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Germany: Right and wrong on naked shorts

Robert Peston | 09:20 UK time, Thursday, 20 May 2010

Those who criticise the German government for trying to restrict the use of naked shorts and credit default swaps (CDS) are - on the whole - concerned about the when and the how, rather than the whether.

Or to put it another way, there are strong arguments for restricting the use of credit default swaps, or insurance policies for loans, in that their use exploded well beyond what could seen as sensible protection against loans going bad.

At their peak a couple of years ago, there were $60 trillion of extant credit default swaps, insuring loans with a value of around $6tn. This was the equivalent of taking out 10 buildings insurance policies on a single house, or 10 life policies on one individual.

The point is that $6tn of credit default swaps would have provided appropriate cover for the risk that the loans might go bad.

And just as you might feel a bit anxious if your neighbours took out nine insurance policies that would enrich them in the event that your house burns down or you pop your clogs, it is reasonable to fear that the other $54tn of CDS contracts were not all taken out with the purest of motives.

As I've pointed out before, many of these CDS contracts were a way of speculating in the fortunes of a business or a government, without the regulatory hassle of trading on a transparent, well-scrutinised, regulated exchange.

If a hedge fund or speculator thought that a company, government or specially created investment product, such as a collateralised debt obligation, were going to the dogs, a CDS was (and is) a way of making a killing from their respective woes.

And, perhaps best of all, that killing could be made well away from the prying eyes of media or regulators: it was the last frontier of a financial wild west.

None of which would have mattered all that much if - to coin a phrase - the cowboys in this financial Wild West had only hurt their own.

The problem is that many of the world's biggest financial institutions, giant insurers such as AIG and assorted banks, couldn't resist the gold rush - but found themselves on the wrong side of these CDS deals.

So when the speculators made profits, the insurers and banks made enormous losses. And the tab for these losses was eventually picked up by taxpayers, because (as you'll be tired of hearing by now) the damage to all our prospects would have been unbearable if we'd allowed these cornerstones of the economy to crumble.

All of which is a meandering explanation for why there is a powerful argument for reforming the CDS market.

As you'll deduce, there is a strong case for banning naked CDSes, or the use of credit default swaps by those who don't actually own any of the relevant debt being insured.

There are also good reasons for forcing all CDS trades through transparent, regulated exchanges and clearing houses, to provide some kind of verification that they're not being used for insider trading, and to ensure that counterparties to deals put up appropriate "margin" or cash when prices swing as proof that they have the wherewithal to honour the contracts.

Here's the thing however.

It's quite possible to be the world's harshest critic of the explosive growth of credit default swaps and still take the view that the German government took leave of its senses on Tuesday night when it imposed a unilateral ban on their use in respect of the debt of eurozone governments.

How so?

Well, in the world as it is - as opposed to the world as we might like it to be - the financial institutions who use credit default swaps provide vital loans to eurozone governments and businesses.

And if they're told that, at a stroke, they can't use those credit default swaps, well then investment climate for them in the eurozone is perceived to become harsher - and it becomes rational for them to seek to put their cash elsewhere.

Christine LegardeThe French finance minister, Christine Lagarde, has grasped the risk: she said yesterday that she was concerned that the German prohibition, if followed by other governments, would reduce liquidity in the eurozone government bond market - which, in theory, means that the price of those bonds would fall and would push up the cost of funds for eurozone governments.

There's a time and a place for radical reform of financial markets. The place is probably the world as a whole, and not just one part of it - because unilateral national initiatives may either be ineffectual or may create dangerous distortions in the allocation of capital around the world.

And the time is probably when there's evidence that fiscal deficits in Europe are on a pronounced downward trend and economic recovery is entrenched.

The worst time to alienate investors and banks by restricting how they invest is when they are anxious about the strains within the eurozone and can simply shift their money to other places where they feel more welcome.

Comments

  • Comment number 1.

    Robert Peston wrote: The point is that $6tn of credit default swaps would have provided appropriate cover for the risk that the loans might go bad.
    -------------------

    Uha! Any possible dates for this party? Dress code etc?


    Robert Peston wrote: There's a time and a place for radical reform of financial markets.
    -----------------

    Yes, scrap it up COMPLETELY!

  • Comment number 2.

    There seem to be some activities in finance that show little use or any advantage to the public good (short selling, spread betting etc).
    Worse than that they can actually DE-STABLISE the markets.
    Do we need any more instability?
    The current capitalist system was devised decades ago, before computerised trading, automatic trades etc were ever dreamed of.
    Perhaps a serious re-think about the rules is required....a panel of enquiry....headed, of course, by Angela Merkel.

  • Comment number 3.

    The place is the world - agree - that is what G20 and other economic get togethers should be there to achieve.

    The time - I disagree - right from the start of this I have been advocating short sharp shock treatment - something needs to happen to allow the world to rebase/retrench and put the financial world in order.

    The opposite has happened with govts throwing more and more money into the hole to keep everything propped up where it is - of course it is ridiculous for me to think that my view is the right one and govts around the world are all wrong isn't it?

  • Comment number 4.

    Good spot Robert, the volume of CDS far outweighs anything necessary to actually cover the risk... so aren't the Germans correct in their assumption that the CDS market is largely made up of speculators?

    I find the corollary to be Goldman Sachs and their desperate drive to buy up more and more dodgy mortgages in order to repackage them as "Grade Aaa" CDOs due to the demand for the product (or the demand of shorting the product) by..... yep, you guessed it, speculators.

    This goes back to my point of yesterday which is that the financial markets are now mostly made up of speculators, not investors. As we know, speculators buy up shares in "a company for whose purpose will eventually become apparent". The house of cards has collapsed, again. Time to clean the house. Make offshore come onshore to do business and do away with the laissez-faire and deregulation that has caused this bl@@dy mess.

  • Comment number 5.

    Merkel's wrath is operating against two targets : feckless eurozone countries ( a eurozone reduced to a safer hard core could result) and market behaviour which, in her view, is excacerbating the problem. Unilateral action belies a frustration that the G20 and EU are not delivering market regulation quick enough. She's right. Roubini is right that the cash flow risks of the market's ( lets say Wall St and the City) fecklessness were transsferred to sovereign balance sheets and now the market is being seen to make the sovereign risk worse. This is going to stoke up one hell of a reckoning between political class and markets. Only when the US government's sovereign debt is stressed will we see the shift start to happen. That's life, Angela!



  • Comment number 6.

    'The worst time to alienate investors and banks by restricting how they invest is when they are anxious about the strains within the eurozone and can simply shift their money to other places where they feel more welcome'
    ____________________________________________________________

    Robert, many have said it before and I will say it again.

