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Hobbling hedgies and bashing buyout boys

Robert Peston | 09:03 UK time, Thursday, 30 April 2009

In much of continental Europe, there's a widespread belief that hedge funds and private equity firms caused the global economic crisis.

Which is presumably one reason why the European Commission wants much tighter regulation of both the hedgies and the buyout boys.

I've had personal experience of this, in a recent interview for French telly on how to prevent a repetition of the disaster: more-or-less all my interlocutor wanted to discuss was the alleged imperative of constraining the activities of hedge funds; there wasn't even a nod at the reality that far more of the real culprits were in the banks, including French banks.

To be clear, neither hedge funds nor the big private equity firms can be seen as innocent victims of the credit crunch.

They did make a contribution to the pumping up of the financial bubble that turned to bust.

As industries, they borrowed more than was healthy or sustainable (although within both industries, some firms resisted the urge to over-leverage).

Hedge funds helped to create a market for the toxic financial products - especially the collateralised debt obligations (CDOs) and credit default swaps - which destroyed the balance sheets of the world's biggest banks.

In their buyout rampage of 2006 and 2007, private equity firms were generating the ingredients (debt) for constructing one category of the poisonous CDOs.

Then there were the mind-boggling sums earned by the partners at hedge funds and private equity houses, which spurred the banks into providing equivalent remuneration schemes to their own bankers, for fear that the brightest and the best would desert - and, as we now know, at the banks these remuneration schemes gave incentives to take crazy risks.

Also banks saw the sky-rocketing returns of hedge funds and private equity houses and wanted some of that for themselves. So they took risks on to their own balance sheets which they didn't understand.

All that accepted, the banks didn't have to behave in a herd-like way - a herd of lemmings perhaps - to pump up the hedge-fund and private equity booms or to mimic the behaviour of the creatures they created (but without the finesse of the best hedge funds and private equity firms to identify and control risk).

Which means that the European Commission's proposed crackdown on hedge funds and private equity firms should probably be seen as an attempt to treat the symptoms of the disease, rather than the disease itself.

The disease (and I oversimplify here) was an excess of cheap money married to the greed and stupidity of banks and bankers.

In fact, from 2006 to 2007 the eye-watering profits being generated by the hedgies and private equity firms - the pay-packets that bust their pants - were an early warning that financial markets were not working in an efficient way, with potentially lethal consequences (which, as it happens, is what I argued at the time).

Regulators in the UK and the US chronically understated the damage that would be done from the market correction that was inevitable. And in that sense, I suppose, the visceral hostility of the French and German political classes to hedge funds and private equity firms, which they perceived as the savage beasts of Anglo-American capitalism, was perhaps a saner evaluation than was acknowledged in London and New York.

But that would not be to argue that there's merit in attempting to drive hedge funds or private equity into the sea.

Private equity can be a valuable source of alternative funding for companies, especially small and medium size companies.

The best hedge funds serve to make markets more efficient, by identifying when assets are chronically over-valued or under-valued.

That said, a bit more scrutiny and oversight of the hedgies and the buyout boys probably wouldn't be such a terrible thing. The question that's more moot is whether the proposed harmonised European regulations are too clumsy and crude (especially in the treatment of smaller buyout funds).

Which would be to argue over the detail of the new rules, rather than to say - after the horrors we've seen and experienced over the past 20 months - that we can simply leave it to these industries to ensure that they never again play a part (even if it's not the leading part) in destabilising financial systems and economies.

Comments

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  • Comment number 1.

    Scapegoats needed.

    To blame hedging, shorting, derivatives etc. is the same as blaming symptoms for a disease.

    The destabilisation is the result of inadequate regulation, low reserve ratios and downright theft.

    The European Commission is in it up to its eyeballs, as is our government and everybody elses. The bankers do what they have always done - make money any way they can - and we are letting them get away with daylight robbery.

  • Comment number 2.

    Robert,

    Why not have a piece on the 'real culprits'? The regulators. Banks are there to serve shareholders and increase profits. They thought they had found a way to increase profits with little risk. Insure the damage away.
    You are really spouting the governemnt line here. Be a reporter and report the role of a lack of regulation. GB thought he'd created a regulatory system that allowed the banks to be clever. We now know he created a beast that ticked boxes and didn't investigate further. A bit like your reporting ( to be fair I haven't seen many reporters delving deeply, except those on 'obscure web pages').
    Please stop blaming a bank for doing what it will always do when you take the hand cuffs off.Blame the people who allowed it to happen.
    Then look to see if we have learned any lessons. Can we say bailing out the banks has helped? Get the governemnt to offer loans to small businesses and individuals. I still can't find a rputable bank to lend £7500 for a rate less than 8.2%. We've done enough for the banks. Time to get the government to lend through Northern Rock.

  • Comment number 3.

    Well said number 1. I am sure we are far from done with the flakey banking and finance system and it is extraordinary the the government is unable to take a lead on this. What about PFI and all the debt arrangements that this daft way of funding public sector development has engendered? The second wave of depressing forces - reduced personal incomes and mass unemployment is still to mature but will make more debts and assets sub-prime provoking another banking crisis!

  • Comment number 4.

    robert @ 0

    The disease (and I oversimplify here) was an excess of cheap money married to the greed and stupidity of banks and bankers

    no, you don't oversimplify, that's spot on ... combination of lax monetary policy and the crazy bonus system ... it's what I keep saying too ... reckon we're right, Robert, you and I

  • Comment number 5.

    its another banking story......stop it ....you're a BUSINESS Editor....
    TM - StH

  • Comment number 6.

    In response to hodgeey #1 that is the same as saying that the murderers of baby P are not responsible because social services/doctors/police did not stop them. They still committed the horrific injuries that caused the death. Likewise, so called financial whizkids who come up with clever scams to make unsubstanable profits are in the end responsible for the ultimate bursting bubble of worldwide debt. To say they were worth their inflated rewards, still being payed and increased as I write, is to miss the point that we only have their word for it. When directors of institutions can manipulate their own rewards without restraint for the shareholders (see recent response from board of RBS) then those feeding at the trough are out of control. Regulation of all financial institutions is necessary otherwise more Stanfords, Goodwins, Munfords(?) - has nobody read Little Dorritte written by Charles Dickens over 100 years ago?

  • Comment number 7.

    It is a pity that all indirect sources of finance are being lumped together. Private Equity is often the conduit for banks to loan money to reconstruct ailing business with (as they see it) less risk (the risk bit is not true but it is the perception of the bank!) Similarly Hedge Funds operate on shorter time-scales than Private Equity are are speculative and quite often rely on the so called 'free market' in securities to do what they do.

    Neither operation is much fun when they decide to make money from your business and both arrogantly pride themselves in making lots of money, not from actually doing much, but by having access to money to do it with. They are parasitic on both bank and business. Their so called expertise come from being able to be believed by banks and financial institutions and then finding some other mug to pay over the odds for a business awhile later either by carefully reconstructing the balance sheet of a business or through stock-market activities.

    It as, they did in the past, banks would lend finance to business to reconstruct then many of the activities of theses concerns would not be necessary. Quiet obviously these 'business' need regulating. Many of their activities should be unnecessary if the banks would actually lend to business again, but as they are showing even less wish to do so now my guess is that there predatory business will thrive.

    Regulation in their case will only be effective is the complain about it -in fact unless they do the regulation is not sufficient! They represent the part of capitalism that is least nice - just the law of the jungle.

    Take for example the so called venture capitalists (part of Private Equity) - you might think that they would provide risk capital however just try to get money from them and you will find that they demand guarantees and first charge mortgages of everything you, your family and friends own - that is the reality - the last thing they do is 'venture'. Similarly Business Angels - true Angels, but Angels from Hell! (Real life is far far less attractive than the TV programme versions!) If anything Hedge Funds are the more decent and acceptable face of capitalism.

  • Comment number 8.

    The Germans didn't seem to to mind the fact that the Porche hedgefund still managed to make bucket loads of money last year.

    More to the point...the Germans plough billions into R and D of clean fuel technologies and then proceed to go and make their inventions happen with extremely efficient manufacturing. Their idea of capitalism is far more sustainable than ours. They will come out of this recession/depression far more earlier than we will. It's because of extensive R and D and highly protected IP the Germans have protected their future wellbeing. High value technology is far easier protect than just simple capital. However it takes long term investment cycles allied with honest returns.

    It just goes to make we wonder why the anglosaxons are so beholden to the banks and high finance in the way the they were/are...there must be a reason that explains this?

    Any offers?

  • Comment number 9.

    Its a bit of everything, Regulators, Banks, Hedge Funds, but there is no doubt the hedge funds need reeling in. For all your admiration of them, I do not see them as a necessary evil. So they may identify companies that are over or under valued, they may make companies more efficient on paper, but they have also destroyed a lot of companies who would have go on in their own merry way too.
    The only function of a hedge fund was to lump huge debt on the company bought whilst taking quick bucks in the short term, strip the firm out ready for re sale within 5 years. Along the way people lost jobs, wages got capped, sure the banks made plenty from it, but it gave hedge funds way too much power, all they demand is profit, to quote you "greed is good".
    But that is not the only reason to run a company. There are workers who invest their lives working for them. They are perfectly viable running at 10% profit, a hedge comes in slash and burns and makes 20% and creates a huge debt to pass on to the next mug, is this really good ?

