Frankfurt) as a financial centre. I think they were forced into this (U-turn) in order to get the package across the line. This is not the government’s policy but the opposition’s. If it does not work or mess things up you can be sure the opposition is going to get the blame – in that context clumsiness might be exactly what was intended.

@ Brian Lucey

Its bad when DE, myself and Bond, Eoin Bond are all ad idem. WTF is going on ?

Thats’ because a bit of political common sense has rattled one of the assumptions governing your beautiful market models. Dis-equillibrium will now rage. Or, as Eoin states: there will be “carnage in the morning”. But, in the real world, for 99% of citizens, things will continue as normal with the exception that some financial gamblers will lose money.

Congrats to Angela Merkel. She put a curfew on the late night casino. A victory for common sense politics over free market fundamentalism.

I agree – it must be a political decision. Or does Angela know something is coming down the line (orderly default) and hence the need to protect the German financial institutions.

@ Stringer Bell

“some financial gamblers will lose money”

How easily you forget about house prices, pensions, the cost of servicing government debt, the cost of goods imported into the Eurozone, the cost of oil etc…

This is not a ban on short selling, if you have the stocks in your control you can sell them short til your heart is content. It is a ban on selling short, stock which you do not own. Naked short selling is gambling pure and simple exactly the same as two Australians in a greasy spoon Cafe betting on which fly on the window will fly off first. As the Oracle of Omaha has opined CDS are weapons of financial mass destruction,now that he has figured out how to game CDS to his advantage he is less opposed. I have a lot of admiration for the Frankfurt and Basel bankers and associated brokers. They are fine honest and fortright people with a social conscience. Not like the shifty fraudsters in New York and London who would sell their mothers for a 5 cents per unit gain. I fail to see how naked short selling, CDS and Hedge Funds are benefiting society. They benefit the well heeled players and impoverish society as a whole. In the island of saints and scholars we now seem to have a lot of support for gambling and societal damage. The next thing I expect to hear is that Ireland is no longer a matriarchal society and mothers and grandmothers have lost all influence over the nations conscience.

Is there a danger of the rescue package falling through??
Curious report from Reuters
Geithner, speaking to CNBC Television in an interview, said: “Absolutely Europe has the capacity to manage through this. We just want to see them follow through.”
While his hedge funds are having a field day betting against Europe Sovereigns.

@Eoin; So what happened to your pronouncements of doom last night? How are the bond futures doing? See any carnage yet?

@ Garo

its great knowing you take such a keen interest in my posts. Do you want to follow me on Twitter as well?

EUR/USD fell 1.5%, Bunds rallied 100tics, Greek CDS levels dropped 200bps at the open, stocks are 2%+ lower, 3 of the biggest market makers in SovX, the biggest sovereign CDS index, stopped trading it today, USD fx swap markets blew out at the open. Carnage is probably an overstatement, but we’ve had a pretty eventful day, and none of it in a good way.

“no, you’re getting through, you’re just not reading my comments – they’re talking about CDS being banned,”

They’re banning naked CDS – not CDS. There is also a difference there. Naked CDS can do even more damage than naked short selling stocks.

@ Aidan

terrible unfair there. I explained in the next few lines about how they were banning uncovered CDS (a derivative can’t be naked in the same was as a naked short on a stock can be), but queried what the rational behind this was, as a derivative position, in and of itself, does not affect the price of the underlying cash instrument (in this case, the bond). I also queried the contradiction here, where i can short the Bund future but can’t buy CDS on Germany? I also queried why they were banning uncovered CDS when they admitted that none of the current problems with Greece were created by them?

@Eoin: very tetchy when called out. Everything you cite is rather prosaic. hardly the doom you were pronouncing yesterday. BTW, EUR/USD screaming higher. Not that hour to hour movement mean much.


I think there are reasons for banning naked CDS’s apart from the role they have played in sovereign debt crises and in creating additional amplification and contagion in credit makets.

I am not clear on the German measures, why they are happening now or what they are trying to achieve. However, the general principle against naked CDS’s is not diminished by their lack of culpability in one instance.