    I will give them a lift free of charge to wherever they want to go

  • Comment number 7.

    Also, following the blog for the last few days, I would expect a few people to change their tune when the speculators grow tired of betting against the Euro and turn their attention to Sterling... who remembers Black Wednesday and George Soros, the "investor"? At that point expect the UK to implement the same type of ban....

    Here we go again...

  • Comment number 8.

    Is this really about ‘credit default swaps’ or is it about real money.

    Thus far:
    American Congress voted 94 : 0 against the IMF bailing out countries with a debt in excess of 100% of GDP.
    Greece has a debt of 130% of GDP
    If the IMF don’t contribute to the bailout, there may not be one.
    German and French banks hold a lot of Greek debt.
    Europeans are withdrawing money from their bank accounts and buying gold.

    So what’s next:
    The ECB may need to print a shed load of money to buy Club Med debt, thereby devaluing the currency. In which case, you may as well throw the Maastricht Treaty out of the window.
    Or
    There is the possibility that some countries may go bust and take quite a few banks with them.

    Have the Germans come to the conclusion there is likely to be no bailout and they need to protect their own banking system?

    Is it going to be one for all and all for one, or is it not?

  • Comment number 9.

    The Germans clearly know there is something coming down the line and this move has simply been put in place to protect German banks. That's why France etc. are not happy about not being consulted. 'First mover' advantage??

  • Comment number 10.

    Go Germans...there I said it. Yes there may just be a liquidity problem but it sounds like a standard piece of squealing by the money men. If they want to take their money somewhere else I'm sure that they can find zero-risk debtors out there somewhere...somewhere???

    The issue it seems is that, just as in 2008, the financial geniuses have come up with a way of apparently making money with near zero-risk. Investment used to be question of making a judgement around a particular stock or fund or currency etc. The investor could manage risk by hedging their portfolio with different types of investment but the risk remained nonetheless. That in a sense was what justified the reward. Then enter the CDOs, the CDS's etc which mathematically erase the risk being faced, turning the process of making money on the markets into a one-way bet...until it went wrong!

    Then the cold wind blew and it seemed the formulae didn't work after all. Money is lost...the squealing mounts to crescendo and the taxpayer rides to the rescue. The bold boys in the City then take the taxpayers money and buy government bonds to make money and bonuses with virtually no risk while the real economy outside burns.

    There is no moral hazard limiting the activities of these people (let alone any morality!). Let's follow the German lead and help reintroduce proper risk into the market place. Let's make these self-aggrandising Master of the Universe sweat for their money. Let's see how clever they really are! Those that succeed can collect the prize. Those that fail can lose their jobs like in the old days...after all where's the complaint? It's just market forces at work! It's nothing personal...it's just business!

  • Comment number 11.

    #8. Dempster wrote:
    "American Congress voted 94 : 0 against the IMF bailing out countries with a debt in excess of 100% of GDP."

    The bill proposal still needs to go through two legislative branches and be approved by the President (who can always veto it, if he so desires) Furthermore if the US doesn't pay they'll lose a percentage of their votes in the IMF.

  • Comment number 12.

    These people know nothing.

    Why take liquidity out of the market?

    As usual, we the people will suffer from very highly paid incompetents, who are just in charge. This is the disease of society.

    Sickening.

  • Comment number 13.

    When are countries going to stop putting their economic prospects in the hands of fast-buck merchants speculating in these glorified bookmakers called "the markets" ? Caledonian Comment

  • Comment number 14.

    8 Dempster

    "Is it going to be one for all and all for one, or is it not?"

    Being old enough to have watched the Black Wednesday debacle unfold I recall the degree of solidarity among European nations. Sterling could not be kept within its 3% band and our fellow EMU countries pulled the plug on supporting the situation. Billions were lost. Billions that could have been spent on schools and hospitals were transferred into the pockets of men who are just thieves in suits. In fact it was probably one of the best things that happened to the UK in terms of keeping us at arms length from the Euro but that's a different thing.

    To continue the story. When the Franc came under pressure a few weeks later there was brief resistance (how very French) then suddenly it was announced that the prevent further attack by speculators the 3% bands could become 30% bands. This ended the speculative assault at a stroke but left a very nasty taste in the mouth of us Brits who had been burned by the same speculators and left to hang in the wind by our "fellow Europeans"

    Much of my own scepticism dates from those events and I am very clear in my mind that we should do precisely nothing. It will be every man for himself and I suspect that Angela Merkel has already realised that!

  • Comment number 15.

    I think that the Germans know very well the difference between naked shorts and CDS etc

    the point is that the existing problems with these transactions are STILL WORKING THEIR WAY THROUGH THE GLOBAL FINANCIAL SYSTEMS

    the banks and hedge funds are still covering up what they are doing, their is little if any transparency and even if some of these transactions are not a systemmic or major risk ... are the transactions legal, have the correct taxes been paid ... how much of this transaction money is mis-reported in national GDP figures etc

    The Germans know this is a problem that it is at the nub of everything that is wrong with porky piggy parasite banking and finance operations and are simply sending a message out - that they are not happy with current arrangements.

    This is what Gordon Brown proposed to get sorted 'internationally' as he and his government did not have a clue how to do this or, indeed, the slightest intention of taking on the massive vested interests involved here.

    The Germans know that sorting out the speculative damage currency and other piggies will take many years to sort out and they're determined to come out on the right side of the argument when the sovereign defaults arrive.

  • Comment number 16.

    The German inspired proposed regulations have shown more a panic reaction than serious a serious attempt at sorting out the problem.
    They meant well.
    Robert is right that the time to introduce regulation (which is needed as others here have said) is when the markets are strong. But you wouldn't want to kill the goose at that stage!
    The authorities now have two problems:
    1 It won't take long for the financial institutions to produce new products to side step the regulations.
    2 The US perception is that these regulations restrict them trading into Europe and may encourage them to introduce protectionist measures.

    The present perception is that the US economy is doing better than expected so it may once again lead the West out of recession. As the UK is linked more closely to the US than Europe we may be ahead of them in the recovery and the negative comments about sterling may be overdone. Sorry to introduce such a positive comment.

  • Comment number 17.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 18.

    "And if they're told that, at a stroke, they can't use those credit default swaps, well then investment climate for them in the eurozone is perceived to become harsher - and it becomes rational for them to seek to put their cash elsewhere."

