Germany Bans Naked Short-Selling

James Bianco looks at the German action on Naked Shorting . . .

  • The London Stock Exchange – Germany announces short-selling ban-Finance Ministry
    Germany will ban naked short-selling from midnight in shares of the country’s 10 most important financial institutions, a spokesman for the Finance Ministry said on Tuesday. The spokesman said the ban on naked short-selling will also apply to credit default swaps (CDS) on euro government bonds as well as euro government bonds…The Finance Ministry did not specify the names of the 10 institutions covered by the ban on naked short selling…Tim Ghriskey, chief investment officer of Solaris Asset Management in New York, said he had doubts about the effectiveness of the German move…”The only problem is investors can go elsewhere to short sell, they can go anywhere, so unless it becomes a global restriction it’s really without teeth as far as we can tell,” he said. “I guess it makes a little bit more difficult but where there’s a will there’s a way.”…Robert Savage, chief executive officer of, added: “This is not a desperate measure. It’s just another tool European policymakers are making use off trying to contain this crisis. The perception that naked-short selling is a destabilising force is not new in Europe but lately those concerns have been compounded by fears that their banks are being attacked and they are moving trying to protect bank’s share prices.”
  • The Telegraph (UK) – Market chaos warning after German ban on shorting
    The unprecedented step saw the euro sink to a four-year low after Germany said that from midnight shorting of credit default swaps of any European government would be banned. The prohibition is an attempt to counter speculators that Berlin believes are trying to destabilise the region’s sovereign bond market. Traders greeted the move by BaFin, the German regulator, with a mixture of anger and astonishment. One bond trader said he expected Wednesday’s trading session to be one of the most volatile in living memory: “It will be complete chaos, I really don’t know what the Germans think they are doing.”…”Without the two-way flow the German market is likely to become utterly dysfunctional,” said one London-based bond trader. “Nobody ever thought they’d do this in a million years and it raises the long-term question of who is now going to want to buy their debt.”…Analysts at Bank of America Merrill Lynch summed up the mood with a note titled What’s Germany going to ban next? Rainy days, harsh words, the Macarena?
  • The Wall Street Journal – German Short-Selling Ban Won’t Cover U.K.
    The U.K. Financial Services Authority said Wednesday Germany’s ban on naked short-selling of certain euro-zone-debt, credit default swaps and some financial stocks doesn’t cover the branches of German companies in the U.K. The U.K. regulator also said it will assist BaFin, the German regulator which has implemented the ban, in whatever way it can. An FSA spokeswoman declined to comment whether a similar ban is possible in the U.K. “We note what Germany has implemented and will assist Bafin wherever appropriate,” the FSA said in the statement. “The scope of these bans relate to German participants or business taking place inside Germany and does not cover branches of German institutions outside of Germany.” Germany’s ban will remain in place until March 31, 2011.
  • The Wall Street Journal – German Short-Selling Ban May Backfire
    We’ve been here before—and the parallels are hardly reassuring. Germany’s decision to ban naked short-selling of euro-area government bonds, sovereign credit default swaps and 10 German financial stocks until March 2011 is a desperate move that comes too late to prevent a deepening of the euro-zone crisis—and may make it worse. Last week’s euro-zone rescue package, consisting of €750 billion ($915.75 billion) of potential funding and the European Central Bank’s decision to start buying government bonds, had started to restore some semblance of order to the market. Bond yields had stabilized and any weakness in the currency and equity markets reflected concerns over future growth more than immediate worries over solvency. But Germany’s action, which may be difficult to enforce, risks blowing a hole in fragile investor confidence. First, the decision repeats the mistake of the 2008 ban on shorting bank stocks, which was imposed long after the selling pressure had switched from speculators to long-only investors looking to hedge or exit positions due to valid concerns over solvency…Second, this seriously muddies the waters for the ECB…Third, investors will find ways round the bans to express their bearish views.
  • The Financial Times – Backlash builds against German ban
    The French government on Wednesday led European reaction against the German government’s move to ban the ‘naked’ short selling of eurozone sovereign debt instruments. Christine Lagarde, French finance minister, ruled out a similar move by France and called for an urgent meeting of European securities regulators to discuss the implications of Germany’s unilateral ban. Sweden and Holland also ruled out action against short selling as European markets tumbled and the euro hit a fresh four-year low against the dollar following the German announcement.
  • Zero Hedge (Blog) – The Definitive Incomplete Analysis Of Today’s German Shock And Awe
    The market’s immediate response to the ban announcement was to sell the Euro. Such a response makes sense as when faced with the inability to manage risk in debt, stock or CDS markets, participants sell what they can. And that means the Euro. But by having inadvertently further undermined the Euro, today’s actions increase the risk of failure in the entirety of the liquidity support program as the Achilles heal of the European intervention is its potential to undermine the currency. Unlike the US policy response, massive liquidity support from the ECB can create the perception (if not the reality) of a debt monetization scheme. While the US explicitly monetized the debt, it benefited from a flight to quality and worlds reserve currency status, neither of which the Euro enjoys. A precipitous decline in the Euro remains the risk to the outlook, and on display today as the Euro declines led the selloff in broad risk markets. – Jeffrey Rosenberg
  • FT Alphaville – Was naked shorting of German financials really an issue?
    We know it’s hard to assess the scale of naked shorting in any particular security. However, it does make sense to look to the scale of conventional ‘borrowed-stock’ shorting activity for an indication. Data Explorers — which tracks short positions in the market — has looked into the matter and provided FT Alphaville with the following chart on Wednesday. It shows the percentage of shares outstanding in the specific names affected by the ban — click to enlarge:

<Click on chart for larger image>


Does this story sound familiar?  With stress in the financial system rising, the government bans short-selling.  While the U.S. tried this experiment in 2008, Germany now figures it is worth revisiting.

While naked short-selling has always been illegal in the U.S., short-selling of all types was banned in the U.S. from September 19, 2008 to October 8, 2008 on select financial stocks. As the chart below shows, those restricted stocks dropped 26.3% in value during the U.S. short-selling ban.  During the same period, the S&P 500 dropped 21.42%.

If the U.S. government was unable to force the market higher with a ban on short-selling, should the European markets really expect a different result?

<Click on chart for larger image>

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