Naked, with a banana

So prudish German Chancellor Angela Merkel is desperate to ban the slightly saucy-sounding practice of naked short selling.

What's all the fuss? What are those excitable Germans on about?

Well, it being the exam season, and revision being underway, let's work through an example.

Let's imagine we're running a small business, the sole purpose of which is to buy and sell soft fruit. This week, we will be mostly dealing in bananas. Just as in the City, and in the Frankfurt markets, all we need to do to retire wealthy is to buy low, sell high.

Supposing CF and his friends think that the price of bananas might be about to go up Perhaps some photos of Lady Gaga doing something unspeakably erotic with a banana are about to be published, creating a huge demand for bananas among the young, trendy and sexually liberated.

In that case, we might pop out and buy a shed load of 'nanas at today's low prices, then flog them at the newly increased price when Gaga's 'Hello' magazine spread hits the newsstands.

But, on the other hand, supposing CF and his friends thought that the price of bananas might go down? Perhaps some other photos, of one of those Millband boys doing something unspeakably pathetic with a banana are about be published, ensuring that no right-thinking person will ever been seen holding a banana ever again.

In this case, the price is going down, and we can only buy low after we've sold high. Tricky. So what we'll do this time is enter into an agremeent with some poor fool who doesn't know about the Millband photo horror. We'd have to ask him to wait for the bananas until next week, because we can't buy 'em until the price goes low, and he'd have to agree on a price now - the higher current price - and stick to it.

So, we've got a deal. Someone has agreed to pay us a quid for the 'nana's next week, and we believe we'll be able to pick 'em up for 20p in a couple of days time. Buy low, sell high.

And that, in a nutshell - or in a banana skin - is 'short selling'. And because CF and his imaginary colleagues can't borrow or steal the bananas, they're selling them before they've bought 'em: that's 'naked short selling'

Of course, CF is taking a risk that these photos don't get published, or that they won't have the desired affect on the price. If the price of bananas actually goes up as a result of the boy Milliband endorsement, CF is going to lose money - he's obliged to deliver 'nanas at the agreed price, and has to buy them regardless of their actual price. But, hey, that's Casino Capitalism, right there, That's the risk CF takes, over and over again, to make a soft-fruit-related living,

Those of you who are still awake will note one obvious aspect of this: at no stage in the imaginary proceedings did anything CF did affect the bloody price of the bloody bananas. CF has made a profit, in both examples, by anticpating the price of bananas, and acting upon it, but he didn't actually change the price himself, did he?

Any more than those nasty hedge funds, and those eeevil bankers affected the stock valuations of banks or the value of the Euro.

So, what the fuck are you on about, Angela?

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