    But surely investors who actually wish to buy eurozone bonds would still be allowed to use CDSs to hedge the risk of their investment as these CDS's would not be naked. There's no additional risk to their investment. So what's the problem? Perception of markets, or markets trying to blackmail governments?

    There is no moral or economic justification for allowing people to insure things they don't own. Make it a criminal offence.

  • Comment number 19.

    Surely the answer is to ensure that those granting the CDS have the where with all to perform. This is no more than proper financial regulation. The fact that issuers in the past failed to maintain adequate financial reserves and that regulators failed to understand the problem and address it is not good cause to ban it.

  • Comment number 20.

    And the way the city works is that everytime these deals happen someone takes in a quarter of a percent. Just for shuffling a deal. Reform is a necessity that the UK cant risk not doing

  • Comment number 21.

    11. At 10:53am on 20 May 2010, I am not a number wrote:
    #8. Dempster wrote:
    "American Congress voted 94 : 0 against the IMF bailing out countries with a debt in excess of 100% of GDP."

    'The bill proposal still needs to go through two legislative branches and be approved by the President (who can always veto it, if he so desires) Furthermore if the US doesn't pay they'll lose a percentage of their votes in the IMF'


    Agreed, but can you really see President Obama going against a 94:0 congress vote, particularly given that America is heavily in debt.
    I know nothing is certain, but politically it's a bit unpalatable, I would have thought, and at the very least, it puts a question mark over the IMF part of the Euro bailout.


  • Comment number 22.

    > And the time is probably when there's evidence that fiscal
    > deficits in Europe are on a pronounced downward trend and
    > economic recovery is entrenched.

    I'll translate this into English for the others:

    When you can make radical market reforms, you don't want to.
    And when you want to make radical reforms, you can't! It's
    like being a drug addict.

    So, according to you, we have to wait forever! Sorry, that's too long.
    The Germans are right. We have to make radical market reforms, when we
    want to, as they have. We have to suffer the withdrawal period, before
    we get better.


  • Comment number 23.

    Yes, it would seem relatively simple (!?) to enforce a rule that anyone buying a credit derivative must own the underlying bond, interest rate swap or whatever, so they won't then go and short the stock or otherwise seek to manipulate the company's credit-worthiness to trigger a payout. As you say, otherwise it's insurance in something in which one has no skin - except in the insurance paying out!

    It's a bit like me buying TPF&T insurance on someone else's motorcycle (I'm a motorcyclist, this would interest me!) and then getting it torched or stolen so I get the payout - hmmmm, actually, now there's an idea... ;¬>

  • Comment number 24.

    I believe what we have here is a classic coverup.

    The banning of short selling is not to protect any Government, but to protect the German banks.

    http://www.bloomberg.com/apps/news?pid=20601087&sid=asFWbw4CZ6yo&pos=1

    The German banks' issues are included in this short selling ban - and you need to ask yourself why.

    The truth is that the German banks (and other major Euro banks) are teetering on the edge of failure, a failure which becomes a reality if there is the slightest fracture in Sovereign debt reliability.

    The ban is to stop speculators profitting from the fall of Euro banks - which naked shorting provides the greatest profit.

    The consequence of the 'new' EU Bailout was that the entire bond market simply 'handed over' all it's debt from Greece, Portugal and others straight to the ECB - ta very much, you can have these risky items and we'll sit back and watch from the sidelines.

    The consequence of this is obvious - Spain nearly 'failed in it's debt issuance' on Tuesday this week - normally sovereign issues are 1.5 times oversubscribed - but if the Spanish hadn't altered the amounts (and this is at record yields remember) - then the issue would have surely failed.

    There is another issue today - could be very interesting - but lets talk about the diversionary tactics of the EU instead shall we Robert?

    http://ftalphaville.ft.com/blog/2010/05/20/237121/thursdays-spanish-risk-factor/

    The LIBOR / EURIBOR is now at 'pre-Lehman levels' - which means the banks are unwilling to lend to each other for fear of not getting their cash back - and remember this is a 3 month loan rate so they're expecting big trouble real soon.

    http://www.reuters.com/article/idUSLDE64I15O20100519

    Don't say I didn't warn you - because it seems our 'brightest and best' journalists aren't going to!

    Real facts from real people.

  • Comment number 25.

    16. Pietr.

    Would you sunny disposition towards the U.S. and U.K. economies be before or after the end of quantitative easing?

    And as to not wanting to kill the Golden Goose... I am afraid that the eggs turned out to be gold plate with a rotten yolk, so in retrospect, it should have been eaten at Christmas past.

  • Comment number 26.

    So let me see if I have got this right:

    1. 80% of Credit Default Swaps are naked.

    2.The buyers and sellers do not know who the counterparties may be because chains of CDS transactions can occur due to 'netting'

    3. The systemic risks can be increased because there are many CDS mapped to a single bond and because of the unknown counterpartiesin point 2.

    4. They are used to structure synthetic collateralised debt obligations CDOs such as Abacus 2007-AC1 subject of the suit for fraud brought against Goldman Sachs by the SEC this year.

    5. They are used for parisitic activities such as Capital Structure Arbitrage.

    So in conclusion CDS are an insurance policy that may or may not pay out, can create systemic risk, are mostly used for speculation and not for insurance on an owned asset and loved by the financial industry. What a wonderful idea - NOT!

  • Comment number 27.

    Naked CDSs are an aberrant abomination.

    They permit persons with no interest in a deal to gamble on its success or failure.

    All they appear to do is magnify market movements and as they represent man many time the size of the underlying securities they always tend to destroy the underlying securities.

    At least with gambling of the options market, for example, if you let the deal go to maturity you have to deliver the underlying security.

    I would like to see all deals on securities where the participants to the deals have no connection with the underlying security globally banned. Hedging what you don't have to sell and don't want to buy is simply insane from an global economic standpoint - it is just racketeering. Furthermore these naked swaps are used as collateral and thus create money and lead to a huge and totally unsustainable bubble in global liquidity.

  • Comment number 28.

    'The point is that $6tn of credit default swaps would have provided appropriate cover for the risk that the loans might go bad.'

    So if you insure $6 of my debt and then spread your risk by syndicating it to two other parties, is that a bad thing on the basis that the same debt has now been insured twice?

    I would suggest not, unless you and your counterparties lose track of the risks you're actually exposed to.

    Blame the people - who should have known better - that bought products and insured risks they didn't understand rather than the products themselves. This was an epic failure of corporate govenance rather than an inevitable consequence of a market in CDS's. By all means argue for transparency but don't close a market that has finally forced European politicians out of their complacency.

