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

Germany's crackdown on naked short selling is classic politics. Why bother with a new villain when an old one will do?
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So we have an old villain in the European financial crisis. Hey, why bother with a new villain when an old one will do?

I'm talking about Germany's crackdown on the

Dr. Caligari

of finance,

naked short selling

. When I heard about that, the moths flew out of my brain. I was veritably bathed in nostalgia.

Naked shorting is the best villain you can have if you're running something that issues or sells stocks. I learned that for the first time back in the spring of 1987.

The market was climbing wonderfully and, as you know, stocks must not ever go down. That's for Bolsheviks. Stocks can only legitimately go up, for otherwise something terrible is happening! (And not with the companies issuing the stock, or the stock promoters or brokerages selling them).

At the time, the victims were stocks being sold by a wonderful little brokerage firm called

Haas Securities.

In a tear-jerking article, Businessweek described how Haas was "fighting back" against these fiends. I was new to BW at the time and I remember how that sob story prompted a rather nasty rejoinder from Barron's, which had run an article saying the stocks Haas marketed were frauds.

It turned out that we had been bamboozled. At the time the BW article appeared, Haas Securities was in the middle of a $644 million stock-rigging scheme involving the same stocks mentioned in the article. In 1990, Haas's president and chairman were sentenced to prison terms for securities fraud.

Since then I have viewed naked shorting claims with suspicion. Whatever naked shorting might have gone on -- and none was ever proven for the Haas stocks --the real problem can almost be guaranteed to be anything but naked, clothed, or any other kind of shorting.

Just look at the companies that have screamed the loudest about naked shorting. The loudest is

Overstock.com

(OSTK) - Get Overstock.com, Inc. Report

, which recently had to

restate earnings

going back quite a ways , turning gains into losses, because its accounting hadn't followed GAAP. The story is neglected in the media, but has had some good coverage in

financial blogs,

including the one by Sam Antar of

Crazy Eddie

fame -- a Harry Markopolos-style whistleblower who has been thanked for his efforts by an Overstock smear campaign. Naked shorting is a favorite excuse of the pink sheet crowd, such as the subprime doggy

Novastar Financial

, the OTC crud

Universal Express

and last but not least

CMKM Diamonds

, whose former CEO has been indicted and is now a fugitive.

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Enron

was also a victim of naked shorting, if you read some of the kookier websites.

Martha Stewart Living

(MSO)

,

Dendreon

(DNDN)

,

Netflix

(NFLX) - Get Netflix, Inc. (NFLX) Report

and

Taser International

(TASR)

are also on the lists circulated by conspiracy types.

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?