    I don't think we should rely on hedge funds as a tool for sifting through companies, the only benifactors are the hedge fund managers, and the investors, and as you know yourself, the plebs wont get invited to the party and would never ever see a return on the investment like the hedge fund managers do.

    Is it morally right that a hedge fund can with little or no effort buy a company strip it out and reap huge rewards? its not difficult, requires little skill, yet they are quiet happy to impose swinging cuts on the workers who have skills, who can create things.

    So I have no qualms if the hedge funds get a kicking, they are part of the problem, they are all in the same boys club as the bank execs and the ministers go to, they knew exactly what they were doing.

  • Comment number 10.

    For all the present heartache I feel certain that over the next generation or two, as a nation, the move from Industry to Banking ( in all its vicarious forms) will prove a timely and astute move.
    The truth, no matter what gloss is given, is that the EU is not for us.
    In Banking just as in almost every other aspect of of lives,commercial or social, we are at odds with the EU.
    Time and time again our internal problems stem from attempting to squeeze into our own philosophical framework customs and practices born and nutured in a European history so totally different from our own.

  • Comment number 11.


    As ever, the devil in the detail. Whilst "a bit more scrutiny and oversight of the hedgies and the buyout boys probably wouldn't be such a terrible thing", how to get it to work?
    And how to get the patient to take the medicine without their protesting about the state intervening in their market?

  • Comment number 12.

    Yet more examples of the built in hypocrisy within Europe.

    It amounts to complaining about the price of petrol whilst driving a gas guzzler. The larger European nations all took huge revenues from their own banks playing the game, yet now they complain that this shouldn't have been the case.

    This is politicians on the continent trying to avoid a public backlash against them for their regulatory failings as the dust begins to settle (for now) on the banking and finance sectors.

    It is right that regulatory reform is on the agenda but to allocate blame against Hedge funds alone is a fundamentally flawed analysis to such an extent that it may prevent the full extent of reform which is desperately needed.

    If ever there was a more stark case in point that Europe is a group of trading economies, but ultimately independent nations, this is it.

    MP's second home allowances are on the agenda here...but can you imagine what the MEP's must be entitled to claim with international travel factored in?! But we don't hear about that- not yet anyway. The blame game is one of distraction and misdirection, and the ghostlike nature of the hedge fund industry make them an easy target. Too easy, now where are those expense receipts?

  • Comment number 13.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 14.

    Watch the money move,
    a global money move,
    from LON to NYC,

    Like a wicked hustle,
    the Hobbling hedgies and bashing buyout boys,
    were tricked and out maneuvered by foreign financiers.

  • Comment number 15.

    eatingantonyo wrote: "Why not have a piece on the 'real culprits'? The regulators."

    But look further back in the causal chain. Who were the regulators? In Britain they were the banks. The FSA was staffed from the banks, and funded by the banks. No wonder there was weak regulation! Now, who set up the FSA? ;)

  • Comment number 16.

    Thank you, Mr Peston: I entirely concur with your assessment. Having spent most of my life in the US, with close family & friends working in top US banks at upper echelon positions -- and with college chums who own or lead hedge funds -- I think you are absolutely right in your allocation of blame.

    Permit me to add one tiny suggestion. I admire the people of the UK immensely, and of course here in London and throughout the country one is forever impressed with the brilliance, erudition, intellectual acumen and really splendid education of so many people 25 years and older. (The younger ones I worry about as schools worldwide are on a rapid downward slide.)

    But a crucial area where the French and Germans, Germans and French -- not to mention Italians -- have been way out in front has been the mastering of foreign languages. It is this linguistic discipline that has helped other European nations pierce the veils of deception so widely practices in the US under its operating model of laissez-faire capitalism (still undented, with nary a hint of reform in the 100th day of Obama's presidency, and some 20 months into the actual financial catastrophe of which Wall Street is the epicentre.)

    Because of English people's mythic resistance to mastering foreign tongues (pointed out by such lights as Byron and Dickens ages ago), you find yourselves especially susceptible to presentations made in decent English by native speakers of that language, even if they have US inflections.

    And because not enough of you, as very young children, have benefitted from the particular kind of language analysis skills that only the comparative in-depth study of idioms and grammar afford, exposing to an inquisitive mind the subtly, crucially different ways in which people think and articulate -- even people of a shared background, and certainly people of divergent heritage -- you simply assume "thoughts expressed in proper English, or close to it" are thoughts, propositions, ideas and arguments that are to be more readily embraced than thoughts presented in a foreign grammar, or translated (usually weakly) from a foreign language, by a foreign person.

    And that is why you are so yoked together to Americana, and now paying a terrible price for having trusted Yanks more than most Yanks trust each other...

    Never too late to start fixing things, however. English is a magnificent language. Mastering another, and even a third (as so many Germans and Scandinavians and French -- and even this tiny Russian person born in South America of all places! -- have mastered your own) shall only enhance your prospects, and make you perhaps a touch more receptive to good ideas from other places, and less susceptible to lies expressed in beautiful English.

  • Comment number 17.

    Government lending through Northern Rock would be exactly the right thing to do, when the market fails the Gov. should step into the breac

  • Comment number 18.

    It's ironical that the new tax rate of 50p on incomes over £150,000 is being opposed on the grounds that it will drive away - who? - the very people who made the financial mess which this new tax rate is, in some measure, intended to clear up. Rather than wait for them to export themselves, why not declare their activities unlawful and change the regulatory system to allow of denunciations to the police? If they do go abroad, wouldn't we be entitled to say good riddance to bad rubbish?

  • Comment number 19.

    Can the UK afford for the Hedge Funds etc to leave the city of London.

    The only reasion Brown is jumping up and down asking for a global set of rules is that he knows if he imposes tighter regs here we will never repay the debt mountain that he is building.

    In the run up to the downturn he already watched several large companins leave the city due to his fillding with corprate and international tax. in his last two budgets, both proposals were watered down but the damage was done and companies started leaving the city.

    He / We can not afford for the city to decamp to the middle or far east.

  • Comment number 20.

    While hedge funds and private equity companies were not the primary cause of the recession, their activities have made it have a worse impact. In particular their habit of buying up public companies and then selling them back loaded with debt and therefore weaker and unable to withstand the downturn when it came did not help.

    However it is arguable that short selling makes a market more efficient, since it helps bring the price of overvalued assets down quickly. This of course does not endear short sellers to the owners of such assets.

    Derivatives also have a legitimate role as a method of hedging risk. The problem here was that the methods used for estimating the risk, were faulty and obviously not properly understood, even by the so called experts employed to advise management.

    It is unlikely that a real mathematician, who was expert in mathematical probability theory, would have made the mistakes that were made. I suspect that those involved were economists who had merely learned how to feed data into computer packages, which were alleged to do the business.

  • Comment number 21.

    The real problem with all this is trust and reliability.

    I mean, even if the EU sign up to this, which will be the first member state to 'bend the rules' a bit to suit their own national political situation?

    Oh, you really think no-one will?

    And I've come to disagree with the idea that the big sin that caused this recession was simply greed. I think it's more than that, it's an arrogance, a sort of "gun-ho" attitude, a way where trade and competition is perceived as a war which requires the destruction of the enemy.

    It's not just the desire to be 'in the money', it's the desire to trash the opponent, to anihilate them like over-zealous Daleks.

  • Comment number 22.

    My experience of private equity (and VC's) is that they are pretty essential to up and coming companies - especially those in the more innovative sectors. They will heavily scrutinise and get involved with understanding the business to fully assess its risks and future potential. They will then also be heavily involved in the progress of the company (too much so for my liking at times) but this is all to manage the risk of their investment. Yes, they are there to make a buck on exit of the business but they can't be lumped as evil - isn't this kind of scrutiny and attention to detail of inward investment what we want from our banks - I don't feel you can lump this kind of dealing with the manage by numbers approach of hedge funds (and yes, before you ask - I used to work for a hedgefund and now work for a private equity backed business so have some insight here)

  • Comment number 23.

    I know this is totally irrelevant, but I'd urgently like an answer to quite a simple but wide-ranging question. What the hell is going on?

    I haven't read a single positive response to the budget; the Government looks distinctly frayed about the edges; as far as I can see, taxes will rise much more than has been announced so far, while unemployment rises and services are slashed back; American GDP is down 6% this year, with house prices falling, still; about a third of America's banks seem to have failed the recent 'stress test'; a lot of European economies are doing a pretty good impersonation of Ireland; we're on the verge of a pandemic which my well hit developing countries (whose economies look the most reliable source of growth worldwide) particularly hard...

    and shares are going up and up.

    Why? Has all this really been 'priced into the market'?

    Yours bemusedly...

  • Comment number 24.

    The thing about regulation is that we already have a ton of regulation to try to keep people honest - and largely, this crisis was not caused by dishonesty. What we need in regulation is: First, to control principal-agency problems (where bank employees act in their own interest and against of their shareholders'). Second and more importantly, to understand irrational appetite for, or aversion to, risk - and adjust systemic incentives to balance it.

