No more rewards for naked shorts

Stephen Beard Mar 10, 2010
HTML EMBED:
COPY

No more rewards for naked shorts

Stephen Beard Mar 10, 2010
HTML EMBED:
COPY

TEXT OF INTERVIEW

Bill Radke: President Obama supports clamping down on financial market speculators —
or so says the Greek Prime Minister after talks last night. George Papandreou says the U.S. wants to talk about regulating some of the financial machinery and derivatives that have led to several parts of the financial crisis, including recently the run on Greek debt. Joining live to talk about it, from London, correspondent Stephen Beard. Good morning.

Stephen Beard: Hello, Bill.

Radke: Hello. Stephen, U.S. lawmakers have said they support building tougher oversight on speculation into the system. But the Europeans have gone much further than the U.S. on this, possibly even banning some trades?

Beard: That’s right. Both the German chancellor and the French president have said they are going to take very tough action against people that speculate against whole countries, gambling that their governments are going to go bust. And yesterday, a top U.S. official said they were indeed drawing up a ban on certain anti-government speculative transactions.

Radke: So which financial products do they have in the cross hairs?

Beard: Credit-default swaps. These are essentially insurance policies that pay out if a government or a company defaults. Now, they’re a perfectly respectable way of protecting your investment if you own the government bonds. But the problem comes with the so-called naked shorts. Um, not quite as interesting as it sounds, Bill; it’s when speculators buy huge amounts of swaps without owning any of the bonds. Andrew Hilton of the CFSI says that can be harmful:

Andrew Hilton: If everybody is buying credit default swaps, naked credit default swaps, you tend to push the price of the government debt down and increase the likelihood that the Greeks will in fact default.

But he says it’s important that you only target the naked swaps. If you ban all swaps, you might make it more likely that governments will go bust, because investors won’t want to buy certain government bonds without insurance.

Beard: Marketplace’s Stephen Beard in London. Thank you, Stephen.

Radke: OK, Bill.

We’re here to help you navigate this changed world and economy.

Our mission at Marketplace is to raise the economic intelligence of the country. It’s a tough task, but it’s never been more important.

In the past year, we’ve seen record unemployment, stimulus bills, and reddit users influencing the stock market. Marketplace helps you understand it all, will fact-based, approachable, and unbiased reporting.

Generous support from listeners and readers is what powers our nonprofit news—and your donation today will help provide this essential service. For just $5/month, you can sustain independent journalism that keeps you and thousands of others informed.