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EU Willing to Sacrifice Hedge Fund Jobs to Clean Up Industry

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The EU seems unintimidated by various threats the hedge fund and private equity fund industry have tried to make to forestall efforts to restrict the activities of those firms. The EU proposed both limiting the ability of EU nationals to invest in non-EU funds, and the ability of non-EU players to operate within the EU.

The idea that any government dare tell the moneybags what to do is a bit of a stunner to the industry, which has gotten used to having its way in the US and UK. But despite the loud noises from the industry, there has been no change in the stance of the Europeans.

Indeed, it gets even better. An EU parliamentarian who is the rapporteur on the proposed reforms, in effect said that what was at stake was 3000 hedge fund jobs….in the UK. That’s a rather pointed way of saying the EU thinks it has nothing to lose via this change.

From the Guardian (hat tip reader Swedish Lex):

The loss of up to 3,000 jobs in City hedge funds and private equity firms is a price worth paying for tougher rules on the sector, an influential MEP said today.

Jean-Paul Gauzès, the European parliament rapporteur on a proposed directive on alternative investment, said: “If the directive wipes out two or three thousand speculators, I am not going to be sad.”

In his first trip to London in more than 30 years, Gauzès said that Europe should become a “fortress”.

Non-European hedge funds should be allowed into the region only if they met certain criteria, he said, and the new directive should be enacted regardless of whether it led to an exodus of hedge fund and private equity managers…

The visit by Gauzès, aimed at increasing communication and transparency, only added to the anger felt in the industry.

“It takes chutzpah to come to London, without speaking English, to say you wouldn’t be sad if thousands of jobs are lost in London,” an industry source said.

Yves here. Do you see the stunning sense of entitlement? How many times have regulatory changes led to the loss of thousands of factory jobs? Did any of these Masters of the Universe have any sympathy? And the reason the EU wants to leash and collar them is that they have engaged in predatory conduct, a point that also seems to escape these “victims”.

Hedge funds continue to maintain that they had nothing to do with the crisis. I am hoping to put up a in the not-too-distant future on an April 2007 paper by Henry Maxey of Ruffer (a UK money management firm), “Cracking the Credit Market Code”. It was an amazingly prescient piece of work. It described how “funding liquidity” came from “non-bank financials”, which he calls “hedge fund banks” which are more fragile sources of liquidity. His paper (60 pages long, impossible to do it justice in a short space) demonstrates that structured credit arb (using lower-rated CDO tranches) as well as the lesser but still very significant leverage of CLOs were the major contributors to the liquidity boom that ended so badly.

And this post from the Columbia Journalism Review (hat tip reader Francois) shows that the European skepticism is warranted:

This from The Wall Street Journal’s Heard on the Street is the stat of the day (okay, it ran yesterday):

Nearly half the 163 U.S. nonfinancial companies that defaulted last year were backed by private equity.

Now I don’t have a number for how many U.S. nonfinancial companies overall are backed by private equity, but you can bet it’s nowhere near half. This disproportionate failure isn’t because private-equity companies are really bad at picking investments. It’s because they levered up their acquisitions with cheap debt to goose their returns, and now these companies, who employ (or employed) lots of people, can’t meet their debt service, much less invest in the business. That’s helping choke the economy.

This raises a critical point about private equity: Why isn’t that industry being included in financial reform? What about Blackstone?

If these firms destroy or hobble companies by loading them up with debt, sometimes to pay themselves massive dividends that recover all their equity with no earnings, where’s the legislative scrutiny. How many jobs have been lost because of the excess debt loaded onto otherwise healthy companies? It can’t be insignificant.

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18 comments

  1. attempter

    The sense of entitlement, the sheer psychopathy (it’s really beyond mere sociopathy) is certainly extreme.

    It’s also interesting how self-confident they are in the political circumstances, not only in the present moment but the indefinite future, that they fight so hard (and with such gratuitous loutishness) against such meager restraints.