    This new model of 'behavioural regulation' is the only way to stop this happening again and, as a happy bonus, it also provides a mechanism to help us out of recessions:

    http://www.knowingandmaking.com/2009/03/towards-rational-exuberance.html

    http://www.knowingandmaking.com/2009/03/behavioural-financial-regulators.html

  • Comment number 25.

    10. At 10:07am on 30 Apr 2009, peterbolt

    That's the most hilarious post I've read in over a year!

    Have not you heard the expression 'Don't put all your eggs in one basket'

    peterbolt...you should rename yourself thunderbolt. Very very frightening!

  • Comment number 26.

    Which means that the European Commission's proposed crackdown on hedge funds and private equity firms should probably be seen as an attempt to treat the symptoms of the disease, rather than the disease itself.

    The disease (and I oversimplify here) was an excess of cheap money married to the greed and stupidity of banks and bankers.

    So, the European Commission wants to crackdown one stage further down the food chain than you do? You are both aiming in the wrong direction. The problem is systemic. At its root the system requires debt to create so-called money and requires growth (at least in the money supply) to sustain itself.

    Regulation at any stage of the process creates moral hazard. We need new systemic thinking not enhanced regulatory thinking.

  • Comment number 27.

    "The disease (and I oversimplify here) was an excess of cheap money married to the greed and stupidity of banks and bankers."

    Half right: the flood of cheap money (directly stimulated by Governments and regulators around the world) married to the greed and stupidity of consumers (especially of houses), share holders and voters are the real causes.

    Until people realise their own culpability in all this, the issues will never be fixed.

  • Comment number 28.

    You seem to argue that the hedge funds and buy-out boys started this - and then that they are the symptom not the cause. Then you conlcude that we should trust the market - which has just failed (again)not to do this in the future. As far as I can see the Hedge funds make the markets more 'dynamic' - which is not what we want - by driving prices up and down using leveraged positions. Sounds like they need to be regulated - or the leverage needs to be controlled.

    Wrt to the buyout boys then this depends whose money they are using - if they using their own then fine - if the banks are lending it then they need to be better at it. If they are raising it from the market then the market needs to be a bit sharper.

    There is a case that these add some value too the market - however they need to be policed and have some means of salary restriction - perhaps 90% ratre for people who earn over £1,000,000 ???????????

  • Comment number 29.

    #5 - 100% agreed - yet another banking story!! As BUSINESS Editor Mr P is failing us all as badly as the FSA failed us in regulating the financial world and the auditors failed us in reporting the banks true positions.

    On another point - it is interesting that the turnaround in the pound seems to have coincided with the Swine Flu story - if there was a global pandemic would this somehow turnaround the dire state of UK finances? Or perhaps if there was a global pandemic everyone would be equally worse off so we go up the rankings a bit on this measurement? Or perhaps as an island we truly are 'better placed to deal with Swine flu'.

    Or is it simply that the plight of the pound has always been overstated by media hysteria and now they have averted their gaze to another story the pound is freed from its media shackles?

    PS Personally I am yet to be convinced that the swine flu story really carries a true risk but WHO am I to query the WHO?

  • Comment number 30.

    #2 that would be a start, start with the regulators then back track from there, until you get back to El Gordo himself. And the real reason for the crisis in this country over public spending.

    New labour wanted to go on a social engineering spending spree, by sovietising areas of the country they were look in votes for the future.

    Know to do this without raising taxes in a direct manner, they allowed the "City" to make vaste protits and therefore large tax contibutions, even if pro rota they were not the same as the working class like me.

    therefore they turned a blind eye to this problem, it kept ministers happey and they went on a profliage spending spree for a decade.

    Trouble they have been ccaught swimming with no trunch on and want to blame the bankers.

    This is why I take you back again to IR35 , think of the motives, before the 97 election there was a vaste clammer on the labour left to tax the earnings of the richer earnings whom avoid the normal PAYE route. SO the Bond of IR35 was thrown in to the ring but it was designed not to effect the golden gooose of the City.

    they talk of £325m from 70,000 contractors , not say one IB that had 700 diretor and votes £4 billion out thus avoid £1 billion of tax and NI and that was 1999 figure. SO everbody was happy , HMG the City and the back benches whom really did not understand what was happening. I confinted my labour MP and he though they were going to get billions out of this. I was gob smacked, it was clear that he did not understand the faintest of what was being implemented.

    it was release quitely as a press statement after the budget so as not to wake any body up.

    But some once said 650 contractors v 650 MP's no contest. Many of us won
    our case against the IRS but that is not the point

    They could not be seen to put up taxes or hurt the city otherwise they would loose the election for sert.

    it was all about staying power and the New labour project and a spend spend spend beyond the means of the country. Well the wheels have really come of now.

    that the story but againt that would require a detail of analysis and movement out side the Sq mile.

    Does Mr Peston have Concrete shoes that prevent him reaching the out parts of the country ?

    he need to talk to people on the country as to the effect of some of these polices then he will get the picture. for that you need quite a few brains cells to cooperate together.

    I'm a working class worker and the party I vote for stiff me right up.
    Never again. They have reward those that failed because they do not want the real story to emerge. The irony is that they have used my money for political means

  • Comment number 31.

    I've always argued that the easiest way to explain the financial crisis to the lay person are what has happened to Manchester United, and this ties in with the hedge funds and private equity groups. United were sailing along quite comfortably, making profits and incurring no debt. Then Glazer, with cheap money from Wall Street and the City, borrows the money to buy the club and load it with debt as the assets aren't being worked hard enough. Now United are making insufficient profits to pay the debt interest.

    All this shows is that monetary policy utterly failed in the early years of this decade as money was far too cheap and was growing too fast. However, there was no impact on inflation as the asset price bubbles weren't included in the measure. Result - disaster.

    I don't necessarily blame the City though. They had so much money at their fingertips they were determined to spend, sorry "invest" it. They had to.

  • Comment number 32.

    8.2% for an unsecured loan doesn't sound intrinsically unreasonable to me; is a business which generates less than 8.2% annual return on incremental capital really worth funding? I don't think it makes any sense for the government to get into the business of making loans at below commercial rate in the middle of a recession; that seems as fine a way of losing money as can be easily contrived.

    The regulation point is the right one; the atmosphere was such that any bank not taking what are in hindsight, and were to some even at the time, unreasonable risks would see most of its deposits and most of its borrowers heading to banks that were taking unreasonable risks, and to some extent the job of regulators should be to slope the playing field such that a risk posture other than 'more! more!' is sustainable.

    Of course, the result of such regulation might simply be that Britain turns into Ukraine, with everyone taking out loans in Swiss francs, Euros or dollars from less-regulated overseas banks and turning the crunch into a really nasty currency mess.

  • Comment number 33.

    # 16. maria-ashot

    That leads to a whole different area - but quite an interesting one.

    And as someone who happens to know that Midori No Saru (#15) means "green monkey" in Japanese (and is intrigued to know why that name), I hope I have something to add.

    Firstly, if a "babel-fish" becomes available, problem solved (at the exepense of many almost-completely wasted years in the language classroom). Secondly, though, in the absence of a babel-fish (or even good results from Google Translate), why the hell aren't we teaching languages in primary school when they would stick most easily - and can be made most fun.

    Hobby horse now hitched, I'll address your comments.

    To my mind you've only touched on only one aspect of "culture" - not only did London thinking fall too much in line with US thinking, but also, as other commentators have already pointed out today, banking thinking throughtout Europe and beyond fell under the sway of the prevailing mindset within the banking culture (perpetuated by the business schools). Voices from the "non-banking culture" were drowned out - with revolving doors between political corridors and banking boardrooms and between banking boardrooms and the FSA.

    From now on, we need some of the capitalists with a conscience and socialists on a bonus - who sparred with each other on yesterdays blog - to start raising their voices more loudly and make the banking culture less of a monoculture.

    If Mr. Pirate's public reconsiderations are anything to go by, the process has started.

  • Comment number 34.

    This is an excellent piece, balanced and thoughtful. Naturally, whipped up by the Europe-hating proprietors of our "free" press (and other media), who have their own, purely selfish, interests at heart, the majority of our journalists will continue to knock whatever is suggested in Europe. Almost as a matter of course.

    All of which makes Peston a fairly rare exception: someone who actually thinks before shooting off a pavlovian response to anything emmanating from (dare I say ?) "continental" Europe.

  • Comment number 35.

    As the events of the past 18 months have revealed, the regulation of hedge funds is needed. Too much money and influence in hands of a limited number of individuals with self serving interests. My guess is that regulation should look deeper into the people running these firms to determine if they are fit and proper to act responsibly. This will only work with a global regime. Interesting to see if the rest of the regulators actually deliver rather than to play lip service.

  • Comment number 36.

    The European politicians pushing this directive forward are hopelessly confused. On the one hand the socialists want to stifle free markets out of principle and short-term populist electioneering. On the other, countries like France mainly want to restrict activism and be more protectionist ...again for populist reasons. But by formalising hedge fund regulation, other EU members must be able to market freely within the EU - which is the last thing they want.

    The ringleaders (eg. Poul Nyrup Rasmussen) used to complain that Charlie McCreevy was isolated in not wanting to restrict hedge funds. But it is clear that it is the other way round, as every political technical and academic study I have seen of the hedge fund market debunks the idea that hedge funds are anything other than beneficial for the markets.

