It was another chaotic day on Wall St yesterday as stocks tumbled once again as concerns around the debt crisis in Europe continued to worsen.
The big news of the day was when Germany rocked the markets by announcing a ban on naked shorti selling of CDS swaps:
BERLIN, May 18 (Reuters) – Germany plans to ban naked short-selling on stocks and euro government bonds, German all-news network N-TV reported on Tuesday.
German coalition sources told Reuters earlier that Finance Minister Wolfgang Schaeuble plans to ban short-selling from midnight.
Economy Minister Rainer Bruederele told Reuters that it was possible the short-selling ban would be quickly enacted.
No other details were immediately available.
Quick Take:
Germany basically just pulled the rug out from underneath the banks with this shocker. Essentially, what the big banks were doing was shorting the Sovereign debt of countries like Greece via CDS swaps.
The problem with these swaps is the lack of transparency.
Naked short selling via a CDS swap essentially turns the equity markets into a version of the “Wild Wild West” because you can basically short a country’s Sovereign debt via these swaps without providing any liquidity in return like you would shorting a stock on the NYSE.
There is no real liquidity in these CDS swap short positions because you don’t provide any transparent collateral against the short position that you are taking in case you are wrong.
What makes short selling different in the stock market is you need to borrow the shares that you want to short in order to take a position against them. This provides liquidity to the market. Without providing any real liquidity you put the system at risk.
Just take a look at the 1000 point drop two weeks ago if you want to see an example of illiquid markets.
The CDS game needs to be done transparently or it needs to be eliminated. Without transparency it’s a blatant form of FRAUD. The scariest part of this derivatives system is the sheer size of the market: It’s in the hundreds of trillions of dollars!
These CDS short positions on Sovereign debt are making Europe’s problems much worse. They have forced the credit spreads of countries like Greece to soar which puts them at severe risk of default because their borrowing costs rise to the point where the government cannot afford to service the debt.
If this type of ganster “pile on” style investing is allowed to continue it poses a serious threat to the global economic system. We saw the damage these instruments can do during our own meltdown in 2008.
The Bottom Line
I applaud Germany and Europe for taking a stand against the banksters. This CDS ban goes into effect at midnight. The euro is selling off hard after the announcement. It will be interesting to see how the market digests this.
This move smells of panic which is why the reaction has been so negative early on IMO. I think the market is thinking that this change puts the banks in a world of hurt because they use these markets to hedge positions, and they are also a very profitable part of their business.
However, in the long run, this was the right thing to do because it goes a long way towards cleaning up the fraudulent financial system.
It also could potentially take a lot of pressure off of the PIIGS in the long run. In the short run this could get ugly because the market will interpret this short banning move as being desperate.
The bottom line of all of these games is clear: The bankers need to be stopped, and the derivative game needs to be regulated before they blow us all to high heaven.
The bullish trend of the market appears to be toast at this juncture. The bulls keep trying to pretend Europe and its problems will just “go away” and try and to take this market higher and they are starting to learn a painful lessson:
Time after time in the past few weeks the bulls are getting repeatedly buried as the “buy the dips” theory rapidly becomes an unprofitable one.
Once Wall St begins to understand the threat that the European debt crisis poses to worldwide economic growth could really force the market to unwind.
The Sovereign debt contagion is much more of a risk to the financial system than the subprime debt crisis ever was IMO.
Now that Germany has pulled the trigger at a time when we are considering more regulations over here in the USA we have created a new risk:
Banking regulation! This will now become another worry for the markets and we all know how much the market hates uncertianty.
Unfortunately, I have many more fears other than just uncertianty:
If we refuse to follow in Germany’s footsteps and stop the naked shorting of CDS then who is to say the bankers won’t come over here and do the same thing to us here in the USA or Japan?
It’s pretty obvious that Wall St doesn’t care who they destroy if they can make a buck. They have already fleeced the taxpayers once with their games in 2008. I see no reason why they wouldn’t fleece us again. The serious question is who becomes the next target?
Can you imagine what would happen to Treasuries if the bankers and their financial weapons of mass destruction decide to target us next?
Be careful out there folks. This minefield is becoming increasingly dangerous. Enter at your own risk.
Disclosure: Sold 50% of my TBT position looking for better entry points as a result of the European debt crisis.
Similar Posts:
- U.S. Senate Tries to Follow Germany’s Lead on Naked CDS, But Falls Short
- CDS Show Real Stress Across European Banks
- The Fed Reopens Dollar Swap Lines to Avert Disaster on US Markets
- AIG: The Main CDS Insurer for Greek Government Debt?
- German Stupidity, The Volcker Rule and the Carry Trade Unwind