The problem is that nobody can really say what damage was or wasn’t done by them.
The fact is that allowing naked CDS is allowing a charter for fraudsters. I think I’d sleep easily I thought the local arsonist was able to buy fire insurance on my house.


Only because of rumours about an ECB statement.

Eoin is right, banning naked CDS was a pointless political exercise. The amount of outstanding CDS on European Sovereign debt is tiny compared to the amount of debt. Accepting that the majority of this is legitimate hedging, the amount of uncovered shorts is tiny. It is not short sellers who are causing the crisis. It was political posturing as another poster said.
The fact that the rest of Europe has distanced themselves from the move shows it was a solo run to satisfy political objectives in Germany. The market over-reacted to the ban but the market is a jittery place.

@ Garo

well its better to have an opinion, than not, right? Know what i mean?

Anyways, i was only kidding – I actually don’t want you to follow me on Twitter.

@ Zhou

i understand why people are worried by naked shorting of anything, i just think its quite often unwarranted, and i think the liquidity provided by them in normal market times is very useful. As such, the banning of them should be a limited or temporary measure, and i think increased transperency would be a better long term solution. I’d also note that CDS movements have generally proven to be a leading indicator, rather than a lagging or false one, in most instances.

@ Aidan

ok, i get the analogy, but look at it this way – if somebody bought fire insurance on your house, wouldnt you maybe look at the possibility that your house suffered from a fire hazard of some sort, and you might try and fix it?

Hmmm, some unnamed Greek official is reported to have said that seperation from the EU “may be considered”. One of those rumour filled days, EUR/USD dropped like a stone and then rallied immediately on the news – is it good or bad EUR news??

If the amount of naked CDS is so tiny, why is the fuss about making them illegal so big ?

The herdinstinct in the market combined with something (relatively cheap to produce?) that some/many perceive as a reliable indicator could be seen as a tool primarily for someone wanting to move the market in a certain way.

I’m not sure if naked CDS (without having to put up collateral) is improving liquidity or if it is just mispricing risk.

Short selling?
Undergraduates are also taught some useful theory.

“When the quantity brought to market exceeds the effectual demand, it cannot be all sold to those who are willing to pay the whole value of the rent, wages and profit, which must be paid in order to bring it thither. Somepart must be sold to those who are willing to pay less, and the low price which they give for it must reduce the price of the whole. The market price will sink more or less below the natural price …” Adam Smith, “The Wealth of Nations” Chapter 7.
Think about it!

“is it good or bad EUR news??”

And therein lies the rub of all this. In the main what is being ‘finessed’ is eurozone sovereign bonds. They are basically being locked into place through a combination of administrative measures and the ECB acting as buyer of last resort (so setting a price floor).

This shouldn’t really surprise anyone. Sovereigns are, after all, money good. If they cease to be money good, then so does money!

I note the Italian regulator has suspended MtM accounting on eurozone sovereigns…

That’s fair enough – my house burns down – I don’t want some b**rd pouring petrol in the letterbox and dancing on my ashes.

Even the fact that you have fire insurance at all is some kind of moral hazard. You may not take as much care as you should, but still you don’t want to deliberately burn it down. If it was someone else’s – you might be tempted to engineer something..
The chances of that happening are increased inversely with the possibility of getting caught – and we have seen that not all investment bankers are as honest as they like to pretend

[…] and depress the currency’s value — which is exactly what is happening today in markets. The Irish Economy blog, displaying that nation’s characteristic wit, put it just right: [P]erhaps the “ve must protect ze currency” crowd might remember that much of the demand for the […]

I believe that most commenters here have it wrong when they say that Angela Merkel and polticians within her party and in the opposition are the prime movers in adopting anti naked short selling regulation. The politicians are acting on expert advice from the Frankfurt bankers and brokerages. I know first hand that the Frankfurt financial community were concerned more than a decade ago about the house of cards in New York and London. In the past three years they have become convinced that the house of cards is built on quicksand. Any loss of business in Frankfurt will be short term and in the medium to long term business will gravitate to Financial Centres that are managed along sound business principles. Most of you know already which ones are and which ones are not.