    But the world has come a long way in understanding what hedge funds do in the last year or so. It is not just that hedge fund managers are discreet, but they are usually precluded by law from talking to the press, so it is hardly surprising that they have not got their message across very well.

    Hedge fund strategies almost exclusively came from the banks' own prop desks, and discovered that they could earn more outside the bank doing the same thing, which spurred the banks to pay their revenue generators a bit more.

    We have known for years that bankers are greedy. And that is why regulators exist. But the regulators were asleep because of the political conflict of interest. The massive expansion of the public sector has been financed by the financial services sector's massive fiscal contribution and higher average tax rates than other sectors.
    Of every £1bn in bonuses, over 60% goes straight to the Treasury without touching the sides. Do the maths.

    Socialism definitely has a place in society, alongside free enterprise, and the welfare state is of benefit if it does not create excessive anti-darwinist tendencies. However it is the private sector, and especially financial services, that have been financing the welfare state. So if the short-termist electioneering socialists get their way, there will ultimately be less fiscal revenue for the "good works".

  • Comment number 37.

    You've presented a very balanced argument here, Robert.

    But it has to be said, the Chrysler debacle is a bit of an object-lesson on some of the recent Private Equity dealings

  • Comment number 38.

    All aspects of the financial world were to to blame, as well as the man in the street. Surely, the only key to all this is how do you keep human greed under control. Man earns 100,000 - not good enough, wants 1,000,000, makes 1,000,000 not good enough, wants 10,000,000. Man borrrows 100,000 for lifes luxuries, not happy wants to borrow 1,000,000.

    You cant control human greed, if you could there would be more distribution of wealth but what you can do is produce systems that at least keep human greed both lender and borrower in relative check. Concentrate on ensuring short term gains arent possible for lenders, they are the key as they lend the money, if they are responsible, Joe loggs cant get into debt anywhere near as much.

    All bar the first £10000 in bonuses in FTSE companies to be paid in shares, yes you can cash them in but only after 1 year at 98% tax rate, after 2 - 90, 3 - 80, 5 -60, 7 years totally tax free.

    Abuse of systems should mean automatic 10 year prison sentences but then that means the authorities doing something they palpably fail to do, and that is to regulate and punish.

    Everyone needs reigning in, knowing they WILL be punished for misdemeanours

  • Comment number 39.

    Robert after reading your article I'm not sure whether you are for or against hedge funds. From what you have written it appears that you want run with the hare and hunt with the hounds when it comes to better regulating or controlling the way that hedge funds are managed.

    Whilst in principle hedge funds might be considered a good thing if they are genuinely able to identify specific bussinesses that are not being well amanaged, the shady dealings and underhanded way they conduct their bussiness affairs (with little or no risk to themselves) suggests they leave much to be desired.

    Unfortunately because these people can make vast fortunes without being properly regulated, that means this type of trading is bound to attract all manner of charletans and other equally dubious characters posing as business experts but in reality all they are doing is cleverly manipulating the markets in pursuit of huge short term gains.

    In their pursuit of short term gains these hedge fund managers might well be destroying that are quite sound but might be experiencing a short term seasonal or product downturn cycle. As we know these hedge fund managers have a voracious appetite for short term gains and that is not necessarily good for our businesses or our economy as a whole.

    That I suspect is why the hedge fund industry grew so dramatically over a relatively short period of time and in doing so they managed to suck vast sums of money out out the recognised banking system. It therefore is no wonder that the big banks and the bankers running them decided if you can't beat them then lets join them in order to gat a slice of the action and rewards, regardless of the long term effects this would have on the financial markets.

  • Comment number 40.

    To Mr Bank..... @ 25
    For the record; I spent over half of my working life in "Industry" and was born and raised in an area that was AND still is predominately industrial.
    I also spent several years in the Middle East and Far East.
    Please read what I wrote;
    Now retired having left school in 1954 I have some experience of "trends"
    We cannot, for a whole (and non retractable) variety of reasons never regain our Industrial strength.
    Perhaps you would care to explain why Japan and Germany both industrial giants, with huge capacity and large population are no less worried than the UK.
    It is because they have "too many eggs in one basket"

  • Comment number 41.

    For quite a while Brown and various G7 / G20 leaders have been talking of greater oversight of banks and financial institutions.

    Talking about it is easy. Actually agreeing the level of what would presumably be quite intrusive regulation is going to be hard.

    The EU proposals have already raised the hackles in the City. Yet many MEPs and Commissioners think the suggested regulation is much too soft. I bet this will roll and roll and roll...

  • Comment number 42.

    Robert,

    I think this targeting of banks, hedge funds and buy-out boys is a convenient fig-leaf to cover up government / regulator responsibility for the system-wide breakdown now underway. Corporate capital gearing ratios were known to be historically high and the BoE were publishing papers on this viz stability.The aftermath of telecoms companies gearing for the 3G auctions which Gordon Brown proudly pioneered to raise 22 billion for national debt reductions. There were clear understandings that the tax advantages of debt finance, its relationship to control of companies, its relationship to profitability and growth were all matters the BoE were keeping a very close eye on in weighing the risks of defaults. In fact, high gearing was a product of macroeconomic stability achieved through low inflation, stable and low percentage interest rates - everything the Government and BoE were proud of. OK, you could say the banking intermediaries amplified the problem but this is only part of the story.

    I remeber you, Robert, in one of your books, criticising lumpy public companies for not exploiting the opportunities leverage could offer in terms of extracting more shareholder value for us and our pensions. The Philip Greens were extracting value through debt finance which institutional shareholders were overlooking.

    Come on - lets get real on why we are where we are and who takes responsibility.

  • Comment number 43.

    I think it's very difficult for a regulatory requirement 'fit and proper to act responsibly' not to end up correlating with 'a generous donor to the political party currently in office'. The rules are already reasonably good at keeping convicted crooks out of the financial services industry, and I'd be very wary of using a measure less strict than conviction.

    I tend to believe in sunlight as a good disinfectant, and to distrust arguments about the value of proprietary trading policies; "hedge fund" has become a word that means only an opaque financial institution. This was almost reasonable when they were purely methods for people with lots of personal money to try to get skilled dealers to increase their wealth; it became pernicious when institutions whose money came in from individual investors started allocating money to hedge funds.

    I don't see a public-policy argument to continue to allow this degree of opacity: publish all holdings greater than 0.1% of capital and all trades with a one-day delay, or face a substantial tax if you move your operations out of the country to escape regulatory surveillance.

  • Comment number 44.

    Peterbolt @40: I agree that Britain probably can't hope to be a hotbed of bulk manufacturing, at least without the enormous dislocations required to get salaries down to Thai levels (and even then we wouldn't be competitive with Chongqing; I'm picking Thailand as a country with GDP per-capita roughly equal to world average GDP per-capita).

    We still have quite a lot of capital left, so can we not hope to make some kind of a living with specialist objects which are essentially made of capital - jet engines seem a good example, a field full of cases where you need ten minutes work on a five-million-pound piece of temperamental equipment whose design and certification took three years to produce an object you can sell for a thousand pounds. It won't employ all that many people, but then again neither did the heavy-duty bits of the financial industry.

  • Comment number 45.

    The greedy lying envious lazy aggressive ignorant bankster masterrs of the 7 debtly sins pile up, put all their shareholders and customers wrigglys in one oversized inflatable butt provided by the hedgies to egg them on and then waited for the patter of little feet ,now they will have to wait till their Brown Mccows jump over the moon and come home whilst the hedgie spoons run away with the dish they fed them .

  • Comment number 46.

    If only it was so simple. Over leveraged hedge funds, Inadequate capital ratios at banks, mega bonus management, and the rest. But what we should all notice is the remedy, it is always a directive from above.

    In the end the problems all come down to management practice. We and other countries, have for a long time, been adopting a managment structure that removes from the experienced shop floor the ability to make decisions in the interest of the organisation and clients. Whether it's foolish income multiples for mortgages, or the removal of all powerful ward sisters in the NHS, we have adopted management from the top informed by statistics, surveys and tick box procedures. It's called de-skilling but that is a misnomer. The same skills exist they are just ignored. It would be better called de-trusting.

    It hasn't worked. The banks have all gone bust. The NHS kills more people from diseases they catch in hospital than die from the ailment they came to hospital with. The remedy is always some directive from the top rather than giving branch managers, department heads or ward sisters the authority to sort it out.

    Every ship needs a captain. And each captain, officers he delegates to and backs 100%. An officer or captain who isn't up to it soon becomes evident and can be sacked.

    It's not rocket science, it's just trust. Without it the quality control disappears, employees give up doing the right thing for the business and client and just hit management targets. This is everywhere, civil service, financial industry, retail. You name it and that industry is dominated by it.

    Unless we start pointing this out, it will continue. Things won't change. We'll be back here again, and in the meantime all of us will be afraid of going in to hospital.

  • Comment number 47.

    I do not recall how many times I have posted this, but if the regulatory authorities had allowed the Nobel prize winning geniuses at LTCM to go bust in the late 1990's and take all their economic rocket science with them, I am sure we would not be in this situation now. The boil would have been lanced sooner and less painfully.

  • Comment number 48.

