Why are the Germans bashing hedge funds?
First week in power, and already the Cameron/Clegg government faces defeat in negotiations on new European Union rules for hedge funds.
But this is not a case of start as you mean to go on: it is not early evidence that the new administration will be more isolated in Europe than the previous one.
Had Labour been victorious in the general election, it would also have been mugged in the European Council.
Because the British position on hedge funds, for both Labour and the Con-Libs, is to defend what they see as relatively successful British businesses (albeit businesses where the legal domicile is usually the Cayman Islands); whereas a majority of other EU members, and notably the Germans, want to bash the hedgies.
As I've mentioned many times here, there is a widespread view on the continent that hedge funds somehow caused the credit crunch and financial crisis of 2008.
Which is an eccentric view, because even if it's challenging to characterise hedge funds as socially useful, the evidence is conclusive that when apportioning blame for the global financial debacle, hedgies were barely at the scene of the crime compared with many big banks (see my note Hedge funds as heroes for an assessment of what bad stuff can be laid at the door of hedge funds).
Also, many continental politicians and journos seem to believe that the current stresses and strains in the eurozone have been magnified by the supposedly heinous dumping and short-selling of government bonds by hedge funds.
But the biggest sellers of eurozone government bonds have been the trading desks of banks. And as those banks were bailed out by taxpayers - whereas hedge funds weren't - it is slightly odd that the fury of eurozone governments isn't directed against the giant banking groups, rather than the hedgies.
As a friend points out, the behaviour of some banks in trashing the bonds of over-indebted countries is particularly churlish, in that much of those frail countries' debts stems from the costs of bailing out the same banks: that'll teach us to rescue them.
As germanely, the proposed restrictions on hedge funds will have no effect on what they can buy or sell: a hedge fund based in New York will still be able to bet against Portuguese debt if it so chooses; the constraints would be about the kind of risks that a hedge fund that is based in Europe and raises money in Europe can take, not about the scope of trading by hedge funds as a global group of investors.
But even if it may not be wholly rational to beat up the hedgies, it's clear that a majority of EU members are minded to do just that. The new Chancellor, George Osborne, may make a brief show of being the hedgies' human shield at next week's ecofin meeting of European finance ministers, but he knows the votes are on the other side.
So on the reasonable assumption that the UK has lost, what's at stake?
Well a bit.
If hedge funds operating in London want to be able to raise money throughout Europe, they'll have to be domiciled in Europe, they'll have to be more transparent, they'll be subject to new limits on how much they can borrow, and they'll have to place their assets in safekeeping with a single so-called depository.
These are not trivial requirements and nor are they conspicuously benign.
The requirement for a single depository looks particularly weird, because it will concentrate the damage when a hedge fund collapses rather than disperse it.
If for example such a system had been operating globally two years ago, when hedge funds started to worry that their assets weren't safe at Lehman Bros, the run on Lehman by its hedge fund clients would have been even more devastating.
Also rules restricting the leverage or borrowing of hedge funds may not be completely bonkers. But the current draft of the leverage rules is vague - although it's already clear that they would be far more onerous than the leverage rules that apply to a class of institution far more important to our prosperity, the banks.
That said, London-based hedge funds may be able to escape the full impact of these new restrictions, because very few of them are - in a legal sense - British or European institutions; as I mentioned, most of them are domiciled in the Cayman Islands, to shelter the tax of their investors.
So if they insist on retaining Cayman as their official home, they may benefit from a waiver that would enable them to raise money via so-called private placements from professional investors in the UK, though not in the rest of Europe.
In other words, the choice facing London based hedge funds, broadly, is to circumscribe where they raise their money or be subject to much more red tape.
Which sounds more like an annoyance for them, rather than a disaster - and makes you wonder why Germany, France and the others are bothering.