In practice, no-one has any real objectives to the banning of naked short positions in equities because it is pure speculation. Touching the CDS market is a different kettle of fish. There is no evidence that there is significant sepculation going on in that market. Doing an uncovered short in the CDS market can be very expensive as these days you are probably paying an upfront fee and a running coupon so the cost of carry is big.
The problem is that no-one understands where this German move came from and why they went off on a solo run. They are hoping it was politically driven because if not, it probably means that there is a crisis in the German banking system that is about to be announced.
I have talked to German banks today. They are as mystifed as anyone, think it is unworkable and will simply do business from their London desks.


“There is no evidence that there is significant speculation going on in that market”.

Not sure about that –
The five biggest dealers in the largely unregulated market — JPMorgan, Citigroup Inc., Bank of America, Morgan Stanley and Goldman Sachs — earned $28 billion from their swaps trading operations last year, according to reports collected by the Federal Reserve and people familiar with the matter.

and that is only five yankee banks. Cannot see them giving up this highly lucrative business. Now Senator Dodd is compromising on regulation to get a vote on his bill

@ podubhlain

“earned $28 billion from their swaps trading”

well what exactly is that referring to? CDS? IRS? What are the underlying securities, and how much of it, if any, related to uncovered CDS? They definitely DIDNT earn $28bn from sovereign CDS, or indeed anywhere even within a fraction of that figure.

@ Gavin S

I think the reason that no one objects to naked positions in equities is
1) from a user point of view it’s quite easy to borrow the share and the cost is implicit in a naked position anyway.
2) Equities are cash markets not derivatives.

With regards to CDS, it’s a DERIVATIVE it’s very existence is to allow speculative and hedging positions without the need to structure them through the cash market. The point made about the bund futures above is very important.

If this policy is adopted in other countries it could spell the end of the CDS market.

Well we do know for a fact that GS helped Greece cook the books and if they didn’t profit later from that I would be very surprised. Especially given their track record with John Paulson and the ABACUS fund. they are just crooks, who are on the edge of being caught.


Thats what I was saying. I don’t understand why they went after the CDS market and blamed it for soverign spreads being so wide. I can understand why they banned naked shorts in the equity markets on their banks because I presume they are trying to protect them going forward but I don’t understand the timing or the solo run. Banning uncovered shorts in the CDS market just made a jittery market more jittery and achieved nothing.

@ Aidan

they helped cook the books in 2001/02 (or was it 2003? i forget). Fairly sure they didn’t sit on that position for the guts of a decade.

For all their wrongs, alleged or not, GS did not borrow 310bn euro’s in the name of the Hellenci Republic, money which it is now clear, even if there had never been a GS-engineered currency swap, they cannot repay.

@ podubhlain

think that reference is just to interest rate swaps (its a poorly written article, a “swap” is one of the most generic terms in finance). Interest rate swaps are the biggest part of the business for many banks, both in nominal volume as well as profit, but those figures ($28bn) are exclusive of derivative business like CDS i think (or if they are included, CDS on sovereign bonds would be a tiny tiny fraction of it). For example, most major banks would have a handful, or less (i work for a decent sized bank and we have nobody doing it), of guys trading sovereign CDS, but they’d have dozens of guys trading different parts of the interest rate swap curves across the different currencies and maturities. The profits would be equally weighted.


I am not disagreeing with you on this. I am just pointing out that reputable commentators have proposed this move. One wonders will CDS spreads continue to be a leading indicator notwithstanding the fact that naked CDSs may be banned.

Having googled it, I can find coments by Wolfgang Münchau but not by Martin Wolf that CDS should be banned where the purchaser had no insurable interest:

Time to outlaw naked credit default swaps
By Wolfgang Münchau

It looks like Edgar is spot on judging from the folllowing reported on Bloomberg:-
Bundesbank President Axel Weber said he’s concerned of “dramatic” developments in financial markets on May 24 unless German lawmakers agree on May 21 to support an aid package to support the euro. He spoke in a parliamentary hearing in Berlin.

