Merkel should avoid channeling Dick Fuld

By Rob Cox
May 19, 2010

German Chancellor Angela Merkel has vowed that Greece will not be Europe’s Lehman Brothers. Yet her country’s unnecessary short-sale restrictions are eerily redolent of the paranoid and fruitless campaign that the Wall Street firm’s chief executive waged from his 7th Avenue aerie before Lehman collapsed. Fighting the market like Dick Fuld won’t solve Europe’s woes.

The German Ministry of Finance on Tuesday banned naked short selling of the stock of Germany’s ten largest financial institutions as well as government bonds and sovereign credit default swaps. Rather than reducing volatility, it sent markets into a tizzy. One worry is that Germany’s government fears  things are about to take a turn for the worse.

But that’s not the only troubling aspect to Merkel’s move. The graveyards of financial history are cluttered with the tombstones of executives who chose to blame speculators for their distress rather than address the underlying causes. There is no more salutary example than Lehman’s former chief.

Just weeks before Lehman went bust in September 2008, Fuld was telling visitors that Lehman’s true enemies were the short-sellers betting against the company. Questions about shrinking Lehman’s over-extended balance sheet or raising fresh capital were quickly turned into pugnacious arguments about the need to restrain the shorts.

True, some investors stood to gain from Lehman’s demise. But their arguments, like the one Greenlight Capital’s David Einhorn put forth about the realistic value of commercial property on Lehman’s books, proved spot on. Rather than bite the bullet, take losses and raise new capital, Fuld tried to shoot the messenger.

Merkel is of course in a far different position. Germany isn’t the Lehman here: the country’s finances are in good shape. And previous short-selling restrictions in the ostensibly more market-oriented United States and UK give her some cover.

Still, the euro zone’s problems, which rub off on Germany, don’t exist only on the trading screens of hedge funds. They lie in the economies of Greece and other nations that have tied their fortunes to the single currency but failed to keep their finances in order. Until these are addressed, banning shorts won’t help. Market forces will still find a way to issue their harsh judgment.

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