    Robert,

    "The disease (and I oversimplify here) was an excess of cheap money married to the greed and stupidity of banks and bankers."

    This is the most one sided, biased, inaccurate, sub-standard piece of journalism I have almost ever seen on the BBC. You are a reporter - your job is to report the facts. Your brand of populist sensationalism, which has such a large part in the misconceptions being widely touted in today's society, has gone a step too far.

    This article will be being reported to Ofcom.

  • Comment number 49.

    Did you really write

    "the pay-packets that bust their pants"

    ?

    [cringe]!

  • Comment number 50.

    Neither hedge fund nor private equity companies create much that is genuinely new.

    Despite their alledged success it is very noticeable that the UK has created significantly less new companies in the past 20 something years than our competitors.

    Personally I'd just close them down because I really don't see what possible use they can be in creating a properly balanced economy.

  • Comment number 51.

    Private Equity - A business where you buy something that's undervalued and with a sleight of hand you refinance it and simply move all the debt further down the time line and then take the profits TODAY.

    Derivatives - Initially sensible financial insurance for commodities to protect against unforseen elements (like the weather) which were developed to such an extent they now are used to bring future profit (or losses) into the present.

    Both are examples of 'getting ahead of yourself' and bringing future income forward to today.

    All well an good as long as there is future income - as we are finding out now there isn't a future income which is why the income of today has vanished and in fact is retracting (we have already spent more than we will earn)

    Both operations work on the premise that there will always be future growth - and often, future growth by a greater degree than today.

    This is why the Governments around the world desire not just growth, but 'growth of growth' otherwise their rich friends won't be able to make money today on tomorrows earnings.

    ....and we need these industries because?

  • Comment number 52.

    Today's pointless banking story really does take the biscuit. Mr Peston has managed to write this essay about Hedgies and avoided mentioning that on this very day the 40-odd Hedge funds (that make up Cerebus) have refused to agree to the Chrysler deal because they want more money; so Chrysler will go into Chapter 11 bankruptcy tonight at 11.59 EST

    http://www.cbc.ca/money/story/2009/04/29/chrylser-fiat.html

    Maybe Chrysler should go into bankruptcy and not come out; the demand for their vehicles no longer exists, and the Fiat deal doesn't look very real to me anyway; but it is a real business story with big implications for jobs, manufacturing infrastructure etc but with the interesting angle of the influence of hedge funds in wider business

    Why is it that some of us bloggers seem to be able to connect more of the dots by cruising a few websites during our tea-breaks whilst Mr Peston, presumably paid a 6-figure sum to know all of this stuff, never mentions any of it........

  • Comment number 53.

    This is just diversionalry tactics.

    What about the huge sums borrowed by Governments? Especially the British Government which has run deficits since 2001 under Mr (Im)Prudence himself Gordon Brown.

  • Comment number 54.

    Turning the clock back circa 28 years I recall a colleague making comments shortly before Rolls Royce Ltd became Rolls Royce Plc, I qoute A Whole New Circus, with the same clowns running it! In other words if you give the lunatics free reign in the asylum, you'll always end up with the same result!

  • Comment number 55.

    "The Brightest and Best"? Don't you mean the greediest and most stupid? who would rush to join their fellows already safely placed in 'private equity' and 'hedge funds'. I think the French got it right. With a Gallic shrug
    they would aim at the smaller easier targets first. Saving the biggest until they were sure they could score a direct hit. French philosopher said - to solve any problem first break it down to its component parts.

    Any chance of seeing your interview?



  • Comment number 56.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 57.

    Yes, but what is it that the European Union is trying to achieve? This is not clear.

    A nice bit of reactionary retaliation against institutional failure or a refocussing of value within the EU from services to industry? The latter would not go amiss; the former would be pointless.

    There is a need to review what we call the financial services industry so that it serves the financial needs of wider society rather than servicing its own financial needs. The context of financial services is everything and that has to include value gains within the wider society.
    In previous times the City did this fairly well and was largely respected but since it abandoned reality it has earned only our contempt.

    I should think that the reintroduction of the concept of value would greatly aid our financial services industry as it would help them to connect with the reality that underpins successful finance.

    However, this is, if anything, a moral issue which cannot be legislated into existence. I would say that our governments have far too much faith in legislation and so a lot of their legislation assumes either a malign nature or becomes a cover for grotesque incompetence. This is why I am of the view that whilst the bankers became incontinent in their behaviour, the regulators became as much part of the problem as the political class failed to call a top to the market.

    Our entire situation is down to a failure of judgement across the upper echelons of our society. This poor judgement continues as all we are getting at the moment from the great and good is a desire to get things back to where they were before. This is just not going to happen.

    We need to move on to getting our current problems under control and dealing with the debt hangover. I see no sign of that. The recession (slump?) will only get worse while our leaders do nothing; to coin a phrase.

  • Comment number 58.

    Hedging is a side isssue.

    What about the US accounting system led by that great man Bernie Madoff?

    What about the UK regulatory system led by our great leader?

    What about the huge personal and business debt?

    Until all this fake money and systems are of the system no one can plan or forecast anything.

    It must be worse for the Chinese who probably have twice as much manufacturing capacity as the world needs in the future.

    Budgets? Planning? Forecasts?

    Bah Humbug


  • Comment number 59.

    I have to agree with "6. At 09:49am on 30 Apr 2009, honestgeraldinho"

    this whole, 'lets blame someone else other than the person who did it' mentality is what is bringing the whole country to it's knee's.

    examples:
    Bankers greed - lets blame the regulators
    Baby P - lets blame social services/doctors/police
    I crashed my car - blame the garage for selling me a car that goes fast
    smoking related health issues - lets blame the tabacco companies
    I'm fat - think i'll sue McD's/pizza shops/cake shop etc

    Wake up Britain/the world and take some responsibility for your own actions and stop looking for someone else to blame other than yourself.

  • Comment number 60.

    maria-ashot @ 16 - Your comments about the use and understanding of English language are noted but there is more to it than that. One of the major things wrong with the make-up of the political and business leadership in the UK is herd mentality - they all think and act in the same way. So when we have a crisis, (such as now) it affects most institutions in exactly the same way because they have all made pretty much the same mistakes.

    If you take a look at the leadership of the major political parties, the government apparatus (regulators, mandarins) as well as CEO's, COO's and CFO's at major financial institutions and you'll see that the majority of them were educated at the same group of "elite" secondary and tertiary institutions (e.g. Eton, Fettes, Oxford, Cambridge, LSE, etc etc). Individuals who were educated at other more "exotic" places or who come from alternative backgrounds don't tend to make it to top leadership positions though there are exceptions and things are slowly changing. The USA is a little bit better in this regard but the UK is really backward. Take a look at the CV's of executive and non-executive directors at FTSE 100 companies and you'll see what I mean. Even worse, in the 21st century, the UK leadership from Boardroom to Parliament is overwhelmingly Male, White, and middle-upper or upper class. Where is the room for alternative thinking?

    When someone dares to suggest things might be done differently (as happened in HBOS with their risk manager) the response is "What's wrong with you? That is not how we do things around here!"

  • Comment number 61.

    #52 Somali_pirate: Maybe the hedge funds need more money from Chrysler to offset the losses from their leveraged real estate positions. Average house prices in Detroit now down to about $7,500. (Source Chicago Tribune).

    Could be an ideal buying opportunity for all those Brits obsessed with house prices. Apparently the murder rate is also down by 14%, so no excuse really for all those would be property investors. No need for a mortgage - you can do it on credit card.

  • Comment number 62.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 63.

    From a speech by Sally Dewar, Managing Director, Wholesale, FSA

    "Going back five years, to an economy with much more benign conditions, where there was legislation that made pursuing a criminal conviction for fraud near impossible."

    "NEAR IMPOSSIBLE" crikey WHY and who's fault was this Robert?

  • Comment number 64.

    nos 63

    I should give the reference :

    http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2009/0427_sd.shtml

    Although I suspect it wont work on here it hasn't on previous posts for some? reason.

  • Comment number 65.

    Greedy Hedge Funds looking to make a quick buck are very much to blame for the current economic situation.
    Regulators should have stopped them from selling shares they do not own and from buying oil when they do not run oil refineries. By manipulating the normal market forces they have caused this big mess.
    There is nothing wrong in making a good investment, like buying shares in a pharmaceutical company with a blockbuster drug. But would the authorities allow them to buy up all the stocks of a certain anti viral drug in the current swing flu scare?? I think not!



  • Comment number 66.

    I think this is indicative of much of what is going on at the top. The French typically barking up the wrong tree in the deliberate hope it deflects blame away from the real culprits. The UK government, ever mindful of a near election, just want to bury their heads in the sand, desperately hoping the crisis goes away, (lest it ruins their re-election chances,) and the U.S. government throwing money at the problem with defeated Republicans in the background accusing the new administration of rampant socialism, conveniently forgetting this Global financial crisis occurred on Republican watch!

    The credit explosion fuelled conspicuous consumption for millions of Westerners and all they seem to want to do is get back to consuming conspicuously as fast as possible.

    Given the political conflict of interest, i.e less bank profits means less tax receipts, it is hardly surprising that the will to regulate or change systemically has about as much effort as a limp-wrist, gloved in apathy.