    I'm sure that politicians would like to go back to the cosy world where pension investors unquestioningly handed over their savings to fill ever expanding deficits but I wouldn't necessarily regard that as a good thing.



  • Comment number 29.

    City rumour is that a Landesbank is about to go belly up and German Govt have pre-empted market to try to contain contagion...

  • Comment number 30.

    Robert, you must admit there are flaws in your arguments.

    Yesterday you said it would be disastrous and yes, we saw stocks, bonds, shares and currencies plummet.

    Funny, the FTSE is up today. Clearly the crims took the dosh, fled and must have invested in the FTSE.

    Why else the rise?

    Now that a period of apparent calm has returned perhaps we can see the wisdom in Ms. Merkel's actions.

    London has always been known for its ineffective regulation and the UK for its weak laws, which is why so many business and people base themselve here and manipulate the systems to the full.

    If I were a business selling dodgy motors, I'd be arrested.
    So why do so many city traders laugh (and cry) so much when they read your exposes?

  • Comment number 31.

    The politicians seem to have done a very good job of deflecting attention from their own behaviour. Radio 4 did a very eloquent summary of the actual debt crisis we face.

    If I remember correctly the numbers were:

    £25,000 per house hold for the national debt (politicians)
    £15,000 per household for the PFI debt (politicians)
    £30,000 per household for state sector pension liabilities
    £100 plus or minus for bank bailout. ie we might make a profit

    Given the scale of these numbers is it any wonder that the markets get nervous about lending to the profligate governments who need to get their own houses in order.

    Whether the market needs more regulation or not and when seems a minor side show to the real financial crisis.

  • Comment number 32.

    Whatever happens somebody is going to get hurt. No doubt that person is blithely going on with their life as if they had no care in the world. The along comes a great clunking fist and smashes them into the ground.

    Isn't this arbitrary power? Isn't arbitrary power the thing that governments and legal systems are supposed to be protecting the public from?

    So much for safeguards.

    The German nation has more experience of the terrors or arbitrary power in recent history both as a practitioner and a recipient. It is sensible to listen to what they have to say: these guys have been there and don't want to go there again. I can respect that feeling.

  • Comment number 33.

    24. At 11:43am on 20 May 2010, writingsonthewall wrote:
    The LIBOR / EURIBOR is now at 'pre-Lehman levels' - which means the banks are unwilling to lend to each other for fear of not getting their cash back - and remember this is a 3 month loan rate so they're expecting big trouble real soon

    Great thats all we need. Another sub-prime crisis this time in what ? sub-prime govt debt.

    Did someone say the FTSE was up ? No it aint!

  • Comment number 34.

    Re: #3 Grim, your idea of a short sharp shock would work, except the consequences of letting banks fail would not be short at all. Politicians in western democracies understand this, they also understand that THEY would get the blame for the mass unemployment and reduction in living standards that would inevitably follow from the markets crashing around the world.(This has already happened in the US where Bush and Bernanke have been castigated for allowing Bear Stearns and Lehman Bros to fail, this is seen as precipitating the 2008 crisis). Even if this period of economic dysfunction 'only' lasted 2 or 3 years before some kind of recovery the people who took the original decisions would be pariahs, unable even to take on those enormously well paid, cushy, consultancy and advisory roles that ex-ministers expect when they retire.
    Its nothing to do with economics why everyone is desperately trying to prop up the existing system..

  • Comment number 35.

    Costmeabob... you should know better than to comment on market intraday... I think it was your comment that caused the drop... however here I refer to the wisdonm of Kenny Rogers...

    You've got to know when to hold 'em, know when to fold 'em, know when to walk away, know when to run. Don't count your money, while you're sitting at the table, there'll be time enough for counting, when the dealing's done.

  • Comment number 36.

    Well, it is only the 'naked shorts' they have banned, the ordinary shorts are still possible.

    The aspect to the Financial Markets that has enabled Traders (not ordinary Investors) to sell things they do not Own has been abused, creating several false Sellers crashes already !

    It is quite one thing if the actual owners of something wish en masse to sell (and thus prices fall), but if people (speculators) who do not own a thing Sell it to force down the value of things other more level headed Investors actualy own, then that is a Market Abuse (in my opinion).

    Such grandiose abuses need a suitably grandiose response from those seen to be responsible for regulating (and defending) the balanced functioning of the Markets.

    The Markets were never intended to be Slot Machines for the benefit of a few shiester traders.

    They were intended to be a place where long term Investors could provide capital to business and Governments.

    There is and has been no genuine risk that Greece would fail to pay it's debts. These engineered pseudo panics benefit only a small elite amongst the dodgy traders.

    Long term Bond Investors still get their Coupons, and will still receive the redemption value of their Bonds. That was never in doubt.

    It is irrational to think otherwise.

    It is just a pity that the other European countries have not fully supported Germany in what seems quite a sensible move to me.

  • Comment number 37.

    Robert I think you have Stockholm Syndrome.

    You're describing a dealer/addict relationship - we should allow these institutions to make fraudulent profits from these contracts that destabilise the global system and leave the taxpayer as counter-party of last resort when they fail, all so we can have our precious debt money from them that we pay for through inflation and austerity measures.

    Ludicrous

  • Comment number 38.

    Although there are a number of European Banks I'm not keen on, especially the one handed B&B on a plate, it is worth people remembering that the European Banks have investments from British Investment Trusts and thusly British Pension Funds,Charities, etc.

    Its just a thought, before folks get too carried away, again......

  • Comment number 39.

    "[CDS] use exploded well beyond what could seen as sensible protection against loans going bad."

    Here's the first misunderstanding. The protection buyer is protecting against the loan going bad. But, the protection seller is *taking on* risk in return for higher yield. There is no more money being made by the market if the loan goes bad - it's a zero sum game.

    "And just as you might feel a bit anxious if your neighbours took out nine insurance policies that would enrich them in the event that your house burns down"

    It's not a very good analogy. You are implying that the insurance buyers would somehow influence the risk of your house burning down. They could possibly set light to it, but then again the nine insurance companies would be very interested in preventing that.

    However, CDS protection buyers cannot set fire to the state of Greece. Together with protection sellers (it's a zero sum game) they provide a much more liquid market for pricing the insurance that Greece has to pay for its own debt (the risk premium on Greek bonds). They do not affect this price. For every one person betting on default, there is another betting it will not happen. Similarly, Ladbrokes does not in itself affect the outcome of the cup final, but it most definitely provides a strong incentive to predict it correctly.

    "if a hedge fund or speculator thought that a company [etc] were going to the dogs, a CDS was (and is) a way of making a killing from their respective woes."

