Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22
How to Profit from 2022’s Biggest Trend Reversal - 11th Jan 22
Stock Market Sentiment Speaks: Are We Ready To Drop To 4400SPX? - 11th Jan 22
What's the Role of an Affiliate Marketer? - 11th Jan 22
Essential Things To Know Before You Set Up A Limited Liability Company - 11th Jan 22
NVIDIA THE KING OF THE METAVERSE! - 10th Jan 22
Fiscal and Monetary Cliffs Have Arrived - 10th Jan 22
The Meteoric Rise of Investing in Trading Cards - 10th Jan 22
IBM The REAL Quantum Metaverse STOCK! - 9th Jan 22
WARNING Failing NVME2 M2 SSD Drives Can Prevent Systems From Booting - Corsair MP600 - 9th Jan 22
The Fed’s inflated cake and a ‘quant’ of history - 9th Jan 22
NVME M2 SSD FAILURE WARNING Signs - Corsair MP600 1tb Drive - 9th Jan 22
Meadowhall Sheffield Christmas Lights 2021 Shopping - Before the Switch on - 9th Jan 22
How Does Insurance Work In Europe? Find Out Here - 9th Jan 22
MATTERPORT (MTTR) - DIGITIZING THE REAL WORLD - METAVERSE INVESTING 2022 - 7th Jan 22
Effect of Deflation On The Gold Price - 7th Jan 22
Stock Market 2022 Requires Different Strategies For Traders/Investors - 7th Jan 22
Old Man Winter Will Stimulate Natural Gas and Heating Oil Demand - 7th Jan 22
Is The Lazy Stock Market Bull Strategy Worth Considering? - 7th Jan 22
METAVERSE - NEW LIFE FOR SONY AGEING GAMING GIANT? - 6th Jan 2022
What Elliott Waves Show for Asia Pacific Stock and Financial Markets 2022 - 6th Jan 2022
Why You Should Register Your Company - 6th Jan 2022
4 Ways to Invest in Silver for 2022 - 6th Jan 2022
UNITY (U) - Metaverse Stock Analysis Investing for 2022 and Beyond - 5th Jan 2022
Stock Market Staving Off Risk-Off - 5th Jan 2022
Gold and Silver Still Hungover After New Year’s Eve - 5th Jan 2022
S&P 500 In an Uncharted Territory, But Is Sky the Limit? - 5th Jan 2022

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

What Does Germany’s Short Selling Credit-Default-Swap Ban Mean for You?

Stock-Markets / Government Intervention May 20, 2010 - 05:07 AM GMT

By: Money_Morning

Stock-Markets

Best Financial Markets Analysis ArticleKeith Fitz-Gerald writes: Germany did something on Tuesday that I've been hoping would happen for three years: It outlawed naked short-selling and speculation on European government bonds with naked credit default swaps.

The financial institutions that have been profiting from this type of speculation immediately went on the offensive.


German officials justified the surprise, unilateral move by financial regulator BaFin by stating that the "exceptional volatility" in government debt - if accompanied by massive short-selling and naked CDS trading - could result in excessive price movements that would actually "endanger the stability of the entire financial system."

Wall Street Responds
To hear Wall Street's reaction, you'd think that Germany was hiding something "that the market's not aware of," said Michael O'Rourke, managing director and chief market strategist at BTIG LLC, an institutional trade services provider, told speaking to Bloomberg News.

And Mark Grant, managing director of Southwest Securities, said Germany's actions make it clear the European stalwart is engaged in an "obvious attempt to control financial market across the globe."

Wall Street may not approve, but I certainly do.

I'm only sorry that our own feckless leaders didn't make the tough decision to take the same actions several years ago when they had the chance to fix this mess - instead of taking the easy way out with trillions in bailouts that we can't possibly pay back.

What the public doesn't understand about naked credit default swaps is that they are not the effective insurance policies Wall Street has everybody believing them to be.

Simply put, buying a naked credit default swap is like taking out fire insurance on your neighbor's house. Now you have an incentive to burn it down so that you can get paid off, which is precisely what global investment bankers have been doing - generating billions of dollars in profits and costing taxpayers similar amounts in the process.

The Self-Fulfilling Prophecy
The key to this whole mess lays in something called an "insurable interest." In the old days, you had to actually own the underlying assets to obtain insurance, because having an ownership stake meant that you had property that required protection.

But the "naked" credit default swaps that are causing such big problems right now are an entirely different animal. They're an " insurance poli cies" ty written on assets where there is no ownership interest.

Thanks to this financial voodoo, Instead, financial firms all over the world are being allowed to bet on the probabilities of an event occurring - the failure of a financial institution or an entire country, for instance. The trouble is that by placing these bets, they have a vested interest in seeing, these bettors then have a vested interest in seeing that event come true.

They also have the financial firepower to accelerate the process, which is precisely what appears to have happened with insurance giant American International Group Inc. (NYSE: AIG), Lehman Brothers Holdings Inc. (OTC: LEHMQ), and a whole host of other institutions around the world.

And today's investment-banking giants have the financial firepower - as well as the know-how - to make that possibility become reality, reaping the payoff as a result.

This is precisely what happened with U.S. insurance giant American International Group Inc. (AIG).

That's why Germany has taken these actions. Today's naked credit default swaps market is played by relatively few participants, accounts for trillions of dollars and has the potential to nuke the global financial system - which is why investing icon Warren Buffett so astutely described derivatives such as credit-default swaps as "financial time bombs."

While I believe there is a role for these and other types of derivatives, that role clearly isn't being fulfilled as they are being used right now.

