Germany Bans Naked CDS Against Euro-Zone Government Bonds: Tentative First Steps in Europe’s Self-Defense Against Zombie Bankers and Hedge Fund Hyenas

Webster G. Tarpley

TARPLEY.net

May 19, 2010

Germany and Europe have now made some promising initial steps in the direction of their necessary self-defense against the depredations of those zombie banks and hedge fund hyenas who have been organizing a massive speculative attack on Greece, Spain, Portugal, and Italy with a view to destabilizing the euro and perpetuating the world hegemony of the troubled US dollar.

The most significant of these moves is the ban imposed unilaterally by the Merkel-Schäubele Christian Democratic-Liberal German coalition government to outlaw the use of high risk derivatives, specifically credit default swaps (CDS), for the naked shorting of government bonds which are denominated in euros. This means that Europe’s largest economy and the Frankfurt financial center – the biggest in continental Europe – will be off limits for speculators using these toxic CDS, which are issued by entities which have not fulfilled the legal requirements for underwriting insurance. This website has repeatedly urged a ban on credit default swaps.

Germany Activates Ban On Naked Credit Default Swaps On Euro-Denominated Government Bonds, Naked Shorting of Financial Stocks

According to wire dispatches, the details of the German move are as follows. “Germany’s securities market regulator Bafin … banned naked short sales of certain securities, in particular the government bonds of the 16 countries that use the euro,” according to AFP. Bloomberg specified: ‘Germany … prohibited naked short-selling and speculating on European government bonds with credit-default swaps…. The German ban, which lasts until March 31, 2011, also applies to the shares of 10 banks and insurers including Allianz SE and Deutsche Bank AG, financial regulator BaFin said …. The step was needed because of “exceptional volatility” in euro-area bonds, BaFin said.’1

The German measure takes aim at the type of derivative which has been massively used by hedge funds and banks to speculate against the bonds of Greece and the other countries of the European Union’s Southern tier. Naked shorting of these bonds using credit default swaps occurs when a speculator places a derivatives bet against such bonds without simultaneously owning the bonds. Speculators using naked credit default swaps thus cannot plead that they are merely hedging or protecting themselves against the risk on bonds which they own. The ban unquestionably blunts one of the sharpest weapons in the speculative armory currently being used in the massive assault on Greece and the other Mediterranean EU states. Also banned is the traditional form of naked short sales of the stocks of a list of German financial and insurance institutions. This needs to be expanded to a blanket ban on naked short sales in Germany, and generalized to the rest of the EU, with the appropriate additions in each country. The goal must be to deter speculation, break the back of the hedge fund assault, and obtain a period of stability for the implementation of further reforms, including a Tobin tax on financial turnover and an economic recovery strategy not dependent on savage austerity and budget cutting measures, but rather on infrastructure, credit creation, and the creation of tens of millions of productive jobs.

It is now imperative that the German ban on naked CDS speculation be imitated and if possible outdone by the other European states, and especially those under immediate attack by international speculators, including Greece, Spain, Portugal, Italy, Ireland, Iceland, Latvia, and others. If Merkel and Schäubele can take these measures, then surely any government can. France must also recognize that failure to outlaw CDS will constitute a crippling handicap for their national economy going forward, and therefore match or go beyond the German ban. One way to do this would be to extend the ban to all credit default swaps without exception, since these always amount to the illegal issuance of insurance policies in contravention of the existing legislation on this point. CDS were the key to the failure of AIG, and have cost US taxpayers some $180 billion and counting. Another type of derivative which has proven itself extremely toxic and dangerous over recent years is the collateralized debt obligation or CDO. In particular, synthetic CDOs – meaning CDOs – which contain other CDOs –have played a central role (along with CDS) in the ongoing Goldman Sachs-Abacus scandal and are prominent candidates for prohibition.

French President Sarkozy has repeatedly strutted and postured as the great enemy of international financial speculators, but his pathetic response to the German CDS ban was initially to stress that France would not join in the ban. Sarkozy thus cuts the sorry figure of a euro-wimp. The British hastened to reassure the hedge fund pirates that they would continue to be welcome in the City of London. Portugal, by contrast, reiterated their own ban again short sales, which they intend to maintain. Other European countries are doubtless observing developments with a view to joining the winning side.

During the first day that the German ban was in place, the euro first declined as a result of short covering by speculators, and then rose by about two US cents, thus indicating a temporary stabilization. Several weeks will be needed to evaluate how much the Germans have obtained by means of the current ban. It is already clear that, once embarked on the road to be regulation, Germany and Europe must quickly strike further blows against derivatives and against hedge funds to prevent the speculators from regrouping.