    And a way of losing alot of money if you're wrong. Zero sum. It's a marketplace for risk.

    "As you'll deduce, there is a strong case for banning naked CDSes, or the use of credit default swaps by those who don't actually own any of the relevant debt being insured"

    I don't agree. The existence of the CDS does not in itself affect the risk of the underlying debt, it simply reflects it.

    "There are also good reasons for forcing all CDS trades through transparent, regulated exchanges and clearing houses"

    This is the only point I agree with. CDSs do not destabilise markets because they are some kind of financial evil hocus pocus, but because a huge proportion of the trades happen over the counter, the network of exposures that is created is impossible to oversee, and the implications of a default are so wide ranging and opaque that no one dares to let them happen. Create registers and standardised products, bring CDS into the regulatory fold, but don't ban them.

  • Comment number 40.

    30. At 11:56am on 20 May 2010, costmeabob wrote:

    "Funny, the FTSE is up today. Clearly the crims took the dosh, fled and must have invested in the FTSE. "

    Very dangerous....very dangerous....

    FTSE 100 5,062.97 -95.11 (-1.84%)

    The world markets have been heading downwards for about 2 weeks, the EU bailout announcement merely created a big day boost for the day traders to profit from - however the markets are bearish over the period.

    Every down day is usually followed by a slightly up day - this is merely the bulls 'buying in the dip' hoping that every big fall includes an overreaction.

    However this is now starting to cost them money as there has not been a sustained recovery in stock prices - mainly because the markets as a whole have worked out there are no solutions in place for the problems which brought us here.

  • Comment number 41.

    "The problem is that many of the world's biggest financial institutions, giant insurers such as AIG and assorted banks, couldn't resist the gold rush - but found themselves on the wrong side of these CDS deals."

    Are these the same ones who are so "intelligent" that they deserve their massive salaries and bonuses?

    "...because unilateral national initiatives may either be ineffectual or may create dangerous distortions in the allocation of capital around the world."

    Aren't there already dangerous distortions ... of capital around the world? Far from ineffectual, it seems everyone is running round squeaking. Which, at least, is a start. Best time is always now. Why wait for the shakers and movers to get their act together.

    Bring it on.

  • Comment number 42.

    There's a time and a place for radical reform of financial markets. The place is probably the world as a whole, and not just one part of it - because unilateral national initiatives may either be ineffectual or may create dangerous distortions in the allocation of capital around the world.

    Look it is like everything else in the world - when you need a lot of people to agree to take action, guess what they do? The sit around forever and a day debating, disappearing off on holiday, etc.

    We've been hanging around here for how long?

    1. Tell the shysters to take a walk.
    2. Write off the debt or restructure it.

    The politicians the world over need to find some backbone, bot tie us into to decades of IMF suffocation.

  • Comment number 43.

    Regarding a mooted US veto of the IMF bailout for Greece (though I've yet to see this put forward by a mainstream source):

    The US national debt is itself approaching 100% of GDP. They surely wouldn't sacrifice their titanic influence in the IMF over such a hypocritical point of "principle"?

  • Comment number 44.

    What is wrong with speculation anyway? If people think the market is going down they should be allowed to sell short just like they can buy if it is going up.
    If the argument is that short sellers push the price down then don't ban short trading but prosecute for market manipulation - this isn't done because the regualtors know it is not manipulation - shooting the messenger is never a good idea.

    Talking about manipulation, why doesn't someone sue the German Govt for trying to manipuklate the market - let's face it, that is exactly what they are trying to do.

    Funny, nobody has suggested banning short selling in oil!

  • Comment number 45.

    Chris B, did you forget halfway through your post what your point was?

    In any case, your comparison with Ladbroke's is way off the mark and Robert's analogy is far more appropriate. Bookies make money by offering odds that provide them a win/win scenario over the long term. Insurers charge a premium based on their assessment of the risk. CDS purchasers are not placing a bet, they are purchasing completely unregulated insurance on an asset that they do not possess. Contrary to your statement, the purchaser is perfectly at liberty to burn your house down in Robert's example, and with no possibility of redress, because the insurance is unregulated. Doesn't any of this sound a teensy bit dangerous to you?

    The market is ten times greater than its intrinsic value to the world economy would imply. The fact that the price only reflects risk is irrelevant, since the market participants have only a speculative interest in that risk.

    "Insurance" that bears no relation to the value, or even the existence, of an underlying asset must be a risk to global stability, and any regulation of it would be thoroughly welcome.

  • Comment number 46.

    Fair point there Robert, but what about the measures that have been put in place to create 'Clearinghouses' or Exchanges specifically for CDS contracts? ICE and CME have already made efforts to set up such mechanisms in place to help create transparency in the CDS world but there is a lot of resistance by banks to report their CDS books this way.
    In my opinion, the whole OTC culture needs to change and personally I think that governments are barking at the wrong tree. If they ban naked CDS trading, why not ban horserace betting too? Do you really need to own a horse to bet on its performance??

  • Comment number 47.

    Anglophone: you'll find the reason for Black Wednesday was the Major governments frequently stated position that they would maintain the £ at 2.98DM. The speculators made a killing from that. We fell out of the ERM, the £ dropped against the DM and interest rates fell, they had been ramped up to 17% in a vain attempt to maintain the £/DM shadow.
    Happy Days are here again and as usual, it's 'yes the market is a casino run by spivs but we can't do anything about it because it will upset them.'
    How much longer are we to be mugged by these spivs?

  • Comment number 48.

    It's strange that the Germans, of all people, have banned an activity involving nakedness. One would see many naked sunbathers on any Sunday afternoon in the English Garden in Munich.

    Once, I was sitting next to the Isar when a stark naked gentleman emerged from the waters and gave me quite shock! Surely they can do without stocks and shares to "cover their positions" if they can dispense with clothing so easily.

  • Comment number 49.

    Given that the biggest example of naked short selling of govt bonds, is when the govt itself sells debt to finance its defecit. Banning govts from selling more debt would be a very big help.

  • Comment number 50.

    CDS should be moved from OTC markets to regulated markets.

    CDS should be treated like an insurance (which is what they are). If I have a house and buy an insurance it wont burn down, that is buying protection. If the whole street buys insurance on my house that it wont burn down, it is an open invitation to the arsonist.

    vs-trader.blogspot.com

  • Comment number 51.

    #45 Tim, sorry if you couldn't follow my reasoning. A main point was that it is not house insurance, and CDS protection buyers and sellers do not affect the riskiness of the underlying bonds - but keep talking about houses and matches if you like. It's a bad analogy.