    Failing to let banks go bust and give us a brutally shocking taste of our own medicine has just hood-winked everyone into thinking the credit crisis barely registered - unless you've lost your job, which so far has affected a minority, (approaching 8%-10% of the workforce is out of work.)

    It's as if the credit bubble was the mother of all parties where the alcohol was the credit - which then ran out. A few had more than their fair share but what we live for is the hope that the beer lorry will be back soon, encouraged by savings and investment companies saying now is a good time to buy stocks (because their jobs depend on it? Perish the thought) and Estate agents insisting house prices have bottomed.

    If you want to take responsibility for making sure you are not affected by the next one (credit crisis) you will pobably have to appreciate that you are on your own. The rest don't want to know how real life might get ugly when the idea of an ever expanding the money supply finally reaches the end of the road.

  • Comment number 67.

    #52. somali_pirate_SP500 wrote:

    "Today's pointless banking story really does take the biscuit...

    Why is it that some of us bloggers seem to be able to connect more of the dots by cruising a few websites during our tea-breaks whilst Mr Peston, presumably paid a 6-figure sum to know all of this stuff, never mentions any of it..."

    Mr Peston cannot possibly write about everything that is happening in the world of finance and business every day, nor should he be expected to. And he should certainly not be expected to write only about things that you and a handful of other internet bloggers want him to write about.

    As you said, there are a lot of websites offering insight and analysis. Read them all. Build the big picture yourself.

  • Comment number 68.

    The French and the Germans have private equity. It is called nationalisation or government/local government ownership. They own most of the UK's electricity industry and soon will own a lot more.

  • Comment number 69.

    I've just had this weird idea of scrapping all of the world's currencies and replacing them with a new global currency. All old money, whether this is money saved or money owed, is invalid. Everyone gets the same amount of new money.

    The new rules are that the total value of everything you own can never be above a certain amount - this would be generous to a T. Anything above this limit becomes public property. Greed, effectively, becomes purposeless.

    Can someone pinch me or hit me please? I must be going mad. This will never happen.

  • Comment number 70.

    All,

    Thanks for the general interests shown yesterday on the blog concerning the lobby group and the posts by myself (click on my name to see them) pointing out the 'unspoken' underlying false premise of the endless arguments on the economics of the issue at hand.

    Apologies I can not offer the responses many of your posts richly deserved as I am on my lunch hour right now and I was sleeping when you posted them yesterday!

    Suffice to say that the lobbygroup org and the blog associated with it is indeed the place we are trying to set up. Volunteers in the background are using their own time to develop a more comprehensive site to try to publisise the underlying concerns above the academic economic arguments, to at least debate it!! Something the mainstream media is not offering.

    This is however a slow process as we are individuals with jobs and families and not much time or resourses to spare to dedicate our time to it, nor are we part of any political group or organisation, we just want another side of the ideological aspect of this at least to be debated. At the moment it is being buried under endless discussions on economics most people would not understand.

    I think they would understand the fact that perpetual growth is not a viable model for running the world when the population, available technology and ever depleting resources no longer balance.

    In nature (of which we are all part)ther is another thing that has the characteristics of perpetual growth within an organism, and we all know what happens if that is not treated in time....

    Just to re-iterate this is not about re-instating communism, communism failed for a reason, this is about trying to come up with a new ideology to debate and if nothing else at least offer a foil to the current blind acceptance that free market capilalism and a perpetual growth model are perfect. The reality is it is not even a reality that is sustainable let alone perfect!! We are been led down a blind alley by the architects of the system whom stand to make the most from it continuing as is...with NO DEBATE.

    I had better get a sandwich now!

    Jericoa

  • Comment number 71.

    Wonderful, totally biased, fact free posts here. I shudder with delight at the lack of knowledge of what hedge funds and PE actually does - to lump them together is to compare apples and pears.

    Effectively PE and hedge funds are operating on different time scales.

    PE is a medium term, sometimes long term play, they buy underperforming companies using debt rather than large amounts of equity, improve the performance using the increased cash flow to bring the debt down such that even if they sell the company for the same price they bought it for they make a massive return - of course they mis-assess thinks, pay too much, find the company was not that underperforming etc but fundamentall PE operates on 2-3 year (sometimes 5 year) timescale.

    Hedge funds operate on a much short timescale because they are pure financial market plays, they believe the market has mis-priced something (shares, commodities or indeed anything else) and deal with it on the basis that the market will self-correct pretty quickly. If a hedge fund has money in an investment for 2 years it means they got the investment wrong.

    Of course there are hedge funds which come close to looking like PE houses but ultimately one is an apple and the other a pear.

    EU wants to regulate this for 2 reasons. France and Germany have never gotten over the fact that the financial markets are centred in the UK not with them and that therefore UK sets the rules - if as a result they manage to seriously harm the economic life of UK that is probably for most of their politicians a very nice bonus. Secondly it is nothing more than a power grab by EU.

    Neither France nor Germany will ever accept the idea that some foreigner can come and buy their companies - of course that fail to ask why the current owners want to sell.

    I am all in favour of openness where PE and hedge funds are concerned but surely the question ought to be why should they be regulated at all? People who invest in hedge funds and PE houses are not ordinary people they are either institutions, pension funds and ultra high net worths who are supposed to be sophisticated enough to understand the risks they are taking - if they get it wrong so be it.

    Banks are regulated because they take money from ordinary people and lend it to ordinary people and companies who should not be expected to follow in detail whether HSBC is more risky than UBS or Barclays

  • Comment number 72.

    #52 Mr.S. Pirate,

    I suspect it has something to do with that chat he was invited to with the T.S.C. The tone and aim of reporting has since been far less investigative or unique.

    Rather it seems to be following the same ludicrous pattern of reporting that we are seeing, day in and day out, in the media these days. Who, if many of the posties here were in charge, should be screaming for answers. Knocking on the doors of No. 10 and the BoE until their skin comes off.

    These are not ordinary times, history is being repeated, unfortuantely most people don't like history and would rather do a business NVQ.

    Robert was an excellent reporter, until he was frightened off by the big boys. now he's still trying to tell us some things but most blogs and reports appear to be rhetoric of Brownian quality.

    Howay, Robert stick your neck out! We know you want to!

  • Comment number 73.

    Nice work by Maria Ashot and Somali Pirate.

    Mon view, mes amis, is that though primary blame surely has to rest with banks AND private equity ANd hedge fund (and probably a few other types of stripy-shirted miscreant), there has been a fundamental breach of duty by those who were supposed to police their activies. I don;t mean the likes of the Fundamentally Supine Authority (thankyou, Private Eye), because they were understaffed underskille dand their remit probably never went so far as to deal with the exotic detail of what was being perpetrated. Ultimate responsiblity, inescapably, must rest with GB and his cohorts - our political leaders. It is they whom we entrust with what amounts to a fiduciary duty to ensure that high finance and big business operate in a way that is beneficial (and definitely not cancerous) for the country. Unfortunately, they were too locked in to being pally with the shysters, and too reliant on the prospetity they represented and tax income they generated. It simply could not be spoken that these activities had ot be reined in, much as the whistle blower at RBS got trodden on.

    That, is why Gordon Brown is culpable. He wanted the hot seat, and he's got it. Now his chickens are home to roost, we need him to vacate so someone else - ideally honest and competent - can sort it out. This Robert Peston, is the point which you failed to make.

  • Comment number 74.

    #4
    Lax monetary policy really is the crux of it, the government let the BofE take control of the official discount rate and money supply and so acted as though monetary policy wasn't its remit anymore.

    The problem seems to be that the goverment should have been controlling the credit supply and acting to slow down the rapid growth of credit in our economy. By handing over monetary policy to the BofE the goverment somehow forgot that the BofE doesn't really have any power over the credit conditions.

    Incidentally a good dose of remembering what good fiscal policy looks like would have helped too - why did no one decide to stifle the housing market while it was ballooning out of control and pricing entire families out of the market without access to the aforementioned credit. Stamp duty or equivalent should have been overhauled in to a progressive tax to slow down the growth.

  • Comment number 75.

    The simple truth is that wealth results from manufacturing, from producing goods, stuff that people can use. Is that so difficult for financial wizards to understand?

    Financial bubbles are just bubbles. Anyone who profits from them does so at great cost to others. Society as a whole suffers.

    But who cares? Just find someone, other than ourselves, to blame. Then we can do it all over again.



  • Comment number 76.

    The whole system of Capitalism is the Aesop's fable of the hare and the tortoise.
    Sure Capitalism creates fantastic growth during boom years, but when it hits a bust the tortoise always catches it up and passes it.

    I saw someone in the states talking about the bust like it's acceptable because we have had so many years of good growth. However if you look at the stock market as an indicator then we're back to 2003 levels. That means we could have all had a 6 year holiday and done absolutely nothing except play and laze around and we would be no further forward than we are today.
    (data source here)

    http://www.euroinvestor.co.uk/Stock/IndexGraph.aspx?StockIds=29880,29880


    Sadly there are very few tortoises left in the world and all Governments seem to be keen on the hare route.

    ....but we all know what the moral of that particular fable was don't we....

  • Comment number 77.

