May 19th, 2010

Merkel and the Naked Shorts

According to this article at Reuters, Germany has "banned naked short sales of euro-denominated government bonds, credit default swaps based on those bonds and shares in the country's 10 leading financial institutions".

A short sale is when you sell something you don't own, in hopes that you will be able to buy it back later for less and make money on the difference. A short sale is "naked" when you sold it without so much as bothering to borrow it ahead of time.

Once upon a time, I was employed by a small, profit-free company which went public during the dot com days. They still exist, and are no longer small or profit-free, but at the time, even the most rabid boosters of that company wouldn't have predicted where they would be today. Despite that, even relatively moderate boosters of the company were roundly mocked by people who could not believe the valuations of that company. There was a _lot_ of short selling -- and only a tiny fraction of the company's shares were available for sale anyway, as they were mostly still closely held by the owner, employees, angels, and some institutional investors. Quite a lot of the time, a huge chunk of the shares in existence were tied up due to insider trading rules. Because most financial firms in the US won't let most of their customers engage in naked short selling, there was a high demand to borrow shares to sell them short.

Me, I can spot a corner from a block or two down the street. My boyfriend at the time had the bright idea to find a broker who would let us collect some fees for loaning our shares out to short sellers. It only took a few phone calls (the first few laughed at us), but Painewebber (now UBS) was game. We caught some flack from the CFO (there really is a moral hazard in shorting a company you are a key employee at, but I fought back -- no moral hazard in squeezing those shorts until they bleed). It was a nice additional piece of cash flow.

Every time a short had to cover their position, they were squeezed: they had to pay more than they sold for, because there was so much competition to cover short positions, which raised prices, which required more short positions to be covered, which created more competition, etc. Squeeeeeeezzzzeeee.

Banning naked shorts makes sense. Especially in that case, but I would argue in every case. You can utterly destroy someone who does not deserve it if enough people get it in their head to short it. That's one thing if they can find the shares to sell. But if people are selling more shares than _exist_? That just seems wrong to me. And when they are leveraged (through credit default swaps, which are really more like insurance than anything else), it's like predicting that someone with curable cancer will die, and then aiming a SAM at his house when he starts to get better. It's not just murder: there's a helluva lot of collateral damage, too.

Maybe Germany has figured out that MORE regulation can make your market more popular in the long run. Surely someone will eventually figure that out.

do you believe them?

According to this, that weird, dark tarry stuff isn't from the oil leak. While that would be great news if true, it's hard for me, at least, to shake the memory of what the Coast Guard said in the immediate wake of the explosion and sinking of the rig.

No, no leak here. We're good.

Sure you are.

I have no reason to doubt what they're saying now. Except they were so, so wrong the last time.

Rand Paul on Maddow et al

Rachel's going after Paul's remarks about the Civil Rights Act and the ADA and how he doesn't like that the rules applies to private businesses that don't receive federal money. Totally justified and it wouldn't be any more fun to watch Jon Stewart do it because Stewart isn't funny when he's doing this either.

In any event, the meat of the nut is straightforward: Paul is ideologically opposed to any rules being imposed on business. He'll use any available argument to that goal. He brought up gun control, believe it or not. That went like this:

If a bar is publicly owned because of ADA/Civil Rights Act (!!! let's assume he meant public space?), and if there are laws saying that people have the right to carry guns in public space (!!! bars and guns are a legal not happening in many places. I know there are efforts to over turn this, but that would be a very different world) then a bar owner wouldn't be able to tell people they couldn't have guns in the bar. Words fail. But never mind that now.

He also argued that the ADA rules, because it's a federal law, don't work well and his specific example was a two story office that hired a person who couldn't use the stairs. He felt that a reasonable accommodation would be to let the person have an office on the first floor, rather than have to spend $100K on an elevator. You can tell he didn't even bother to read the least little thing about the actual ADA, because in a lot of situations, that would indeed be a perfectly acceptable accommodation (particularly if the company in question employed fewer than 15 or whatever employees). It is amazing to me that he thinks having a zillion different local rules and regulations would lead to more flexible outcomes; it would more likely lead to regulatory arbitrage and be yet another race-to-the-bottom in which stupid management relocated to lightly regulated areas and only figured out later on what the problems with that were.

For your further edification:

FWIW, I've been through my anarcho-capitalist phase. I have a lot of sympathy for the no-government position, and I've been through the theory about how wonderful things could happen without the legitimized coercion and police powers of government. Even then, however, I recognized there was a really tough transition problem and, furthermore, I also recognized that while wonderful things _could_ happen that did not in any way guarantee they _would_ happen. Rand Paul, like his father, embodies one of the many worse worlds: he's a "libertarian" who's anti-reproductive choice:

"I will always vote for any and all legislation that would end abortion or lead us in the direction of ending abortion. I believe in a Human Life Amendment and a Life at Conception Act as federal solutions to the abortion issue."

There's no health or life of the mother exception there. Some libertarian, some small-government there, right?

I also used to be a JW: totally opposed to abortion, believed homosexuality, like sex before and outside marriage in general, was wrong. But _even when I was a JW_, I recognized that laws against abortion were bad public policy (and as a good JW, I had no involvement in politics, either -- this was purely an academic question for me). And since scripture treated homosexuality as _exactly_ like sex outside of marriage, I frequently laid into people who acted like homosexuality was somehow worse than other forms of sexual activity outside marriage. Needless to say, bailing on the religious cult I was raised in was the best single decision of my life (yes, even better than any of my job choices).

I actually understand exactly where these idiots are coming from. Trust me on this. This is the work of the Devil. And not the fun one, either.