    "CDS purchasers are not placing a bet, they are purchasing completely unregulated insurance on an asset that they do not possess"

    I'm not sure you understand how CDS protection works. The seller of the protection is betting that the risk of the underlying bond defaulting is small enough to make it worth the insurance premium they receive. The buyer of the protection is taking the opposite bet.

    Ladbrokes is a betting market. It takes opposite bets from individuals who believe that the price (the odds) represent good value or not good value. The partipants need not have any stake in the game other than this. The market makes a margin in the middle. This is in principle the same as the CDS market. Just like with CDSs, this activity does not affect the outcome of the game. Or in your preferred analogy, non of the participants can burn the house down.

    Why is it anyone's business what the motives of the buyer or seller of this insurance is? And even if the buyer owns the bond in question, what about the seller? What is his motive for making money out of insuring against very unlikely events?

    In reality there are a number reasons why someone may want to benefit from say, Greece defaulting on its bonds, other than actually owning those bonds. And a number reasons why someone may want to take on this risk, for a premium. It comes down to the overall profile of their investments, not just whether they hold the actual bond or not.

    As I have said, I completely agree that allowing this kind of activity to destabilise financial institutions is not a good idea. But it is not the nature of the activity that causes this. It is the lack of transparency.

  • Comment number 52.

    Germany's position on this move is political not economic. They are perfectly aware that their actions have little or no effect on the global trading markets.

    Put that is not the point of their actions.

    The point is that as Chancellor Merkel has pointed out that the control of the economy is 'political' and not dependent on the reactions of the markets. It is governments, elected by the voters, who make the decisions regarding the economy....not the international money markets. She is re-asserting the right of elected governments to 'govern' the economy of their country.

    This has come as a surprise to the rest of the eurozone ministers.

    Do not be under any illusions.

    Germany intends to take control, once again, of its own money. This will be with, or without, the consent of the rest of the eurozone finance ministers.

  • Comment number 53.

    Chris B has it right.
    Don't ban the activity for what seems more like emotional reasons but regulate that all trades should be on a regulated platform

  • Comment number 54.

    "CDS should be treated like an insurance (which is what they are). If I have a house and buy an insurance it wont burn down, that is buying protection. If the whole street buys insurance on my house that it wont burn down, it is an open invitation to the arsonist."

    BTW - Arson is the illegal activity not insuring the house! Don't stop the insurance market but have better policing to stop the arsonist

  • Comment number 55.

    Chris B you keep repeating the same argument over and over while ignoring the obvious problem with naked CDSs. There are many problems with the system, but the obvious one arises from the fact that you can potentially take more CDSs than the value of the product they are structured against (NOTE the reference to CDSs accounting for more value than the loans they "insure"). Namely the potential profits from a CDSs positions can be LARGER than potential loses from the product they are taken against.

    The above situation is an invitation to abuse. Imagine a scenario where a single party takes enough positions on a debt to affect its market value, AND THE SAME party takes out enough CDSs betting on the debt defaulting to produce a profit greater than the cost of getting the debt (or the cost of potential losses from changing market value of the debt). This single party then proceeds to use the market influence it gained by owning the debt to reduce its value... of course the party loses money from the debt, but makes MORE money from the CDSs betting on the debt defaulting or losing value. This provides an incentive to manipulate markets and is an open invitation to abuse.

    This is possible due to naked CDSs because they can be taken out to a value far greater than the debt itself.

    CLEARLY the above scenario is a potential problem... and an OBVIOUS one. I do not know why people do not see it. Plus I believe there are more problems with the system than the above... but rather than banning it, logical rules should be designed for CDSs (or whatever instrument is designed next) to close holes that invite abuse or create instability.

  • Comment number 56.

    ... so to rephrase the CDSs situation in terms of burning down houses. It is the SAME situation as taking out insurnace on your neighbours house above its value, and having both the means and motive to burn it down.

    OR naked CDSs are nothing other than a novel and complicated take on the old scam of buying an old car, insuring it well above the purchase price and torching it yourself while blaming others and getting away with. You of course pocket the insurnace, subtract your costs and call the difference a profit. This scam is of course illegal because it brings no benefit to society... but for some reason the same behaviour on a far larger scale is allowed with CDSs.

  • Comment number 57.


    At their peak a couple of years ago, there were $60 trillion of extant credit default swaps, insuring loans with a value of around $6tn. This was the equivalent of taking out 10 buildings insurance policies on a single house, or 10 life policies on one individual.

    The point is that $6tn of credit default swaps would have provided appropriate cover for the risk that the loans might go bad.


    Honestly Robert, we pay you to do better than this. Your readers would be forgiven for concluding from this that, if a loan goes bad, speculators would clean up to the extent of 10 times the value of the underlying loan.

    This is simply not so. The gross CDS exposure is meaningless since it doesn't take into account the extent to which banks hold offsetting positions, ie they both hold a CDS and have sold a CDS on the same loan. The figure you need to look at is the total net exposure to CDS contracts. Because of the lack of transparency in the CDS market this is difficult to determine. However the BIS estimated a total net exposure of 5.7% of the gross CDS exposure. Furthermore, the settlement of CDS contracts on Lehman's is consistent with this level of net exposure.

    Speculators may indeed be buying naked CDS contracts. And greater transparency in CDS contracts would undeniably be beneficial. But please do not mislead your readers as to the extent of this problem with meaningless figures.

  • Comment number 58.

    Judging by many of the comments on this site, it clearly makes a lot of people feel better to lay the blame for everything that's ever gone wrong at the feet of "greedy speculators". Assuming this to be a disparaging term for "the market", you'll find "the market" is simply a mechanism by which discipline can be imposed on poor performance. It's natural for those poor performers, and their sympathisers, to heap derision on those administering the painful treatment, but they must look closer to home to find the true reasons for their predicament.
    Greedy speculators didn't force consumers to max out their credit cards. Greedy speculators didn't make the last UK government go on tilt with the public finances. Greedy speculators didn't force Greece to falsify the accounts or fail to collect taxes. Greedy speculators didn't force RBS, HBOS, Lehman's and the rest to have incompetent management.
    Look to where the real responsibility lies.
    On a more mundane technical point it's important to correctly interpret the $6tn number quoted as the total of outstanding CDS notional. Netting means it does not equate to the total level of insurance in the market. For example, A sells $1m of protection to B with CDS number 1. Spreads tighten and A buys $1m of protection from B with CDS number 2 to lock in a profit. Total insurance held is zero, but the metric reports an overstated, and economically meaningless, $2m.