It looks like Edgar is spot on judging from the following reported on Bloomberg:-

Bundesbank President Axel Weber said he’s concerned of “dramatic” developments in financial markets on May 24 unless German lawmakers agree on May 21 to support an aid package to support the euro. He spoke in a parliamentary hearing in Berlin.

Excellent article – cuts through all the bullshit and calls a spade a spade.

” Not even the most libertarian extremist would accept that you could take out insurance on your neighbour’s house or the life of your boss.”

come on Eoin surely you can prove he’s wrong

@Stringer Bell
“Congrats to Angela Merkel. She put a curfew on the late night casino. A victory for common sense politics over free market fundamentalism.”
+1. Speculators have waged financial terrorism unhindered on the European public for too long, whipping up a hurricane of fear for their own profit. The opposition SPD should now demand a Tobin tax. Europe needs to stake the vampire squids into oblivion. It’s us or them.

Oliver Vandt

Ha Ha Ha

Nasty Nasty Speculators.

It wouldn’t be that the French and German banks are, how can I put this, BANKRUPT.

Just like AIB and BofI.

Oh, and Anglo Irish.

It wouldn’t be that the entire of the EU is bankrupt?

What is a “Speculator”?

Would it be one who recognises the bankruptcy of failed Government?

While that Government tells its subjects they need to feel more pain?

In your world the “Speculator” is the problem not the Government.

What an interesting idea.

JTC should just print up 5T.

Let the inflation begin.

”Not even the most libertarian extremist would accept that you could take out insurance on your neighbour’s house or the life of your boss.”

Dead Peasant insurance (insurance taken out by companies on junior employees for the benefit of the company) seems common enough in the US. It has much the same hazards as the above examples. Clearly, someone is happy to argue in favour, even if it’s not libertarian extremists.

@ Aidan

it kinda boils down to this – you consider all the investment banks and hedge funds to be immoral or criminal in nature. I think they often see the problems before they arise. Maybe they end up being somewhat shady at times in how they go about it, but they forsee problems none the less.

CDS’s on subprime were originally created for some very ‘moral’ investors (i mean that honestly) who simply thought the US housing market was insane and wanted to naked short it. Please read Michael Lewis’ “The Big Short” to find out how it all happened (i know, i know, i’ve been on about this before, but its an eye-opening book). They saw way before anyone else that the whole thing was a massive ponzi scheme, and potentially an outright fraud, and wanted to create investment positions that would earn money for them and their clients when it all blew up. Right now you’d be calling them arsonists and evil speculators, but they are truely nothing of the sort. Some of these same guys are no doubt shorting Eurozone bonds via sovereign CDS, and Merkel & Co would like to blame them for the sudden realisation that a 10-yr Eurozone credit party has finally come to a messy end. It’d be great if it were true (that its all their fault), but we really only have ourselves to blame.

@ Pat

your legend grows deeper with every post…

@ Pat

took a quick look at that article you posted there. Rampantly anti-Israel throughout, “its all a Zionist conspiracy” & “i don’t hate Jews or Israel, they just seem to do bad things a lot”. Congrats, you’ve reached a new level of crackpotiness.

” you consider all the investment banks and hedge funds to be immoral or criminal in nature.”
No I was actually being pretty specific in this instance – the Abacus CDOs fund was created by GS with the help of John Paulson, and sold to their clients as a good investment with the help of rigged ratings. Then GS knowing of course that they were mostly subprime crap, bet against them at same time.

From what I can determine about it the computerised high frequency “front running” stock echange trading scandal which has not yet got the prominence it deserves may be the scandal that destroys their reputation for good.
It is effectively automated “insider” trading but with no risk, and makes them 100 of millions per day.

And yes I consider naked CDSs as near as any financial dealing can get to being immoral – and like Munchau in that article linked by Zhou – I include bank robbery in that definition.

@podubhlain – “Or does Angela know something is coming down the line (orderly default) and hence the need to protect the German financial institutions.”

I suspect you may have hit the nail on the head there. I wonder what they know?