    They must be happy with the existing system, which even at its most severe would still absurdly coddle them. They must also have no doubts at all about the perpetuity of the system, that they can so brazenly discredit those who are really just protecting them against those who would deal with them as they really deserve to be dealt with.

    And yet sometimes, only rarely, I’ll grant, justice does take a hand.

  2. Swedish Lex

    The hedge fund and private equity industries continue to use a couple of contradictory arguments in their attempts to water down the draft EU Directive.

    Their main line of attack is to claim 1) that their industries provide risk capital and market efficiency to such a high degree that is very beneficial to society as a whole and that we should not tamper with the provider of golden egges (to whom?); 2) the industries are systemically insignificant and pose no potential threat whatsover to the economy and that it therefore is a silly idea to discuss anything onther than voluntary self- regulation.

    I am exaggerating, of course, but not by that much.

  3. derek

    That’s what I always say about crackdowns on crime; don’t the police know how many *jobs* there are in the important mugging and burglary industry?

  4. john haskell

    Yves, you are 100% correct that hedge fund employees don’t show much sympathy when unionized manufacturing jobs are lost due to regulatory changes.

    You might go so far to say that the hedge fund employees show about as much sympathy for the loss of union jobs as the unions show at the loss of hedge fund jobs.

    Jean Paul Gauzes’ sympathetic approach is also impressive. But then again, Eurocrats are known for their stunning sense of entitlement.

    1. attempter

      In Tett’s Fools Gold she tells how one of the “Morgan Mafia” who went on to start a hedge fund (in England) had large pictures of begrimed coal miners on his wall so he and visitors could laugh at them and make jokes.

  5. charcad

    Gauzès said that Europe should become a “fortress”.

    The key feature of a fortress is strictly controlled ingress and egress. Nothing passes without the permission of the fortress commander.

    We normally expect tariffs, severe immigration control and capital exchange controls to be a part of this control regime. What Gauzès and other pro-EU putschists really agitate for is a state of anarcho-tyranny.

    Nearly half the 163 U.S. nonfinancial companies that defaulted last year were backed by private equity.

    Absolutely. 100%. Very good snag there.

    Yves, at the start of this can we please demystify “private equity” before it becomes another boogeyman legend?
    “Private equity” is just a series of convenient masquerade ball costumes. Among the real guest identities are CALPERS, CALSTRS, the Ford Foundation, the Harvard University endowment, the Southern Poverty Law Center and all the other pillars of the liberal-progressive establishment.

    1. charcad

      Once upon a time I almost posted a tongue-in-cheek comment here. The idea was that actuarially failed (a/k/a “bankrupt” in the Dark Ages of my youth) government employee pension funds could try to retrieve solvency by backing, buying and building dozens of casinos in Detroit. This scene included features like live simulcast and the Harvard & Yale University Endowment sponsored poker and blackjack teams. Plus the usual fake p.r. chrome plating of claiming moral credit for “economic redevelopment”.

      Reality has now beaten me to the punch.

      http://online.wsj.com/article/SB10001424052748704100604575145881339999478.html?mod=googlenews_wsj

      “The Ontario Teachers Pension Plan has just beaten European buyout firm CVC Capital Partners to the chase to buy U.K. lottery operator Camelot Group.”

    2. Anonymous Jones

      Methinks it’s a little more complicated than you posit.

      I must be so brainwashed by the liberal-progressive establishment that I can’t see it even though it surrounds everything I do. Thanks for tipping me off! Must have become background noise. I’m so silly for being so gullible and unable to do any serious self-examination and self-criticism!

      Also, really interesting theory about the definition of bankruptcy. I’m not sure I would lump pensioners’ claims with those of, say, bondholders, but I can see the similarities. Black-and-white-it-up for me as much as possible. Makes it easier for those of us who aren’t smart enough to navigate the world on our own!

  6. Dan_in_KC

    “Backed by Private Equity” is a phrase that should be relegated to the hall of shame with the likes of “I’m from the Government, I’m here to help”.