  • Comment number 59.

    Whenever the bubble bursts, and things go awry, guess who gets the blame?

    It seems that all those calling for the banning of shorting the markets, are yet again reluctant to take responsibility for their losses. (Surprise surprise!)

    Good traders use whatever means is at their disposal, one of which is leverage, this will, and can not change, so some people on here, need to grow up and get used to it!

    We do not cause panic, we do not cause trends, we merely REACT to them!

    The markets are for TRADING, NOT for INVESTING. The market rewards WINNERS not LOSERS!

    Shorting the market creates something I think some posters here, are forgetting, (or didn't know to begin with), and that is LIQUIDITY.
    Speculators and hedgers, naked or otherwise, create cheaper markets, or do you believe markets should only go north?

    We all have the same opportunity to profit, and the rain falls equally on the righteous and the wicked.
    When a security gets painfully low, who do you think benefits?

    Thats right, we ALL do.
    It seems people don't care when the money rolls in, but when lean times arrive, it's the gamblers at fault?

    Guess what? WE ARE ALL GAMBLERS!

    Grow up Germany, no use throwing your teddy bear in the corner because the market didn't do what you'd hoped!

  • Comment number 60.

    #55 Rob - I'm clearly not repeating the argument enough, we still have people talking about houses and cars and arsonists, as do you in a round about way!

    1. Owners of bonds can NOT influence the likelyhood of default.
    2. Owners of a CDS can NOT influence the likelyhood of default of the underlying bond.
    3. In the parlance of home insurance - non of these can even get near the house, let alone set fire to it.

    A default is the only way to make money out of a CDS in the way Rob is talking about (as long as you don't also own the underlying bond). Your example:

    "This single party then proceeds to use the market influence it gained by owning the debt to reduce its value... of course the party loses money from the debt, but makes MORE money from the CDSs betting on the debt defaulting or losing value"

    CDSs and bonds are priced by markets that keenly watch the likelyhood of default - it is the main thing that influences both prices. Arbitrage usually makes sure that they follow each other. The existence of a CDS market therefore makes it alot *more* difficult to influence the price of the bond, because the market is much much deeper. For each person attempting to dump bonds, there are - say - nine people ready to profit from an underpricing of that bond, by selling CDS protection and earning a juicy risk premium. You dump your bonds - the CDS price didn't budge and therefore neither did the bond price. You just lost lots of money.

    Nor is it true that the market is flooded by people with a vested interest in a default. For all CDSs and bonds, there are two parties: one that stands to gain - and one that stands to lose - alot of money if the credit defaults. There is no imbalance for or against a bond created by the existence of CDSs.

    The above is the reason why markets are nervous. Turned on its head, they believe German - mistakenly or not - are trying to remove the influence of the 18 (not 9, but 9 "for" and 9 "against") people who spend all their day wondering if the bond will default. Those 18 people are much more likely to agree on the real answer than a pension fund that bought the bond when it was AAA and have no intention of selling it, they simply wait for it to mature or for the rating agency to tell them they should sell it.

    It makes Merkel's job harder, because the feedback loop from her actions to the price is instant, and she wants time to think. It also makes her decision harder, because she doesn't know who the 18 are (in reality, many of them are the same people). The answer is to regulate so that the network of CDS exposures is better understood. And to make sure you don't get into default.

  • Comment number 61.

    Most of the market in CD's consists of speculators, not investors.

    90% to be precise.

    Only offshore companies should be allowed to play this game with one another.
    Onshore companies should be banned from participating, and that includes all subsidiaries, sub-subsidiaries and associated companies in any manner or form.

    With no access to onshore markets--> aka the taxpayer sucker, this wide boy system will quickly wither and die.

  • Comment number 62.

    The system failed massively, with the capitalists completely bankrupt.

    Government/Taxpayer intervention saved a bunch of greedy fools from going belly up.

  • Comment number 63.

    59 Redshield

    Keep talking tough-guy. I don't think that many people with more than a basic awareness of how it works seriously wants to outlaw market trading.

    What I think exercises most of us is the wildly overinflated degree to which trading in securities and derivatives has detached itself from the real economy. That and the extent to which the orderly and perfectly proper trading of securities has been supplanted by barefaced manipulation. The latter has absolutely nothing to do with virtuous speculation in the pursuit of genuine growth, It doesn't create growth. It simply transfers money from one pot to another and has everything to do with beggaring your neighbour!

    Anyone who invests money is by definition a "speculator" so perhaps it's the wrong word to describe what I suspect you do. The characters manipulating the markets for gain are not speculators...they are just thieves in suits. Does that analogy make it clearer to you?

  • Comment number 64.

    Chris B, clearly you just repeating your argument. I agree that CDSs are not inherently evil and have their uses, this is why I wrote they should not be banned but properly regulated and bound by rules that prevent ABUSE.

    However, you TOTALLY IGNORE the possibility that an investor, or a group of them, or a group through "herd mentality, etc, can MANIPULATE the market. The way you write makes it sound like it is impossible to manipulate CDSs, and I say it is.

    Of course the money has to come from somewhere when a debt defaults and the insurance providers LOSE. I did not get into that side of the argument because the argument is complicated enough. Two things on this though: one, the money trail is not clear and with bail outs added in it may be that the taxpayer pays in the end, i.e. it is a way for the markets to transfer risks and debt to the public; two, any losses and instabilities are magnified through naked CDSs.

    You aregument is that CDSs CAN NOT be used to manipulate the market... I say you are WRONG and described one way it can be done.

  • Comment number 65.

    Rob, not many left here now I think, but I think we agree on one thing, that regulation and transparency are the key to prevent instability.

    However, conveniently ignoring that there are two sides to a CDS may appear to help your argument, but it means your argument is not based on reality.

    If one side tries to manipulate the market in the way you describe, the other side will stand to gain from countering it. The lack of transparency does not affect this reality. It is the very existence of a CDS market that makes it harder to manipulate the bond price.

  • Comment number 66.

    Tim

    "CDS purchasers are not placing a bet, they are purchasing completely unregulated insurance on an asset that they do not possess"

    CDS packages are worth ZERO at inception otherwise the trade would not take place. The buying of protection thinks the underlying will get more risky or ideally default in the future. The protection seller thinks it will get less risky. They have differing viewpoints. One will make money. The other will lose money.

    What is the problem?

  • Comment number 67.

    55. At 8:22pm on 20 May 2010, Rob_Hob wrote:
    Namely the potential profits from a CDSs positions can be LARGER than potential loses from the product they are taken against."

    Nonsense. The CDS has a buyer and seller. It is a zero sum game.