@Eoin, Pat
Have to agree with Eoin on this – I wasted a good 10 minutes on that anti-Israeli drivel as well.

@ Aidan

read the book – it’ll make you change your mind on the immorality of naked cds shorting. These guys told anyone who would listen that the housing market was gonna crash, and no one listened. They weren’t huge investment banks, they were tiny little hedge funds or asset managers.

You’ve also directly linked the shorting of Eurozone sovereigns with this crisis being caused by the likes of GS, so its not just the specific instance of the CDO’s.

Question – why shouldn’t i be allowed buy flood insurance on property in New Orleans? Wouldn’t increasing exposure to such an event make the insurance companies lobby either the government or private citizens to increase protections against it? Wouldn’t it force insurance companies to reprice the risk associated with it? It’s a far better analogy than your fire insurance one, because there is no way i could create a flood event in NO, it would simply be down to mother nature and poor planning etc. It’s too big an event to be caused by just me. Just like the Eurozone debt crisis is too big a problem to have been created solely by a few investment banks.

The guys who successfully shorted the american housing market are the guys who managed to stay solvent longer than the market stayed irrational 😉

Flood insurance is a good analogy, however, didn’t the federal government have to step in as many insurance companies underpriced risks and were unable to pay up when disaster struck? Their reserves/provisions/collateral weren’t sufficient.

If I remember correctly this has led to very expensive insurance premiums in high risk areas as insurance companies were required to hold more reserves/provisions/collateral. Then of course there were the ususal cries for government intervention (lowering requirements and/or subsidies) to be able to continue to underprice risk…..

& posting a lot of collateral sounds like tying up liquidity in one part of the system to allow (less?) liquidity to flow in other parts of the system…..

@Eoin Boesky
At the peak, the CDS market ‘insured’ tr$6 of asssets. And was a $60tr market. Yep, 10 New orleans insured for every one that existed. Unregulated, opaque and no central clearing. Tell me there is no incentive for bad behaviour amongst those little mom and pop hedge funds worried about flooding? No temptation to dig a few holes in the flood defences? No incentives for inappropriate herd behaviour? Gimme a break.
And when AIG was found to be on one side of those deals, who ended up footing the bill? Not mom or pop hedge fund but Uncle Sam. The CDS market ran totally out of control: yes it did provide powerful signals about the housing market but it ran amok and left the taxpayer with a huge bill. The market has only itself to blame for what is happening now.

@ Simpleton

i dont think you will find anyone who is against central clearing, exchange traded products, and far far far more transperency in the CDS market. But the German proposals essentially amount to restricting its usage due to it being ‘part of the problem’, are sadly misguided, and only underscore how little some politicians understand about the markets. This isn’t a reason to buy EZ govt bonds – its a reason to exit the market altogether. At least Sarkozy and Lagarde, no fans of unfettered capitalism, can see the foolishness involved in these proposals.


The trigger of 100% of GDP would capture Greece and Italy as of now but the bill has to go to reconciliation – I don’t think this is the reason for sudden action by the German regulator. It would seem that Angela is short of votes
with the FDP not supporting ‘shock and awe’.

@podubhlain & Joseph – read my comments above. This is about the upper house (Bundesrat) and not the lower house (Bundestag). The FDP have their tails between their legs – they had promised tax cuts, they were told yesterday in the Bundestag that they will get tax increases (they have taken the hint and are going to keep quiet and do whatever they are told).

To get the package across the line Merkel needs the SPD. They were calling for the actions that have now been taken for many weeks if not months. Merkel also promised them that they get their way on a tax on the financial markets. In her speech yesterday she addressed the opposition directly and told them she was willing to make concessions – they now want this in writing!! The political stakes are very high here, if this goes wrong Merkel is in very big trouble.

If there were any other explanation like a potential meltdown of the financial market in Europe they would have taken their time and drafted up something better. They also would have informed the ECB and other EU members but obviously they got bumpod into this. They need the SPD on board fast or the whole 750bn deal falls through.


