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The financial stocks and the overall market continued to get pounded by news out of Europe. This time it was Germany halting naked short selling. Chancellor Merkel's coalition wants to stop traders from buying credit insurance on government bonds they don't own ("naked swaps"). 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.
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Reader Comments (Page 1 of 1)
5-19-2010 @ 7:48PM
ayoung1230 said...
Too many so-called regulators and perhaps politicians go to too many highly corrupted parties with Wall Street and multi-nationals for:
1) Money
2) Drugs
and possibly
3) Sex
To save our dear country, we need to fire, fine, long term jail them and strip off all their life time benefits like those in Singapore.
Have less regulators and politicians and pay them better to serve the American people and they do not dare to be corrupted the way they have been being. Being in these positions by no mean is a ticket to corruption for many.
5-19-2010 @ 7:28PM
Mike Sanders said...
You may be right... "Golden Parachute" removal might improve the Herd. Better ethics and performance. Stop vilifying companies (fools) and go after the individuals!
Excessive bonuses were always a "big secret," when I worked at GM/EDS (now, HP/EDS). The hourly worker might reap a $75 Cross pen set, but the managers often received $5000 (or more), even at the local level.
I'd like to see EDS hourly workers become part of a union, like CWA (Communications Workers of America). This might offer workers a measure of protection. If it works for AT&T, it must be the right choice.
5-19-2010 @ 10:09PM
william lindblad said...
Pardon my language, but naked shorts are bad shit.
If you don't like it, please censor.
As I can't think of a better word definition I leave of this up to you,
This practice is one of the reasons that we still have a real estate market in a precarious position and I could go on and on, but the gist of it all is it that finance has simply put itself on an equal plane with betting at the track. Betting on "show" when near sure of "win" is an old practice of "hedging". This is OK at the ponies, but doing this in the high finance markets is insanity based on greed.
I agree with the krauts, and if we had any brains, we would follow suit. Besides, I am part German and don't object to slurs, my own or otherwise.
5-22-2010 @ 2:09AM
SiriusNews said...
Here is the new video I just made on youTube. It will be 5 minutes you need to spend to get educated on what has taken place on Wall Street the past 3 years.
Please watch this video and if you can reply back to me on your thought.
The video came out today May 21st, 2010
http://www.youtube.com/watch?v=HGAXCmg-_Vc
Richard Keane, narrator
6-01-2010 @ 11:28AM
SiriusNews said...
What about this youtube video that just came out linking Goldman Sachs to a Russian Computer programmer math whiz who worked for Goldman Sachs and was arrested by the FBI after he downloaded over 1000 secret codes and files to a German Web Site. He was arrested July 3rd, 2009. What did Germany know about these secrets sent to that German Web Site. Is that why Germany banned naked short selling May 18th, 2010.
A must see video about Wall Street Dirty secrets out on youTube. here is the video clip link.
http://www.youtube.com/watch?v=tNiTANt8m4Y
please review it and sent all over internet.
Richard
www.SiriusNews.com