    #61 armagediontimes

    I think I'd rather live in Mogadishu than Detroit, but then I would say that; there are $1 houses in Detroit Mich and Gary Indiana etc ... if you are willing to pay the taxes, but they are or will be vandalised, so probably more trouble than they are worth

    That said, it is interesting what lovely houses you can get now in a lot of small-town USA - £150k buys you a big house and garden; very reasonable compared to house prices here in the UK but there is little work and it is low-paid; house prices are still declining in the States and things look far from rosey for ordinary people; credit card debt is another huge 'elephant in the room' problem over there and must be weighing the US banks down, whatever the dubious stress tests run by the highly suspect Mr Geithner (the bankers' friend) might say

    credit card debt problems also growing fast here in the UK of course, as we love copying everything that our American friends do; not something Mr Peston is likely to need worry about, with his BBC credit card good anywhere in the Square Mile and up to 5 miles beyond

  • Comment number 78.

    8 BankSlickerminustheR

    Think it goes way back, British Empire trading, finance to exploit differentials in goods, good profits, short term strategy. Innovation is hard work and long term, yes we had the industrial revolution but the main wealth was empire trade. Many industrial developments might have enabled more trade but did not return long term profits, eg canal network, trains. Cultural problem. Short termism.

  • Comment number 79.

    23.

    Answer to your question is either;

    A. The market priced in Armageddon (at least in the most leveraged stocks)and there is a growing sense that that is no longer on the cards

    or

    B.Irrational exuberance

    Take your pick. I know which most of the readers of this blog would choose.

  • Comment number 80.

    Why have the regulators all gone unpunished?

  • Comment number 81.

    #60 phire1

    I pretty much agree with you, but I would factor in another thing.

    It's an influence that has come particularly from the USA over the last couple of decades. It's basically the idea that I'm going upwards, and to do that, I'll push downwards whoever I need to. It tends to make heroes of those who belittle and/or set up their co-directors or colleagues - he damn well showed that wimp!

    It's not even just about making money. Indeed, it has a kind of disembodied ruthlessness to it. Even if your not making any real money, there's still some sub conscious social imperative, for some people, to splatter the competition, the other side, the enemy.

    Is it just language, as maria-ashot suggests, or is there something more cultural that we share with our American cousins, that gives us a greater tendendy to this than, perhaps, continental Europeans?

    It's not unlike the mindlessness that says because you support a different football team to mine, I've got to give you a damn good thrashing. It's a kind of overzealous, almost obsessive, competitiveness.

    For want of a better phrase it's a kind of sponsored bullying, but somehow we accept it as a norm for some sorts of businesses, especially financial ones. Somehow it's "o.k." to behave badly towards others if you make money from it.

  • Comment number 82.

    Robert, people need to be shown by you the distict difference between a Hedge Fund and a Private Equity fund.
    The is a fundamental difference not just on trading timescales but the way they actually make their money.
    It's the same problem when people say we are a multi-cultural country and think they mean cosmopolitan when they are totally different.
    Separating Hedge funds from Private Equity funds is desperately important because one should not get blamed for the others excesses - in this instance Hedge Funds being the classically guilty party.
    But we need to look at money managers as well because they too through the size of the funds they manage are too big for the market and it only takes a small movement to in rates to see them cause disproportionate knock on moves i.e out of cash into equities or vice verca.
    In so far as what the remedy is there would have to be a rethink of how these funds operate as they are equally as damaging but what the answer is - right now I don't know.
    All I do know is that they are huge players and need to be in the equation as well.
    Browns backdoor regulation that funds need to hold more fixed income government debt would suggest he is trying to corner the market in funds to cover the massive shortfall but any government however sly tryinmg that one will see a flight of money away to other centrs because lets face it who can believe Labour now on anything.
    All that is important to realise is that with proper all encompacing well thought out regulation by thise who have a clue as distinct from the FSA who hasn't, there is a way to square teh circle.
    Suffice to say teh primary point is that with the EU firmly in teh driving seat it needs to appreciate where blame lays and not tar the wrong party with the brush of guilt for deeds never done.

  • Comment number 83.

    Pardon me, one more entry - IR35 Survivor says precisely what I to have long felt about what Labour has been up to. Spelling it out, they effectively created voter vassaldom, to wit - turkeys don't vote for Christmas but they can be made to vote Labour to keep their (made-up) jobs. So yes, Labour has been buying it's votes by bloating the public sector from tax funds reaped from a phoney boom. Now, truly unthinkable sums are being incurred to try to keep the doomed ship afloat - as it happens it's being kept up by the rocks it is aground upon, but the tide is coming in fast.

    And RP - if nothing else, your blogs provoke comment, so that can't be bad, can it?

  • Comment number 84.

    Why oh why do we always have to follow everything that the US does. Canada is right next door to them and as far as I am aware their Banking system which is based largely on the old British system has come through this "Global Banking crisis" largely unscathed mainly because they stuck to the principles of sound banking. I think the Aussies are largely Ok too. Needless to say their Regulatory authorities were not watered down by people who knew zero about the principles of lending.

  • Comment number 85.

    #67 - RBS Temp - I do not expect, and I do not think Mr Pirate expects, Mr Peston to write about everytihng that is happening in the world of business and finance every day.

    However he is the BUSINESS editor and ALL he talks about is the world of banking EVERY day.

    When you operate in an industry like Engineering or Manufacturing or Construction which are all on their knees in this country and all Mr Peston, as BUSINESS editor, can write about every day is BANKING then it is not acceptable.

    I agree that a lot of his pieces provide a good insight but as BUSINESS editor I would like him to provide me with a broader insight.

    For example a massive BUSINESS story has just broken about Chrysler filing for Chapter 11 in the US - surely the BBC BUSINESS editor must post a blog about this - however I will offer you high odds (odds even RVPisneverinjured would think were good) that Mr Peston will be incapable of addressing this issue and that is what is so very disappointing about his daily diatribe of BANKING stories.

  • Comment number 86.

    69 lukeo1980

    Yes you are going mad....... I bags the esiest job please.... after all there would be no point in working hard, would there........

  • Comment number 87.

    Not a point directly relevant to this story, but Robert I'm sure many people are very interested to know your views on one of the big stories today - Chrysler filing for Chapter 11 bankruptcy in the US. What strikes many of us non-experts is that this mechanism seems a very useful tool in allowing businesses to attempt to sort themselves out while they have protection from their creditors.

    It appears that Chrysler will almost certainly emerge from Chapter 11 largely intact, and with a path forward. Contrast that with the automotive story on this side of the Atlantic, where LDV looks almost certain to fall into administration, whereupon it will be rapidly consumed by its creditors. Can you explain for a general audience why the UK has no equivalent of Chapter 11, and whether it would be possible for something similar to be set up in the UK?

  • Comment number 88.

    #71 Justin150

    ....and translated for the rest of us that means....

    "they buy underperforming companies using debt rather than large amounts of equity"
    - which is a very interesting concept at the moment, surely HSBC were 'underperforming' as were Standard Charter - well at least until the world realised that companies like RBS were making them look like they were underperforming - which of course with hindsight we know why.

    "improve the performance using the increased cash flow to bring the debt down"
    - with magic tricks that simply create cash from thin air. Usually this is re-negotiating the debt on a longer term, reducing the payments but incresing the lifetime of the debt - a bit like re-mortgaging your house - you save payments in the short term but you keep moving the end date of your mortgage so it's still 25 years long even though you've lived there for 6.

    "Neither France nor Germany will ever accept the idea that some foreigner can come and buy their companies"
    - it's odd they should think that as both countries seem to own a lot of out companies (EDF for example).

    "People who invest in hedge funds and PE houses are not ordinary people they are either institutions, pension funds and ultra high net worths"
    - Oh, so that pension fund I am looking at right now for a rather large public media company isn't investing in a hedge fund - ah well I had better remove that holding right now - off he comes. The beauty of the giant pyramid scheme is that NOBODY knows what ANYBODY is investing in anymore - remember diversifying risk? - well this is how we are ALL invested in these funds. I didn't realise until recently that my Stocks and Shares ISA invested in a fund, which invested in a hedge fund which had invested in a Stanford fund - when I received a letter about the bank intending to chase the losses I was rather surprised.

    "are supposed to be sophisticated enough to understand the risks they are taking - if they get it wrong so be it"
    - so that private pension you were all forced into taking that's now worthless - then so be it.

    There's one phrase to sum this all up.

    "Don't try to frighten us with your sorcerer's ways, Lord Vader. Your sad devotion to that ancient religion has not helped you conjure up the stolen hedge fund money, or given you clairvoyance enough to find the Rebel's hidden millions..."

  • Comment number 89.

    As someone who has worked exclusively across the hedge fund sector over the past 7 years implementing process based investment management systems (ISO 9001 etc) to ensure investment processes are clearly defined, effectively implemented and closely monitored, I have some understanding of how robust the infrastructure of hedge funds and fund of funds actually is.

    The bottom line is that some hedge funds/fund of funds have clearly defined, transparent investment processes which they follow rigorously, coupled with an independant due diligence function, genuinely and deliberately separated from analysts/traders (investors/risk takers). Other hedge funds/fund of funds have a 'back of a fag packet' approach to investment based on industry contacts and formulaic investment strategies. The hedge fund sector can be (and has been) of considerable benefit to the global economy but the time has come to separate the cowboys from the funds/funds of funds who are exceptionally diligent in the way they invest their clients money.