“This isn’t a reason to buy EZ govt bonds – its a reason to exit the market altogether. ”

Not quite sure I understood what you are saying here. Are you saying that CDS are so important that if they are no longer allowed then nobody will want to buy EZ government bonds?

If that is the case it sounds like the market is made up of spoilt children who’ll refuse to play unless they are given their favourite toys……

Some might be changing from euro to other currencies, it is anyones guess for how long they’ll keep doing so but without the ability to short sell, the amount of euro liquid enough is finite so I’m not quite sure if the market makers can put much more downward pressure on it.

And some might even consider that the pound and the usd might be about to fall a bit, thus leading to lenders with sources of liquidity in the euro zone getting/expecting a restructure/devaluation of their lending….. But maybe the risk of that kind of restructuring is different from the risk of restructuring of Greek debt 🙂

“Question – why shouldn’t i be allowed buy flood insurance on property in New Orleans? Wouldn’t increasing exposure to such an event make the insurance companies lobby either the government or private citizens to increase protections against it?”
It would increase the cost of insurance.

There are, I believe, two elements of cost to insurance – probability and value – the probability of the stuff covered and the total amount covered. If the total amount starts to rise, everyone pays more – the VaR increases even if the probability stays the same.

Besides, we are constantly told that CDS are not insurance, they are contracts. The German state is acting to limit the writable scope of contracts. I can’t enter into a contract with you to pay for the purchase of the National Gallery, as you don’t own it.

@ Jesper

the German govt is both changing the rules of the game as well as trying to control the flows in the game. Market’s hate both uncertainty and intervention, and they’re getting both in spades from the Germans.

The markets will put up with the ECB buying bonds because (a) it will support the market and (b) it will increase the liquidity in the system, so although it affects the ‘true’ market price, it is obviously good for most market participants. The German provisions, however, will TAKE liquidity from the system, both in terms of the bond market as well as the derivative market, and its difficult to see who it could potentially assist on the buy side of the market. These provisions will help only the issuers, in the same way that equity short selling bans ultimately only helped failing banks, and only temporarily in the worst cases.

Thanks. Good explanation on the political front. But could this be a twofold crisis? The Regulator is independent?? Reports today show a mini run on banks (telegraph) ECB window lending up 22% in a week to 103B.

@ YM

“I can’t enter into a contract with you to pay for the purchase of the National Gallery, as you don’t own it.”

huh? i dont get the analogy? CDS contracts dont require you to pay for a bond on my behalf, they only require you to make up the difference upon default. A CDS contract has an asset side (being made whole in the event of default) and a liability side (the premium). If you can construct some contract around paying for the national gallery that had asset and liability, i dont see the problem. For instance, you could pay me for every cent of revenue taken in by the national gallery above a pre-assigned level, and i’d pay you a premium every year. Neither of us would have to own the national gallery to create this contract.


if I understood you correctly this will lead to lenders having to lend instead of storing their funds. I thought that was the whole point, getting lenders to lend to consumers and businesses?

Or is the whole point of the liquidity to have it flow in large amounts between banks, never coming close to businesses and consumers and that would somehow help recovery?

The Greek debt crisis will force a rethink for some German (& French) banks and some German (&French) companies/consumers might find that they’ll have easier access to credit as a result.

@ Jesper

one unintended consequence could be that banks lend to businesses rather than Eurozone governments. But im pretty certain that wasn’t the point of the German decision, and at this point its a highly unknowable outcome. Banks might just as easily decide to keep their cash on deposit, so we’d end up with higher government borrowing costs as well as no increase in liquidity.


you’re right. We don’t know the reasons for why the decision was taken & neither of us can predict the future so we don’t know what the banks will do with their stored liquidity.

My guess is that the banks with excess liquidity either lower their costs of funds (by lowering interest paid) and decrease the amount of funds available to them or they’ll start lending more in their home-markets. The only other alternative is accepting reduced profits.

Lowering interest paid out for the banks will create incentives to spend & maybe additional spending would drive an economic recovery. Increased lending might lead to additional spending and again that could be a driver of economic recovery.

