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Report: Germany unilaterally bans naked short-selling

Angela Merkel - World Economic Forum Annual Me...

Image by World Economic Forum via Flickr

The German government is taking the rather radical step of banning naked short-selling of stocks, government bonds and credit-default swaps starting at midnight, the wires are reporting from that nation, a unilateral move to try to restore some stability to teetering European markets.

German Chancellor Angela Merkel (pictured) is set to announce the ban tomorrow morning, the wires are reporting.

What is naked short-selling? First, let's take on short-selling. If you're a short-seller, you're betting that the price of a stock will go down in the long run. In order to short sell, you borrow stock and then assume you'll be able to buy it back at a lower price. Short-selling is a legitimate part of all markets; it's for pros only and it adds crucial liquidity to the system.

Naked short-selling, or naked shorting, is another matter entirely. In naked shorting, you never actually take possession of the shares you say you intend to buy back at a lower price. You take advantage of the three-day stock settlement window to make your money, then get out. There is no risk for the traders because they have no skin in the game. But naked shorting can destroy companies. It exists for one reason only: to drive down stock prices. That's why it's illegal in the U.S., made so in 2007.

Now Germany is doing the same. At first blush, this looks like a positive move by the government. But remember: 16 nations, including Germany, are linked by a common currency. Autonomous moves by one of the eurozone nations -- especially the strongest, Germany -- could cause distortions that could harm the weaker ones.

This news has already further driven down the euro, which has been falling all day, and it now sits at about 1.2 against the dollar.

This seems like a good opportunity to send you, if you haven't been, to my piece "5 reasons why Europe is sick".

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By Frank Ahrens  |  May 18, 2010; 2:10 PM ET
Categories:  Deficit/debt  | Tags: Business, Credit default swap, Germany, Investing, Naked short selling, Short, Stocks and Bonds, United States  
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You're nuts.

Allowing naked shorting is like allowing people to place bets in Vegas without having the cash.

That's why they made it illegal.

You can accomplish the same goal by buying, or selling puts and calls.

So blow off.

Posted by: BattleOffSamar | May 18, 2010 3:04 PM | Report abuse

STOCKSTRADAMUS...I think it's a case of Stockstradamus --LOL
The movie "Stock Shock-The Short Selling of the American Dream" predicted the "flash crash,"naked short selling bans, the rise of Sirius XM, and the fall of Goldman Sachs. Every investor should see this movie.

Posted by: JVMfan | May 18, 2010 6:44 PM | Report abuse

Financials will take a hit tomorrow; gold will rise at least $20. Even though naked shorts are outlawed here, our TBTF banks trade on the other exchanges; they'll get pounded as well. When is everyone going to learn that the TBTF cheap access to the Fed window and the reason that CDOs and derivatives will never (at least in the near term) be separated is the fact that our TBTF banks ARE STILL TECHNICALLY INSOLVENT from the meltdown. The Fed will still allow them to scam the American investor, the state pension funds and the bond markets until they get even.

Posted by: apberusdisvet | May 18, 2010 8:36 PM | Report abuse

will the Washington post report on Goldman Sachs being busted for Naked Short Selling

story broke May 4th, 2010 yet the TV news media covered up the story

Posted by: StockShock | May 19, 2010 6:40 AM | Report abuse

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