  • Comment number 90.

    @87 - Administration is actually different to liquidation in the UK as well. Upon going into administration in the UK a company cannot be legally sued for its debts (similar I believe to Chap 11 in the US). A firm of administrators are then appointed to manage the company whilst it is in administration. It is their remit to ensure that the interested parties who are owed money by the company are given the best returns for their money. This doesn't always result in break-up and liquidation - indeed the first thing they are meant to do is to see if the company can "trade" its way out of administration - the reasons that a lot of administrations end up in some kind of liquidation (or break up) is because for whatever reason the business model has become unsustainable (usually the reason why the company went into administration in the first place). The main difference in the UK to Chap 11 is that the management retain control of the company in the US and generally a company "chooses" to go into Chap 11 while in the UK administration is often brought about by someone the company owes money to (sorry, this is a very simplistic explanation and not completely correct but should give an idea of the differences)

  • Comment number 91.

    Good subject Robert.
    The financial industry now has a big image problem.
    Most ordinary folk still regard them as parasites, not "wealth creators".
    A giant leech, sucking on the blood and effort of the working bloke.
    I agree with the French and Germans....the hedge funds are also seen as parasitic and de-stabilising.
    Many of us have pulled our savings out of banks and put them into National Savings etc, and this trend may continue if the banks' image problem is not dealt with.
    They cannot cotinue to pay themselves in millions, which are coming largely from the working man and his kids.
    Hedge funds are perhaps the most prominent face of this nasty, selfish capitalism.
    The 9-to-5-ers of Canary Wharf and Bishopsgate must be taken off their pedestal....they're not worth millions.
    Why are we all working our butts off all day....just to provide more Ferraris, mansions and Carribean hols for these people?
    And when they are in deep trouble, we bail them out and pat them on the head. It's pretty pathetic.
    The parasite image. Deep change is needed.
    Vive la France. Deutschland uber alles.

  • Comment number 92.

    in response to Jericoa #70:

    Good luck and much energy for the long-term commitment you will need to make a contribution to improve the slighty mismanaged UK society.
    One of the best web sites where serious in-depth discussions take place of the underlying assumptions of current ecomonic ideologies is Steve Keen's Debtwatch Blog at:
    http://www.debtdeflation.com/blogs/

    He has written a bestseller called 'debunking Economics'

    Happy reading! A little caution though: serious thinking is required to follow the arguments.

  • Comment number 93.

    Mr.Robert Peston's piece, I may be forgiven for feeling,sounds like apolegetics for hedge fund managers and private equity firms.They need to be regulated if not dismantled.The hope that that their managers have learnt their lessons and will behave responsibly in future is absurd.Molly coddling them will not in any case secure London's preeminent position as a financial centre [if that is Mr. Peston's concern].I am astonished that highly qualified [I mean phds in economics from Princeton to Oxford]and experienced policy - makers are refusing to acknowledge that a specific economic model has collapsed and is beyond recovery at least in its current form.Every one is hoping that status quo ante will return.But it is unlikely. For the structure of economies and the underlying behaviour patterns of economic agents have changed.The young consumers have been led up the garden path and made to believe that they can live without saving.Hopefully they had a rude awakening.Incidentally they will figure out what is good for them --this is in a broad sense the assumption of economic rationality. Further the interactions between powerful national economies are undergoing radical changes. Those at the helm of affairs will be wary of making things plain and thus scaring an already anxious public.But media should hold the financial establishment to account. Mr. Peston appears to imply that public anger at hedge funds and private equities is misdirected and and grounded in dubious psychological motives and ignorance about sophisticated financial instruments and entities.This approach is a form of gnostism.Public should disabuse itself of the notion[which is sedulously fostered]that its finacial security lies in handing over hard earned savings to guys for speculation in stock markets, currency markets and commodity markets.Governments should create fail-safe mechanisms for providing modest but assured returns to pension funds of working population.The present economic models--at national and global levels--need careful study free from political correctness and cant.

  • Comment number 94.

    #49 FreedomIW

    Yes - loved your comment and ROFL - double cringe even - funny thing is this sort of phrase would normally be heard from working class people who had done a 'double shift' - who has Robert been mixing with ?

  • Comment number 95.

    As a seasoned business man with 2 businesses where one has suffered due to the downturn in production at Nissan Sunderland, I would like to say that throughout my business life, takeovers and buyouts have seemed to me to be a really bad thing. Therefore, I feel I should take issue with your rather tentative, nay piffy comment, 'The best hedge funds serve to make markets more efficient, by identifying when assets are chronically over-valued or under-valued'
    These buyouts generate huge fees, for due dilligence and accounting and sloicitors fees and it is my contention that this group of individuals are the only ones to benefit from the buyouts, often at no risk to themselves, but at the same creating huge risk to the business and its employees. Answer this question - who has benefitted from the Mittal buyout of Arcelor - the money wasted in that process has not helped anyone at the mills. If a business is a good business then its bank and directors should easily know if it is over or under valued and what does that statement mean anyway - in the real world of actual business. so much activity goes on regarding floatations and takeovers, and a lot of money is wasted in fees. Take Lastminute.com that company has never ever made a profit and had to sell out, but it did not prevent Martha Lane Fox from selling her shares for a massive profit to her personally, and the company had to sell out to a competitor in the end. It is like 'who here are a load of perfectly good businesses on the stock exchange, if we can get a convincing prospectus together we will convince investors, and then we will make a fortune from the process and who cares if it is succesful or not' I thinl combined private finance, especially using pension funds should be banned or need to be allowed only if it benefits the employees and directors and with a 5 years probationary period so that if the prospectus proves to be less than realistic the people that have written it are taken to task.
    Nice blod though Robert, but I wish you would talk in local and not global terms because our future will depend mor and more on what happens down the road than in America Europe and the East and the sooner we learn to be more partisan with our pound the better. Willymanc

  • Comment number 96.

    Robert

    Have you reported on the attempted David and Goliath takeover of VW by Porsche?

    Now THERE's great story for you if you're in a hedge fund bashing mood...

  • Comment number 97.

    Writing on the wall:

    "it's odd they should think that as both countries seem to own a lot of out companies (EDF for example). "

    I agree it is odd but it is Germany who called PE houses a plague of locusts (for example), politicians in those countries really dislike PE and hedge funds.

    As a holder of a pension scheme I have, like most, seen its value fall alarmingly. I have suffered but the mistakes were made by the people running my scheme, they are regulated and if they have gone outside the regulations they will be penalised. Of course you can make it the case that pension funds cannot invest in high risk investments but then there is the consequence that pension fund long terms returns will be lower and this means I have to put more money in - which I cannot do because Gordon Brown has taken away all the tax incentives to do so.

    The point remains the same - institutions, be it pensions funds or banks who deal directly with the general public must be subject to tight regulation. Institutions in the wholesale institutional market should have lighter regulation because they are supposed to be able to assess risk and if they do not they suffer. What govt forgot is there is an overarching regulatory need that has to apply to both retail and wholesale market - namely you cannot allow the whole system to be put at risk. So not only did institution risk analysis fail but so did the regulatory system. It was not the PE houses and hedge funds who did this (they are, at best very minor players) but the banks.

    You also totally misconstrue what PE houses do. They do make real changes to the way the businesses they buy are run. This is not slight of hand but actual changes on the ground, be it removing unnecessary costs, changing market focus or something else. Sometimes they get it wrong but most of the time they get it right. In the last 2 or 3 years what went wrong in PE was not the because PE is wrong in principle but they simple paid too much for too many of the businesses they bought - which means they had to make really big changes in the business - and the reason they paid too much was there was too much cheap money.

    To use the mortgage of the house example. PE buys the house for £100,000. £10,000 is PE cash, £90,000 is borrowed. If by changing the business slightly to improve cashflow in 2 years time they can reduce the debt to £85,000 the chances are (because companies are usually valued on a multiple of profits) not only will the amount they can sell the company go up but there equity stake has gone up to. So if they sell the house for £105,000 the PE house has doubled its money. It gets £20,000 back on a £10,000 investment. Changing the debt profile does not deliver the same profits to a PE as the house example of actually paying down debt.

    As I said hedge funds are entirely different and should be regulated (if at all) differently.

  • Comment number 98.

    #83 SirusWonderblast

    "And RP - if nothing else, your blogs provoke comment, so that can't be bad, can it?"

    Absolutely agreed.

    O.K. sometimes the contributors go a bit 'off-topic' - though usually there is some degree of link or connection - as they explore the subject and/or associated ones. Though I think that it's good and wholesome for it to encompass a "broad church" of contributors.

    This is a much better and more focused blog than at least one other hosted by the BBC. (Moderators - if you want to know to which I refer, then email me. It wouldn't be right to name and shame it here.)

  • Comment number 99.

    "The disease (and I oversimplify here) was an excess of cheap money married to the greed and stupidity of banks and bankers."

    Good point, but you do over simplify - it was the greed and stupidity of the population as a whole, not just the banks and bankers.

    Somehow, our collective responsibility for this mess seems to have been forgotten in the rush to find someone to blame.

  • Comment number 100.

    @95
    you have explained very nicely why hedge funds are not the the bees knees

    Greed is not good

 

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