German Desperation

Karl Denninger is wrong again. He should turn off his caps lock and think a bit harder about the desperation move that is the German government's ban of various free-market transactions like short selling and credit default swaps.

Credit default swaps (CDS) are a good idea that make it easier for bonds to find the right market prices. The cash bond market is illiquid and CDS are an innovation that makes pricing information enter the market more easily.

All these arguments about CDS buyers "burning down their neighbor's house" where they don't have an insurable interest are hogwash. Notice all the complaints about CDS come from entities that have an interest in bonds NOT finding market prices. Notice you never hear Norway complaining about hedge funds buying Norwegian CDS.

There's no such thing as "naked shorting" of common stocks in the United States of America, and I doubt it's a problem in Europe either. I have a terrible time finding shares to short when I have a bearish view on a company. Notice that insolvent banks and companies with bad business models complain the loudest about "naked shorting." When was the last time Microsoft went on CNBC to complain about short sellers? In 2009 when Georgia Gulf was financially distressed, they quietly fixed their company by conducting a brutal restructuring, and never said a word about short sellers.

Hedge funds are not the problem. Hedge funds speculate with their own money, not government money like investment banks. Hedge funds have skin in the game. If a hedge fund is buying CDS on something, you can bet that they have identified a real problem.

The Euro is failing because it's a disaster, because for it to survive would require people who don't like each other to make huge sacrifices on each others' behalf, not because of hedge funds.

From Credit Bubble Stocks