Call the Whaaaambulance: Treasury Fails
by Karl Denninger
Posted at 08:04
Thursday, April 30. 2009
Bloomberg has an interesting story this morning:
A Fed-endorsed industry recommendation will require traders to pay a three-percentage-point penalty on uncompleted trades, known as fails, starting tomorrow. That may reduce the number of bets on price declines, according to RBS Securities Inc. and Societe Generale SA.
While the new recommendations are meant to curb disruptions caused when traders fail to meet their obligations, some strategists are concerned it may do more harm than good in the $7 trillion-a-day repurchase market, where dealers finance their holdings. A reduction in trading would be a setback for the Fed as it seeks to lower borrowing costs by pumping cash into the banking system and purchasing as much as $1.75 trillion in Treasuries and mortgage securities. tiny.cc
Known as "fails"?
How about "otherwise called fraud"?
Folks, there's nothing wrong with shorting things. It makes the market efficient, it prevents overpriced garbage from being sold into the market without the price reflecting value, and to the extent that people do short it represents a reservoir of buying demand, thereby stabilizing prices during serious declines.
But shorting something you have no intention to deliver, thereby producing "fails", is fraud. It is effectively counterfeiting additional securities, and is exactly as damaging to both confidence and valuation as is using your copier to print up $100 bills.
“Making short-selling potentially costly can reduce market liquidity,” said Darrell Duffie, a Stanford University finance professor and member of the New York Fed’s Financial Advisory Roundtable. “Financial markets with relatively unencumbered short-selling perform better.”
Yet another so-called "professor" who needs to have his degree revoked.
Financial markets without fraudulent counterfeiting of securities not only operate better but are more liquid besides, as trust is the most important element in liquidity and when you cannot enter into a trade with a reasonable degree of certainty it will settle liquidity is destroyed.
Because the penalties will be imposed across the government debt market, unregulated investors such as hedge funds will be held to the same standard as banks and bond dealers. Since it’s a recommendation, some dealers are still uncertain which counterparties will need to pay the penalty.
Gee, you mean that the law will apply to everyone?
Good.
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