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Hedge Funds’ "Dangerous Opponent" Rasmussen Pushes EU Crackdown

Date: Friday, June 19, 2009
Author: John Rega, Bloomberg

Buyout firms and hedge funds, “Read my lips: You’re going to have regulation.”

So says Poul Nyrup Rasmussen, the Socialist Party president who conducted a two-year campaign for the first European Union regulations governing so-called alternative investors. Hedge funds and private-equity firms, which manage 2 trillion euros ($2.8 trillion) in the region, are in line for some of the world’s strictest rules, and potentially billions of dollars of compliance costs, under an EU measure proposed in April.

“What are you afraid of?” said Rasmussen, Denmark’s former prime minister, as he thumped a desk in an interview at the European Parliament in Strasbourg, France. “You can earn your money in a well-regulated market.”

The EU proposal would require managers to gain regulatory authorization and report their strategies and exposures so that authorities can monitor risks. They also would have to post capital against potential losses and safeguard investor assets in custodial banks. The legislation gives regulators powers to restrict a firm’s borrowing and allows for future setting of industrywide debt limits.

“He’s the most visible, dangerous opponent the industry has,” said Jon Moulton, founder of Alchemy Partners LLP of London, which manages 2 billion euros of private-equity investments. “It’s a shame that his opposition is not more of what I would call a constructive form.”

Rasmussen, concerned that hedge funds and buyout firms destabilize markets and destroy jobs in a hunt for profits, was key in pushing the issue, say critics. They argue the measure will drive investors from the U.K. and other EU countries.

Global Backlash

The initiative keeps Europe in the vanguard of a backlash against hedge funds amid the fallout from the financial crisis, in which the decline of the U.S. housing market triggered bank losses and set off the first worldwide recession since World War II. It builds on the work of EU members Germany and France in winning agreement at the Group of 20 for all countries to install some oversight. Critics blamed the funds for panic selling that deepened a rout in markets.

Europe’s proposal would put more detailed requirements on managers than measures contemplated in the U.S., said Christopher Fawcett, chief executive officer of Fauchier Partners of London, a fund-of-hedge-funds firm overseeing $5 billion. Investors may opt to relocate and conduct business with fewer burdens in the U.S. or elsewhere, he said.

President Barack Obama’s plan for overhauling financial regulation, released yesterday, called for hedge funds to register with the Securities and Exchange Commission and provide enough information so that regulators can assess whether a fund poses a threat to financial stability.

‘Gaining Popularity’

“Criticizing financial services is clearly a way of gaining popularity,” Fawcett said. “If the objective is to ‘make the world a safer place,’ putting that part in quotes, it won’t do so unless the whole of the world goes along the same path, and there’s no indication of that now.”

Alternative investors are private partnerships that aren’t subject to the same requirements as brokerages or mutual funds because they are limited to wealthy individuals and institutions such as endowments and pension plans. The commission proposal defines them as being all money managers not already subject to EU rules on retail investments.

Negotiations among EU lawmakers and governments over the final shape of the legislation begin later this year.

While the U.K. may seek to scale back the requirements, France and Germany have the votes to defeat such changes. Few measures are killed outright under EU lawmaking procedures.

Parliament as Pulpit

Getting the debate onto the agenda is a coup for Rasmussen, from his perch as a member of the EU Parliament. The power to propose binding laws rests with the bloc’s executive agency, the European Commission, which resisted his plan for two years.

Rasmussen, instead, used the Parliament as a pulpit to advocate rules. He started with a March 2007 report titled “Hedge Funds and Private Equity: A Critical Analysis,” written with Dutch Socialist member Ieke van den Burg months before the onset of the economic meltdown.

The collection of policy prescriptions, analysis and case studies argued that buyout firms and hedge funds had come to dominate financial markets in search of short-term profits while neglecting long-term investments needed to create jobs.

Charlie McCreevy, the commission member in charge of financial services, declined at the time to propose new rules. He said alternative investors are already subject to rules against abusive trading. They’re also watched over by the securities firms that fund them and national regulators, said McCreevy, the former Irish finance minister.

Rasmussen’s Strategy

Rasmussen wouldn’t be deterred. As criticism of the financial industry mounted along with the crisis, he and other Socialist leaders in Parliament turned to a little-used procedure formally requesting a policy response.

