Wednesday, September 2, 2009

Please leave us with at least one industry

Mayor to lobby EU on hedge fund crackdown

Europe or banking 'industry' - EU wants to regulate hedge funds - oh dear

Posted by matt_the_hat @ 11:00 AM (994 views)
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15 thoughts on “Please leave us with at least one industry

  • mark wadsworth says:

    They are so stupid it is not true.

    They said on Radio 4 this morning that they want to restrict hedge fund borrowing. That’s tackling the wrong half of the equation. What they should be doing is restricting lending TO hedge funds by deposit taking banks*. Everybody else (including investment banks) should be free to lend to them if they are prepared to accept the risks and rewards of doing so.

    *Speculating with somebody else’s money = very bad
    Speculating with your own money = none of the government’s or the EU’s business.

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  • Well said Mark,

    Just to add that their tax contribution is only 3 billion and that regulation will not affect genuine hedge funds speculating with their own money as Mark said.

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  • The BBC currently have this story on their business section – Boris J video included SEE news.bbc.co.uk/1/hi/business/8232868.stm

    Boris: Bankers are vital to economy

    London Mayor Boris Johnson is travelling to Brussels to argue against legislation proposed for finance businesses. He says the moves to control the activities of hedge funds would target London directly. And he says it could be construed as a “naked attempt by Paris and Berlin to attack the competitiveness of London”.

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  • MW
    – What you say does makes sense …but, thinking out loud here, …
    What about retail banks purchasing bonds issued by investment banks; where does one draw the line? How should retail banks invest their deposits, only in lending to non-financial businesses, maybe? This still begs the question though, since a non-financial company could still have a financial business exposure ( just look at Porsche! But more realistically a utility for example. ) I have a suspicion that money will find it’s way and if not, the arbitrage will be found, which could have a worse result. Thoughts?

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  • … cont
    – looking at the proposal, for example, one could legitimately set up SPVs to act as an intermediary, so long as the assets under management ( i.e. the loan ) is not valued over €100m, since this SPV will not fall under the legislation.

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  • @ 4 666,
    I am no financial man, but i think what MW is saying is, if you want to invest & gamble, fine, but not at the expense of everyone else, which makes sense to me, however i understand to get good returns on pensions etc the money will probably be invested in a high risk scheme (Madoff not included) which then obviously there is a chance of your money going up the Swanee. On a personal note i do think investment companies should NOT be allowed to invest in homes ( not property) which as we all know helps inflate prices out of reach for the humble man..myself included..

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  • Guy’s for me this is (and I’m simplifying things here) all part of a big game – you only need to google “split capital trust debacle” to shed some light on what’s going on (The Magic Circle)

    See following link going back to 2001 http://www.telegraph.co.uk/finance/personalfinance/2745247/FSA-disenchanted-with-split-capital-trust-magic-circle.html

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  • mark wadsworth says:

    “where does one draw the line?”

    Exactly where Glass-Steagall drew the line eighty years ago. US house prices didn’t go up significantly until Clinton got rid of it ten years ago. Or where (apparently) Spain and Canada draw the line Deposit taking banks can lend to households or non-financial businesses. Deposit taking banks are NOT allowed to invest in bonds etc issued by other financial businesses.

    a) Will there be loopholes and arbitrage? Yes of course. For example, what if we decide to borrow a shedload of money to buy all the shares in an existing non-financial business? Is that investing in productive assets or leveraged speculation? You tell me.

    b) Can the Bank of England quietly threaten to withdraw a banking licence if a bank is playing fast and loose? Yes of course.

    c) Another way of keeping banks to heel is to make it illegal for them to raise money in any other way apart from normal deposits and normal share capital (which used to apply to building societies). That way there aren’t any “mortgage backed securities” to worry about.

    Problem solved.

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  • Retail banks should have a cap on the riskiness of the businesses it lends to.
    Investment banks could argue for no limit so long as they fully accept that they can fail. No government bailouts.

    To control the risk in hedge funds just limit their leverage ratio. If a hedge fund wanted to borrow from a retail bank it would have to have a very low leverage ratio. It would be able to, but it wouldn’t want to because the equity return would be too small.

    BTW, investment banks have been getting around capital requirements by lending to hedge funds and selling them structured products at the same time. Essentially they are just outsourcing their prop desks.

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  • MW
    – it is not possible to draw the same line as G-S unfortunately ( unless one appends to it by disallowing many financial products ) – your points are all good, but I don’t believe it’s “problem solved”.

    RTB
    – sounds good, and much better that trying to define products as per G-S… no doubt future administrations would bend the rules in one way or another ( most likely by ‘improving’ the risk measures ), but I think that all regulation has both inherent flaws and a propensity to be changed in favour of big business. It’s quite sad really.

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  • mark wadsworth says:

    666 “it is not possible to draw the same line as G-S unfortunately unless one appends to it by disallowing many financial products”

    Such as what? Maybe I have overlooked something really important.

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  • MW,

    There are now swathes of products ( mostly structured ) that do not clearly fall clearly into one of the categories, loan or security – and many are useful to industries such as utilities, agriculture and raw materials ( of course they are also used for speculation and accounting trickery ). Hence a different line would need to be drawn… or rather a crisper line – or maybe I am over-complicating things, maybe it’s good enough to limit retail banks to a few, simple securities too.

    However do note that I am not arguing against a G-S style regulatory approach; just saying it would most likely need more legislation now than it did then and that ( as always ) any regulation will have inherent flaws and that there will always be the likelihood of changes-for-the-worse ( long-term ) during the good times.

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  • MW – although if your point (b) was exercised occasionally we wouldn’t need any of this regulation other than the current definitions of retail banks!

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  • mark wadsworth says:

    “swathes of products ( mostly structured ) that do not clearly fall clearly into one of the categories, loan or security – and many are useful to industries such as utilities, agriculture and raw materials”

    Sure, these commodities are dealt with on proper futures exchanges run by proper futures brokers. Of course these trades are leveraged, but the brokers make sure that your deposit is always enough to cover actual and potential losses.

    This has nothing to do with banks.

    Conversely, if a farmer or manufacturer wants and overdraft then that’s normal banking. And credit insurance is a bit trickier but banks deal with that via letters of credit and payment only against physical delivery at the quayside.

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  • MW
    – Just goes to show I must have overcomplicated things there. Mind you, no doubt someone smarter than me will conjure up some clever product that gets round all the rules ;p

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