I agree though, if banks are willing go to for reduced profits then there will be no benefits. However, since they are in business to generate profits I find that unlikely.

@ Joseph

well thats what we really need right? We’ve already said that we wont allow any banks to collapse in a disorderly way, so the only way to get rid of the dead wood is via M&A. Part of the reason the European banking sector is still struggling is that the ‘strong’ banks have for the most part sat back and kept their powder dry, while the ‘weak’ banks have stumbled along thanks to government support. I think if you’d said two years ago that there would have been almost zero European banking consolidation by mid 2010, you wouldn’t have had very many people agreeing with you. Everyone assumed 2009 and 2010 would be an M&A lawyers’ paradise.

A bank in trouble due to a bad bond trading desk should be easier to value than a bank in trouble due to poor lending decisions as the losses would be easier to spot when doing due diligence.

I’m guessing that nobody want to buy a bank in trouble due to poor lending decisions and nobody can afford (& might be blocked due to To Big To Fail criteria) to buy banks in trouble due to bad bond trading desks.

Buying a bank now is really only for the brave and the long term rewards could be very nice.
A bank in Ireland without legacy losses of unknown size, without a questionable internal audit team & without questionable risk people should be able to make some very nice profits. However, I’m not so sure there is such a bank 🙁

The German Bundestag comfortably passed the vote on the package – the SPD and Greens abstained and only the far left voted against. It is expected to also pass comfortably in the Bundesrat. You can expect Germany to be pushing for an international agreement on a financial transactions tax which the SPD have been looking for and the CDU did not want – that is the price Merkel has to pay to get this through.

In a TV-debate last night the normally very abrasive chairman of the CDU parliamentary party, Volker Kauder, was having a love-in with the deputy parliamentary party chairman of the SPD – all of a sudden they could agree on everything (I wonder are we in for a return of the Grand Coalition, they certainly did a lot of reminiscing??). The debate also included a manager of a German hedge fund who was trying to explain some basics and who was making some excellent points (including calling Kauder a liar) but got shouted down.

There is plenty of blame to go around but this thread was about speculators.

@Pat Donnelly
The one positive feature of our Irish bubble is the total absence of any Jewish involvement. Hopefully it therefore suffices to refute the conspiracy theories. Your strong points about excessive bank lending, held by many others, are regretably undermined by such references.

Oliver Vandt

Wake up.

You, your children and your grandchildren’s grandchildren are getting.

Remind me again of your outrage at the bailing out of Anglo, AIB and Bank of Ireland.

Was it not that they had lent “money” that they could not and cannot recover?

Was it not that you were angry because you had to pay for their stupidity?

To be fair to the original Oliver Vandt you are a mere sock puppet.

Oliver Vandt

JTC should just print up 5T.

Let the inflation begin.

Try to begin to understand.

Oliver Vandt

JTC should just print up 5T.

Let the inflation begin.

Try to begin to understand ………..

The Currency War.

Can you print faster than Anglo Irish can print credit out of thin air?

Wake up.

Oliver Vandt

Come on Oliver. Come on.

All JCT has to do is print Euros like Bernanke prints Dollars.

Get it?

Why should Bernanke have all the fun?

Get it?

If we have to print money let’s get to it.

If we don’t.

Bernanke Dollars will buy the entire Europe for paper.

Get it?

Currency War.

@Greg – “Bernanke Dollars will buy the entire Europe for paper”

Surely you mean Chinese-owned Dollars will be buying Europe up cheaply?


“Surely you mean Chinese-owned Dollars will be buying Europe up cheaply?”

No I don’t.

The Chinese owned dollars are worthless and they know it.

They learned that from the Federal Reserve.

China and America are one.

That would be Chimerica.

The place where pollution doesn’t happen because you’re watching American Idol.

Two slave states wanting the entire planet to be on global slave state.

This is how China does “business”.

This is where your “goods” come from.

Tell me.

Is there any “good” in it?

“Oliver Vandt Says:

May 22nd, 2010 at 5:06 pm
I’m still outraged and you make some strong points.”

No you’re not.

You killed Oliver Vandt and took his name.

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