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Tuesday, May 18, 2010 4:19 PM


Shock & Awe Phase II: Germany to Ban Naked Short-Selling at Midnight; Politicians Battle Markets; Short Selling Restrictions and Market Crashes


Shock and Awe I worked so "well" that it's time for round II: Germany to Ban Naked Short-Selling at Midnight

Germany will temporarily ban naked short selling and naked credit-default swaps of euro-area government bonds at midnight after politicians blamed the practice for exacerbating the European debt crisis.

The ban will also apply to naked short selling in shares of 10 banks and insurers that will last until March 31, 2011, German financial regulator BaFin said today in an e-mailed statement. The step was needed because of “exceptional volatility” in euro-area bonds, the regulator said.

“You cannot imagine what broke lose here after BaFin’s announcement,” Johan Kindermann, a capital markets lawyer at Simmons & Simmons in Frankfurt, said in an interview. “This will lead to an uproar in the markets tomorrow. Short-sellers will now, even tonight, try to close their positions at markets where they can still do so -- if they find any possibilities left at all now.”

Allianz SE, Deutsche Bank AG, Commerzbank AG, Deutsche Boerse AG, Deutsche Postbank AG, Muenchener Rueckversicherungs AG, Hannover Rueckversicherungs AG, Generali Deutschland Holding AG, MLP AG and Aareal Bank AG are covered by the short-selling ban.

“Massive” short-selling was leading to excessive price movements which “could endanger the stability of the entire financial system,” BaFin said in the statement.

“In some ways, it’s a battle of the politicians against the markets” and “I’m determined to win,” Merkel said May 6. “The speculators are our adversaries.”
Politicians Battle Markets

We have seen this play before. It's hopeless.

Politicians cannot battle markets and expect to win. Wage price controls do not work. The Bazooka ploy failed a dozen times, and the ban on short selling financials in the US failed miserably.

Moreover the Alice's Restaurant Theory of Central Bank Currency Moves is rapidly falling apart.

Short Selling Restrictions - A Great Indicator of Market Crashes

Please consider my January 27, 2010 post Short Selling Restrictions "A Great Indicator of Imminent Market Crashes" Here is the key chart.

Fannie Mae Weekly



click on chart for sharper image

All these short sale restrictions are going to do is create a vacuum. Once the shorts are driven out these shares will plunge.

If history is any guide, there will be a brief rally in German banks, followed by a collapse of unknown duration. Politicians are not bigger than the markets, no one is.

However, politicians can and do frequently exaggerate the existing trend. In this case, the trend is down. Short sellers are not the problem, if anything, short sellers are the cure, exposing problems and failed policies that politicians refuse to address.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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