The Parliament adopted Rasmussen’s resolution calling for capital and disclosure rules by a 562-86 vote in September. After months defending the alternative investors as more victims than perpetrators of the market turmoil, McCreevy issued the proposal April 29.

“They obviously decided this is a big issue for them, and they’re going to run with it,” McCreevy said in an interview in Brussels. “That’s politics.”

While he’s retiring from the Parliament next month, Rasmussen, who turned 66 on June 15, continues the fight as head of the Party of European Socialists until December. The group’s affiliates include Britain’s ruling Labour Party, Spain’s governing Socialist Party and Germany’s Social Democratic Party.

‘Swiss Cheese’

Getting to a proposal is only a first, unsatisfactory step, Rasmussen said. He called the commission’s draft “Swiss cheese” and said managers can avoid supervision by dividing their portfolios into funds of less than 100 million euros. The rules should also include immediate debt limits and controls on the individual funds, he said.

Rasmussen said his goal is to encourage the money- management industry to invest in building businesses and creating jobs, supporting “the welfare state” he’s advocated as trade-union economist, nine-year prime minister and EU Parliament member since 2004.

Alternative investors have instead focused on shuffling financial instruments that don’t expand the economy, he said, making the sort of profits he lambasted in a 2007 book, “In a Time of Greed.” They enjoy an unfair advantage over more regulated activities such as banking, he said.

‘Who’s the Best’

“Why are you so afraid to compete on a level playing field, guys?” said Rasmussen, his baritone voice filling the partly furnished extra office he uses at the Parliament’s Strasbourg complex. “Come out of your bushes and take it as a challenge, and let’s see who’s the best.”

The regulatory push stands to hit hardest in Britain, the base for managers of 80 percent of Europe’s $400 billion in hedge fund assets, and about 60 percent of the region’s private- equity business, according to the British Private Equity and Venture Capital Association in London.

“It’s perplexing as to why Denmark would have any interest in regulating an industry that doesn’t exist in its country,” said Philippe Bonnefoy, chairman of asset allocation for Cedar Partners Investment Management Ltd., a Geneva hedge-fund manager, in a reference to Rasmussen’s nationality.

The EU measures would cost the industry in the U.K. between 2 billion pounds ($3.3 billion) and 3 billion pounds in the first year, and hundreds of millions of pounds a year thereafter, estimated Kinetic Partners LLP, a London-based consultant to hedge funds.

Economics Background

The costs will stem from posting capital, procuring legal advice, adding staff to prepare reports for regulators and hiring outside consultants to vet valuations, Kinetic said in a statement after the proposal.

With a master’s degree in economics from the University of Copenhagen in 1971, Rasmussen said he made himself into “close to an expert” over three to four years studying private equity and hedge funds. Rasmussen met with Nobel Prize-winning economist Joseph Stiglitz several times since 2007 in the U.S., where Stiglitz is a professor at Columbia University in New York, and in the U.K. to discuss regulation.

“He was very persistent,” Stiglitz said in an interview. “As a political leader he sees some of the consequences, and as an economist he thinks about how to mitigate those consequences while preserving some kind of market economy.”

Danish Record

Rasmussen’s economic credentials rest on his time as prime minister, when he focused on making it easier to hire and fire workers through a policy dubbed “flexicurity.” The unemployment rate in Denmark’s mostly unionized workforce fell from 9.5 percent in January 1993 to 4.7 percent in November 2001, when the rate in the 12 countries using the euro was 7.9 percent, according to EU statistics. Gross domestic product grew by 26 percent in that period, similar to the gain in Sweden, more than Germany’s and France’s, while less than that of Finland, the Netherlands and the U.K.

Rasmussen, the son of a manual laborer and a cleaning lady, and his Social Democrats were voted out in November 2001. Their popularity was sapped by some of Europe’s highest taxes and his bid to raise the retirement age beyond 60 years.

Calling himself “a very pragmatic, Social Democratic guy,” Rasmussen brushes aside charges of being anti-business and cites his support for the EU’s drive to create a borderless market, when he was an economist for the Danish Confederation of Trade Unions in the 1980s.

“My ambition is to change the structures in such a way that we can avoid a new financial crisis on the devastating level that we have now,” Rasmussen said, wheeling his desk chair from side to side in animation. The issue is, “how can we reform our structures in such a way that our welfare states can survive. This has been my driving concern.”

To contact the reporter on this story: John Rega in Brussels at jrega@bloomberg.net.