  • Comment number 68.

    SmilingEdBalls:

    "Namely the potential profits from a CDSs positions can be LARGER than potential loses from the product they are taken against."

    Nonsense. The CDS has a buyer and seller. It is a zero sum game."

    Of course it is NONSENSE when you take the sentence out of context. Of course it is a zero sum game on the scale of the market. HOWEVER, I mean the phrase in reference to a particular theoretical person/group that manipulates the market, for them a successful strategy IS NOT a zero sum game, they profit.

  • Comment number 69.

    Chris B:

    "If one side tries to manipulate the market in the way you describe, the other side will stand to gain from countering it. The lack of transparency does not affect this reality. It is the very existence of a CDS market that makes it harder to manipulate the bond price."

    This is true, but it still does not remove the possibility of manipulation through various means and scenarios. My point is simple: naked CDSs provide the MOTIVATION for manipulation... and where there is a will, there will be a way... sometimes people will find a way to manipulate the market. Perhaps you can think of it as a war, sometimes one side wins then the other. The problem is that when a manipulation of the kind I describe wins it creates just destruction wihout any benefit to society. I am not arguing for an always win way to turn the market... if I had one I would be too busy using it to take over the world!

  • Comment number 70.

    If governments spent less than they take in though takes, there would be no need for govt debt.

    How is it that a five year old knows that they can only buy as many sweets as they have pocket money to pay for it, but politicians don't understand this.

  • Comment number 71.

    It is easy to see the damage that short selling does, its basically gambling on negativity. The point is, is that this market is so EASILY MANIPULATED.

    A serious point is, how can the world EVER plan for long term sustainability when it is constantly undermined by SHORT TERMISM in the financial markets whos ACTUAL SOLE purpose is to wrench maximum profit from any negative situation, thus creating a never ending chain event of negativity.

    This short selling concept is like a remnant of WWI, wherby massive massive risks and losses are sustained just to gain a quick profit and then the financial generals chaff on their oversized cigars while downing caviar and champane, away from the real world and battles and victims of their endevours.

    Pestons right, ANY regulation needs to be worldwide but vested interests have already fragmented/damaged worlds ability to do such a thing. USA is undertaking its own regulations, Germany is also now doing some but by doing it unilaterally may cause Germany even greater problems.

    It is inherent human behaviour/trait to counter one problem via creating yet more, this needs to change.

    I think we are actually many decades beyond ability to regulate, it was all very well empowering the world and spreading wealth but now there are many other major players with different outlook and also opposing game plans.

    At the moment, there is a war being enacted via financial services. There are some serious players who are not just international businesses or interests, but actually NATIONAL interests.

    This is about wrenching financial and economic strength away from the west and it moving east, which was often mentioned in the early days of the financial catastrophy. Eastern markets may be taking a knock also, but there are big players in the east who are doing very nicely out of all this in many many ways.

    I think what is happening, is NOT just market problems relating to trading zones like the EU, but is a knock on effect of the west having to borrow HUGE amounts from the East and as is a practice with business takeover via buying up a businesses credit then demanding payment, so too this is basically happening to the EU. The demands are that the EU puts its money up, even though the markets KNOW FACTUALLY well that the EU has used up MOST of its available resources in actually protecting the very same markets from collapse.

    The EU is a big market, and before this financial catastrophy was VERY VERY stable and reliable, hence anyone with any money to invest over the long term knew full well the reliability of their investment. To get back to this position will take significant changes.

    Short selling has become a milestone around the necks of those very governments who sought to use it for finance. Now so many are in so deep, it is hard to give up.

    The EU I think should take note of the new synthasised bacteria life form and create a NEW market form for obtaining credit. Whatever happens, I do not think short selling can or should continue in its present form. To change it, will ultimately and initially possibly damage the whole EU economy, but at the end of the day the EU cannot afford continued subsidance to its foundations. Underpining is costly/expensive in more ways than one, but if the foundations are NOT strengthened with PROPER materials designed specifically for the job, then eventually the whole thing will just come tumbling down, whether piece by piece or all in one.

  • Comment number 72.

    Speculating must be banned or the worlds' economy will never recover!

  • Comment number 73.

    "The problem is that many of the world's biggest financial institutions, giant insurers such as AIG and assorted banks, couldn't resist the gold rush - but found themselves on the wrong side of these CDS deals."
    Did everyone posting, miss this sentence.
    I am no financial genius but after reading previous posts I figure that I have a head start on most of them.
    Ban this, ban that, what rubbish.
    If I have loads of money and want to bet it on some financial outcome, then in order to do so, surely I must find someone else who will accept my bet.
    If I went into the bookies and said that I wanted to put £1 on England to win the World Cup at odds of 1,000,000 to 1, would I be able to twist the bookies arm to make him accept the bet, dream on.
    If I am willing to risk my money and make a bet on some financial outcome with "giant insurers such as AIG and assorted banks", and win, and clean them out, then that's their hard luck.
    I end up rich; the people who entrusted these institutions with their money end up broke and learn a hard lesson.
    Perhaps the next time that they have money to "invest", they will examine more closely how it is "invested".


  • Comment number 74.

    Germany - absolutely right.

    Stand up to - and fight all the financial bullies in the financial playground.

    Angela Merkel, German Chancellor, is being 'blanked' by all the male idiots in banks and governments that caused/allowed this financial/banking crisis in the first place?

    Yes, let's have some vitriol from men with/without families and children - you know it's true - it's not personal, but clearly evident?

  • Comment number 75.

    Robert, you make complex situations understandable...as ever. What an asset to the BBC you are!

    Our capitalist economies have over-expanded because of too much credit. We have over-bought and over-committed ourselves. That goes for governments, too. If banks cannot insure their loans, they will have to be more careful about how much and to whom they lend. This seems right to me. The price of loans will then better reflect the real risk: painful to the borrower, but ultimately good for him.

  • Comment number 76.

    small grip re your cds naked short outstanding notional calculation. you ignore "reinsurance". a lot of cds contacts are just market makers squaring their books. so a lot of double counting exists for perfectly legitimate reasons, and not because of naked shorts. all the same, it is perfectly true that there is a heck of a lot of naked shorts out there.

  • Comment number 77.

    #76 Don't confuse the issue now. You don't want the truth to get in the way of a good scare story. ;)

    But since you've mentioned it, if you only allow owners of a credit to buy CDS protection, it means that the seller of the protection cannot reinsure - he wouldn't be allowed. So an opportunity to spread the risk and reduce the impact of a default is banned. Oh well.

 

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