Berlin - Before the leaders of the world's most powerful
countries even board their flights to this week's G8 summit, Germany
has surrendered hope of securing commitment to increased control of
hedge funds - largely in the face of unbending US opposition.
Summit host Angela Merkel conceded in a weekend interview that she
'could have wished for more' in the way of transparency and a
willingness to adopt a code of conduct on the part of the funds.
Chancellor Merkel's G8 sherpa, Bernd Pfaffenbach, added: 'I
acknowledge that we didn't get very far with this. But a voluntary
code of conduct remains a good idea.'
A 'good idea' is what it is likely to remain.
In April, US Federal Reserve Chairman Ben Bernanke reiterated his
view that 'the market-based approach to the regulation of hedge funds
seems to have worked well.'
And a former US under-secretary of commerce in the Bush
administration, Grant Aldonas, made clear last week that control -
even a voluntary code - 'won't happen.'
Most estimates of the volume controlled by the world's 9,000 hedge
funds run to 1.4 trillion dollars, although US Treasury
Under-Secretary Robert Steel recently put the figure at as high as
2.1 trillion.
Well over half resides in the United States, with Britain - which
takes a similarly light approach to financial regulation - another
major player.
Without the cooperation of these two countries, the idea of
greater control by the financial regulatory authorities is a
non-starter.
Germany initially had high hopes, the forthright Finance Minister
Peer Steinbrueck believing Merkel could push through a commitment to
greater transparency in the workings of hedge funds and other highly
leveraged investment institutions.
'We all agree we need greater transparency,' Steinbrueck said at
the close of a European Union finance ministers' meeting in Berlin in
late April.
Sitting next to him, EU Monetary Affairs Commissioner Joaquin
Almunia said 'remarkable progress' had been made in establishing a
voluntary code.
But British Chancellor of the Exchequer Gordon Brown was a notable
absentee from the ECOFIN meeting and is unlikely to have felt
included in Steinbrueck's sweeping claim of broad support.
Even the German finance minister was compelled to concede that
requiring too much openness from hedge funds, which often buy
suddenly into underperforming companies, could negate the very reason
for their existence.
And he acknowledged their role in improving liquidity and
efficiency and in helping to determine accurate prices.
Pfaffenbach concedes that the last time Germany raised the issue
at the G8 - under Social Democrat former chancellor Gerhard Schroeder
at the 2005 Gleneagles summit - 'we ran into a brick wall.'
'This time the US and Britain are at least prepared to talk about
the issue,' he adds somewhat forlornly.
Steinbrueck, a Social Democrat in Merkel's broad coalition, steers
clear of the 'locust' description of hedge funds once used by his
fellow Social Democrat, Deputy Chancellor and Labour Minister Franz
Muentefering.
But he remains concerned about what he terms 'systemic risk.'
'I'm worried that there are some hedge funds that have leveraged
activities, for example, five or six or even seven times and that
creditors could be damaged whenever such hedge funds become
insolvent,' he said earlier this year.
But Bernanke takes the view that the financial institutions
lending to hedge funds 'have the clout to demand the information they
need to make their evaluations.'
After the losses they sustained in the LTCM collapse in 1998, they
are taking their market discipline responsibilities seriously.
The Fed chief notes in addition that small investors are not
allowed to put their savings directly into hedge funds under US law.
Merkel has pledged to keep the issue on the G8 agenda, but at
best, all the Germans can hope for at Heiligendamm is for the
respective financial supervisory authorities to monitor the funds
closely.
'And that,' as Aldonas says, 'is happening.'
© 2007 dpa - Deutsche Presse-Agentur 
USA
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