Passport-Waving Socialist Challenges London’s Power in Europe

Date: Wednesday, September 23, 2009
Author: Simon Clark and Tom Cahill, Bloomberg

European Socialist Party President Poul Nyrup Rasmussen waved his red passport at hundreds of hedge-fund and private-equity managers in London’s 600-year-old Guildhall to assert his challenge to the city’s financial power.

London, the meeting place in Europe for bankers and traders from New York to Mumbai, faces an unprecedented challenge to its right to set the rules of financial engagement. Rasmussen, 66, is pushing European Union legislation of all hedge funds and private-equity funds that want to invest in the 27-member region, which makes up the world’s largest economy.

“Having a passport as a financial player to the whole of the European Union’s financial market, that is so valuable,” Rasmussen told a packed audience at the Sept. 11 meeting. “If you come from the United States and want to have this passport, this common-entry passport to the EU’s financial market, you’re not going to have it free.”

Europe is forging new laws and institutions for markets after the region’s largest pension funds lost 18 percent, or $560 billion, of value last year, according to consultant Watson Wyatt Ltd. As many as three new European financial regulatory agencies with the power to overrule national authorities may be announced today, pressuring London’s bankers.

“Punishing or somehow reining in the financial services industry is not the answer,” Ian Luder, the 681st lord mayor of the City of London, said at the annual Mansion House banquet last night, according to a copy of the speech. London’s financial center is a “major national and international asset,” he said.

Parliament to Vote

As world leaders prepare to meet in Pittsburgh this week to overhaul financial regulation, London’s investors are rallying to fight Rasmussen’s Directive on Alternative Investment Fund Managers in Brussels, the EU capital, on the grounds that it is protectionist and flawed. The European Parliament will vote on the law, currently under review, which proposes that funds disclose more information and limit borrowing.

“We must not be beguiled by protectionism hiding as protection,” U.K. Treasury Minister Paul Myners told the audience that Rasmussen spoke to in London. “The draft directive as it currently stands is flawed. It tilts at mythical windmills, at times pandering to prejudice.”

Rasmussen forced the directive onto the political agenda in the European Parliament, pressuring the European Commission, the EU’s executive arm, to issue the rules in April. Rasmussen retired from the Parliament in July.

In addition, the EU will today propose new regulatory agencies for banking and the securities, insurance and pension industries.

Financial Capital

“You are the center of Europe for financial activities, but by being that you are also part of the confusion,” Rasmussen said. “After this crisis there has been a socially useless increase in complexity.”

London is home to more than 80 percent of the region’s estimated $400 billion in hedge-fund assets and about 60 percent of its private-equity firms and may suffer as managers decide that leaving is easier than complying with new laws, according to Open Europe, a London-based research organization that is critical of EU integration and wants national parliaments to “gain real powers over EU legislation.”

Rasmussen’s new rules could cost funds as much as 1.9 billion euros ($2.8 billion) through increased compliance costs in the first year and 985 million euros annually thereafter, according to Open Europe.

BlackRock’s View

The directive will limit European investors’ choice and challenge non-EU investors who try to raise money in Europe, said Douglas Shaw, director of European alternative investments at BlackRock Inc., which is buying Barclays Global Investors to become the world’s biggest money manager.

“Clients fear that under the directive they will only be able to hire EU managers of EU domiciled funds serviced by EU custodians of EU prime brokers,” he told Rasmussen. “I would just like to maximize my consumer choice.”

Six days after Rasmussen spoke, Myners met hundreds more investors in a former brewery a mile north of Guildhall to urge them to influence changes to the directive. “I reject this protectionist argument,” he said. “Now is the time to start making these arguments more widely across Europe.”

The directive is a direct attack on London, according to some of the City’s investors and politicians. Tomorrow, a London-based research organization, Institute of Economic Affairs, will debate whether the EU has the political goal of blunting London’s power.

‘Downsize the City’

“I’m looking forward to voting against this directive,” David Campbell Bannerman, a European Parliament lawmaker for the U.K. Independence Party, told Rasmussen to loud applause. “You intend to downsize the City because you don’t like our Anglo- Saxon methods.”

Rasmussen, a former prime minister of Denmark, disputed his London critics. “My point is not to destroy -- I couldn’t dream of that -- London City,” he said.

“You’re the masters in Europe,” Rasmussen said. “If you are as good as you are without rules, you can become even better with rules. Don’t fear. Be happy. Let’s make a level playing field.”

The directive could help London by creating a real EU internal market for funds and by setting a new global standard for private equity and hedge funds, said David Wright, director of financial services and markets policy at the European Commission. That’s what happened when the EU regulated mutual funds under rules known as Undertakings for Collective Investment in Transferable Securities, or UCITS, he said.

‘Global Standard’

“We want to move toward a real internal market for funds,” Wright said. “UCITs are the global standard.”

Rasmussen’s directive needs many changes to meet that goal, said Richard Saunders, chief executive officer of the London- based Investment Management Association. Investors can win a technical debate on the directive, he said.

“If, however, it gets turned into a political bun fight -- the City of London against the dastardly Europeans -- mark my words, we lose,” Saunders said.

Peter Montagnon, director of investment affairs at the U.K.’s Association of British Insurers, said London’s investors must argue their case in terms that European Parliament lawmakers can understand such as showing job creation.

Londoners should also enlist continental Europeans to make their case to Parliament, Montagnon said. “It’s never very good coming from anybody who lives in London,” he said.

To contact the reporters on this story: Simon Clark in London at sclark4@bloomberg.netTom Cahill in London at tcahill@bloomberg.net