    An excellent example of the level of ‘backing’ these companies can provide was provided in a New York Times article last fall: “Profits for Buyout Firms as Company Debt Soared” which can be found at the following link:

    http://www.nytimes.com/2009/10/05/business/economy/05simmons.html

  7. readerOfTeaLeaves

    Do you see the stunning sense of entitlement? How many times have regulatory changes led to the loss of thousands of factory jobs? Did any of these Masters of the Universe have any sympathy?

    Stunning sense of entitlement in financial sector? Check.
    Regulatory changes leading to job losses in manufacturing? Check.
    Masters of the Universe (MOTU) have no sympathy? Check.

    It seems that the rubber is starting to smolder as it hits the road: will financia entities choke out government, as a parasite eats its host?

    With news breaking in the US of Wall Street colluding to rig US municipal bonds, it’s a good time to start asking about the financial relevance of some of these economic entities.

  8. KFritz

    This is reminiscent of Microsoft’s EU legal adventures. It took a long time for the folks in Redmond to figure out that the EU would actually, like, regulate them and fine them a substantial amount. They were angry and nonplussed.
    All PC users have benefited from the EU’s ‘hang tough’ attitude. GO EU REGULATORS!!

    1. liberal

      This is an important point. What do Redmond and Wall St. have in common?

      Massive collection of economic rents.

  9. Ishmael

    Something that seems to be not very well understood about PE/LBO firms is that they sit on the Boards of their buyout companies and push for the most liberal if not out right fraudulent accounting standards so they will not get caught with a hot potatoe. Accordingly, they buy a company, asset strip it, dress it up and take it public again and their friends in the IB industry put a buy on it and the PE/LBO firm unloads and the company then goes into a death spiral.

    That is how the came is played. If a PE/LBO firm owns over 20% of a company then the firms partners should be personally liable for the actions of the Company. Otherwise it is a whole pump and dump scheme.

  10. Andrew Bissell

    It’s unclear from the article exactly what the criteria are which the “directive” seeks to impose. The only market activities mentioned are “betting on the collapse of the property market and certain banks.” If EU legislators seriously believe that the biggest cause of risk in their financial system is the short selling activity of hedge funds — and that their number 1 legislative priority should be to rein in such activity — they’re even bigger idiots and dupes than I thought. That they would do this before addressing the problem of those same banks carrying toxic sludge on their balance sheets at wildly inflated marks, speaks volumes about their credibility in addressing financial matters.

    If the problem is that a few hedge funds are putting on trades which can only be paid off through public bailouts, then the only “regulation” that is needed is to stop bailing out their damn counterparties!

    Speaking more generally, squeezing out shorts will remove one of the only natural sources of demand that exists to create a bid during market declines/panics. All it will accomplish is to create “air pockets” under asset markets. A few people will be glad to see the short sellers brought to heel, simply because they hate seeing anyone in finance make money (especially by placing successful bets on “unpleasant” outcomes like a collapse in the sovereign credit of an extravagantly overspending state like Greece). Personally, I’ll enjoy watching these legislators (and the major banks for which they are the lackeys) search in vain for a bid for their junky assets when panic conditions return for a second act.

    Hedge funds are an easier target than the big banks because a.) the hedge funds don’t own the legislators themselves, and b.) unlike the banks, they can actually make money when asset prices go down, which in our CNBC-ified world is the equivalent of betting on the “Don’t Pass” line. Taking on the “moneybags” should hardly be seen as a major victory when it’s mostly a propagandistic distraction from the much more important sources of systemic risk, namely, the publicly-supported banks.

  11. Bernard

    the loud noises coming from those who now complaining about change in hedge fund regulation by the EU sound like some pigs squealing after they just got caught and want to be let go on playing in the muck, just like the banksters did. The only problem here is that in America they own Congress.

    we would never see such laws in America. the thought of Government doing something for the good of the society is not a viable concept here. Government has been portrayed as “Evil Incarnate.” the Banksters are starting to see what “Evil Incarnate” means.

    i wish i could see and hear the squealing on this side of the Atlantic.

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