The Vested Interests
Needless to say, the financial heavyweights that have been profiting from this global gambit aren't happy about Germany's decision because they are like a bunch of party happy people who see a 24-karat punch bowl filled with their favorite libation being whisked away while the party's still rocking.

But that's not the worst part.

Financial giants like Goldman Sachs Group Inc. (NYSE: GS), JPMorgan Chase & Co. (NYSE: JPM) and dozens of the most powerful financial-trading firms in history aren't above tanking the markets so long as they can rake in billions in profits from these financial instruments.

It doesn't matter which direction the markets are headed (although, as we've seen, it's even better when they can influence that direction) - These firms profit as long as there's "action" in the markets. And that "action" can be described with one word: Volatility.

Germany's push to add some regulatory muscle is designed to calm the markets, and decrease that volatility. Based on the way the investment-banking brethren are already reacting, I think it's pretty clear that Germany's finally struck a nerve.

Personally, I think Germany should take things a step further and require that any foreign firm doing business in Germany, or with German institutions, should comply with German rules worldwide. New York State already does this with insurance companies so this is not without precedent.

The way today's global financial firms operate - and the financial instruments they employ - are so complex that there's no single agency anywhere on earth that can police their actions. That's why I've pushed for unified global action since the global financial crisis began.

And by "unified global action," I'm not talking about bailouts, either.

Those have been a complete waste of time from Day One, and have done nothing to address the fundamental issue: Wall Street - and the financial instruments that it has engineered - are out of control and answerable to no one.

And Wall Street firms know this, which is why they are reacting so vehemently to Germany's regulatory riposte. These rules could strip away a lucrative revenue stream, so you can rest assured they and their lobbyists will do everything they can to nip this in the bud. look for a way parry this unilateral thrust.

So far it appears to be working if for no other reason than Germany stands alone. And that's just it: Because it is a unilateral thrust, with Germany standing alone on the matter, it appears that Wall Street is retaining the upper hand. At least for now.

If you're not of the same opinion, ask yourself why Wall Street lobbied so strongly leading up to the Commodity Modernization Act of 2000, in which derivatives and swaps like the ones in question were made exempt from official financial reporting. The latest estimates of the total value of credit default swaps written worldwide range from $30 trillion to $75 trillion - or more. In the world of estimates, that's quite a disparity. And the reality is that nobody really knows, because the swaps market is completely unregulated and reporting requirements are largely voluntary.

Wall Street likes it that way: After all, you can't regulate what you can't see.

Then ask yourself why LIBOR (the London Interbank Offered Rate) and credit default prices have skyrocketed since Germany's announcement. overnight. The LIBOR rate is supposed to represent the lowest possible interest rates banks charge to each other because, theoretically, they are each other's best customers. If the banks were clean and not dealing in these things, rates should be falling, especially with the announcement of the $930 billion (nearly 1.0 trillion euros) European bailout package now on the table.

However, the reality that rates spiked signals that the banks increasingly don't trust one another - perhaps because the all have financial skeletons in their closets.

It appears that Germany is the first to really see the light on this issue and that it's going to take other key economies awhile to do so. Denial can be a powerful emotion, particularly when elections are just around the corner, as they are in the United States.

And that means we're going to see credit default swaps shift to other markets in the days ahead because the political will to implement a concerted and coordinated global response simply doesn't exist. isn't there.

Moves to Make Now
The bottom line is that we need to do one of two things worldwide:

•Either outlaw these financial instruments entirely.
•Or require them to be brought into the light of day - and onto regulated exchanges - in a very short period of time.
Expect Wall Street to do what it has always done: Pull out all the stops - and pull in all the lawyers and lobbyists - to avoid a regulatory renewal that would take away the party punchbowl and the dry up their profits.

Granted, A a s individual investors, we have limited influence on that outcome (although I encourage you to write to your representatives, and let them know how you feel ... print out this commentary and send it along with your letter or e-mail).

But we can absolutely take steps to But there are moves we can make to protect ourselves - and even profit - from the situation at hand. likely outcome.

So no matter what your investing style or preference and whether you agree with me or not:

1.Cover your assets: Make sure that you have protective "stops" in place or have deployed options that help hedge your risk; once the stuff hits the fan, it will not be evenly distributed and you're not going to get a second chance.
2.Take out insurance of your own: Purchase your own credit default swaps in the form of such "inverse" funds as the Rydex Inverse S&P 500 Strategy Fund (RYURX) or the Rydex Inverse Government Long Bond Strategy Fund (RYJUX), which profit when markets go haywire; these will provide important stabilizing influences on your portfolio that allow you to stay in the game even as others watch their financial futures get vaporized.
3.Create a shopping list: Get your "Buy list" ready; if we get even half the storm I think is possible based on how the markets reacted yesterday (Wednesday) to Germany's CDS ban yesterday, the massive declines waiting in the wings could create some truly legendary buying opportunities.

[Editor's Note: Money Morning's Keith Fitz-Gerald is still perfect.

With his latest trade, Fitz-Gerald is a perfect 23 for 23 with his Geiger Index advisory service. A veteran trader, skilled analyst and noted market tactician, Fitz-Gerald is able to see through the confusing haze of today's quickly changing markets, which enables him to visualize and understand what the future holds. This ability to see into the future -predicting looming changes while also divining the profit opportunities those changes will create - is one of Fitz-Gerald's greatest strengths.

That's a big reason that Fitz-Gerald - Money Morning's chief investment strategist and the editor of the New China Trader advisory service - has maintained a perfect record with the Geiger Index.

If you would like more information about the Geiger Index, please click here.]

Source : http://moneymorning.com/2010/05/20/germanys-credit-default-swap-ban/

Money Morning/The Money Map Report

©2010 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in