Nein! Germany Wrong to Blame Naked Short Sales: Gary Weiss

In 2008, the small-cap naked shorting kvetchers were overshadowed by Bear Stearns and Lehman Brothers -- two of the foulest, worst-managed, risk-loving, subprime-devouring, out-of-control banks ever to screw their shareholders, customers and the public. Both Alan Schwartz of Bear and Richard Fuld of Lehman blamed "rumors" and "naked short sellers" for the demise of their splendid firms in congressional testimony.

The problem was that there is absolutely no evidence that there naked shorting caused bank shares to collapse. That thesis was in fact disproven by a 2009 academic study that tracked "fails to deliver" in bank shares in 2008. ("Fails" are sometimes tracked as a proxy for naked shorting, even though they can be caused by other things.) But the facts didn't stand in the way of regulators, and the SEC's Chris Cox imposed naked shorting restrictions that proved utterly useless. (Of course, you have to ask yourself, is there anything Chris Cox did that wasn't utterly useless?)

Now, I'm not suggesting that Germany is engaged in stock-rigging, that it's cooking the books or doing anything else underhanded. My suspicion is that the temptation just got to be too much for Wolfgang Schäuble, the German finance minister who dreamed up the naked shorting assault. After all, bureaucrats and shady CEOs alike need to demonstrate that they are in control, even while sitting in a rowboat in the middle of a hurricane. The Wall Street Journal pointed out the other day that the restrictions on naked shorting have "helped the 67-year-old German finance minister demonstrate to his domestic audience that he's up to the job of managing the euro currency area's growing financial crisis."

I'm sure the same sense of duty propelled Stanley Aslanian, the president of Haas Securities, to peddle his naked-shorting baloney to the media 23 years ago, at the same time that he was screwing his customers right and left. "Boys," I'm sure he said to his FFA (future felons of America) accomplices, "I'm up to the job of managing this crisis." He did for a while, to his customers' regret, if they believed that naked shorting was really the problem.

The same dilemma faces us today during the European debt crisis. Yes, I know, even a child can see that Europe is suffering from gross fiscal mismanagement. As Groucho Marx would have put it, do you believe that naked short selling is the problem -- or do you believe your own eyes?

>To order reprints of this article, click here: Reprints