While there has been little support for this measure outside of Germany by governments or financial institutions, I think it is long over due. Many are crying foul, stating that it will increase interest rates, dry up liquidity, and prevent institutions from hedging their risks. I'm not so sure these would be bad things. I can think of good reasons to ban naked swaps.
I do not take this stance without due consideration because I have significant stakes in the financial sector, including positions in Bank of America Corporation (BAC), Citigroup, Inc. (C), E-Trade Financial Corporation (ETFC), General Electric Company (GE), Goldman Sachs Group, Inc. (GS) and Wells Fargo & Company (WFC).
Generally speaking, interest rates are being held artificially low and should rise as soon as the global economy begins to stabilize. The abnormally low rates contributed to over heating the housing market, which blew up in all our faces. In addition, if rates are low than perhaps we are also miscalculating or inappropriately valuing risk, as all the ratings agencies did.
If there is less liquidity in the market place because of this change then perhaps the liquidity is not real in the first place, just like home equity lines based on inflated housing added phantom dollars to the economy.
As far as hedging against certain risk, the naked swaps or short selling of something that does not exist, allows for a kind of risk inflation (my own term) and added market leverage that has proven to be more risky for the masses even if it removes marginal risk for a few. If you are not allowed to take out a life insurance policy on a person you have no relationship with, why should you be able to basically do it for a financial instrument?
It is natural for the investment banks and Wall Street traders to want to place large bets on risky propositions if they have the potential to make piles of money when they work, and leave the taxpayer holding the bag when they don't. The decision makers and risk takers need to have skin in the game or stay on the sidelines.
The Germans in this case are trying to lead the charge into a more responsible and sane investment world.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture and planning firm. He writes the columns Chasing Value and Serious Money.