German Government Demands Tobin Tax As Price of Greek Bailout

Having made the foolish decision to support the $1 trillion bailout of the euro and the euro-zone banks, the Merkel government now feels impelled to shift part of the cost of this effort onto the banks which are responsible for creating a crisis in the first place. Merkel also needs the CDS ban as cover when she requests that the German Social Democratic Party (SPD) join in voting for the trillion dollar bank bailout. Merkel and Sarkozy would have been much better advised to steer clear of the bailout, and rather escalate counterattacks against the zombie banks and the hedge fund hyenas mounting the speculative assault on Greece, Southern Europe, and the euro itself. Even so, the idea of a financial transaction tax or Tobin tax is unquestionably valid and should be instituted immediately. If this is done with sufficient energy, it will soon become clear that there is no need for the bailout as such since the loan guarantees in the bailout will not be needed. Aggressive regulation, in short, is far cheaper than bailouts.

According to wire dispatches from Berlin:

The financial sector must contribute to the euro-zone sovereign-debt rescue if Germany’s share of the €750 billion ($924.6 billion) package is to be approved in the lower house of parliament, the ruling coalition said Tuesday. ‘We have agreed in the coalition committee that the government will be asked to campaign for a European, global contribution of the financial markets—this means a financial-transaction tax or financial-activities tax,’ said Volker Kauder, parliamentary floor leader of the conservative coalition.2

Of these two types of taxes, it is the financial turnover tax which is truly indispensable, although it could be supplemented by an additional tax on banks. Here again, Merkel is trying to placate the strongly anti-bank sentiment of the German public and the Bundestag. An effective financial turnover tax needs to be at least 1% of all sales of stocks, bonds, foreign exchange, and derivatives, with the tax being calculated on the notional value of derivatives. The Tobin tax should be instituted as a strictly national measure, so as to provide revenue for cash-strapped national budgets, and must on no account be transferred to the International Monetary Fund, World Bank, or European Commission.

European Finance Ministers Want Regulation of Hedge Funds

Given the obvious role of wolf packs of predatory hedge funds in creating the Greek crisis, the necessity of cracking down on these corsairs is also too obvious for the European authorities to ignore. The European finance ministers have now approved new measures to regulate and limit hedge fund operations in the EU. According to wire service reports:

in addition to disclosure obligations and leverage limits, new requirements in the EU legislation include restrictions on compensation for fund executives. Perhaps the most contentious provision is an EU plan to put up hurdles to marketing of so-called third-country funds doing business in the EU. Under one version of the legislation, non-EU hedge funds would need to get permission from each country in which they want to operate. Under another version, third-country funds could get a ‘passport’ for access to all 27 EU nations, but only if they met requirements, such as voluntarily complying with the EU’s risk and compensation restrictions.3

The approval of these measures was an important defeat for the new Tory Chancellor of the Exchequer George Osborne, whose attempt to sabotage these minimal steps proved futile. Osborne is motivated by the fact that 80% of European hedge funds, including some of those leading the charge against Greece, are based in London. Many hedge funds which are controlled from the United States are nominally based in the Cayman Islands, a notorious offshore paradise of money laundering and shady finance.

European Parliament Approves Hedge Fund Rules

Parallel to this action by the European finance ministers, the European Parliament has also approved its own regulations for hedge funds. According to published accounts,

the European Parliament approved new, tighter regulations for hedge funds and private-equity firms, rejecting complaints that the legislation would make it too difficult to offer offshore funds to European investors. European Union finance ministers at the European Council are expected to approve their version of the legislation Tuesday night, kicking off what will likely be months of talks between the council, the parliament and the European Commission, the EU’s executive arm, to hammer out a final version that will become law.4

As a result of the ponderous and Byzantine EU bureaucracy, the approach of the finance ministers will have to be merged with that of the European Parliament, a process which urgently needs to be accelerated.

On Wednesday, CNBC showed hysterical London speculators warning that the German ban will mean a loss of liquidity and of the wonderful creativity of credit derivatives. Later, a parade of hedge fund hyenas speaking from their conference in Las Vegas lamented the German government’s moves, while conceding that they were all scrambling to reduce their risk exposure because of the public blowback against the looting of the world economy by hedge funds.

1http://www.bloomberg.com/apps/news?pid=20601087&sid=a7Ibb3CrSfU4&pos=1

2http://online.wsj.com/article/SB10001424052748704912004575252303082088116.html

3http://online.wsj.com/article/SB10001424052748704912004575252632251750758.html?mod=WSJ_business_whatsNews

4http://online.wsj.com/article/SB10001424052748703315404575249923482000294.html