Hedge funds seek refuge from unfair European regulations
Lobbyists defend the interests of corporates against disruptive technologies, writes Paul Marshall
If anyone wants to understand why so many UK-based hedge fund managers are inclined towards Brexit, they need look no further than the European Commission’s response to the 2008 financial crisis, a case study in producer capture.
Rather than a rational, fact-based response, the commission launched an onslaught on hedge funds, leaving the banks and their lobbyists largely alone.
Even shortly after the financial crisis, there was widespread agreement among regulators and central banks about its origins: an overleveraged US property market and overleveraged banks. Hedge funds had a walk-on part, a small number of them as winners from the calamity, most as victims.
Anglo-Saxon regulators focused quickly on the root of the problem. The US introduced the Volcker rule to constrain proprietary trading activity; Britain adopted the Vickers proposals to create a firewall between investment and retail banking. The Federal Reserve introduced bank stress tests as early as May 2009, and over the next six years US bank leverage fell substantially.
Not so the EU. The commission largely ignored the issue of bank leverage, focusing instead on hedge funds. The draft Alternative Investment Fund Managers Directive in April 2009 proposed restrictions on hedge fund leverage, rules on depositories, remuneration, liquidity, valuation, and protectionist measures to restrict the marketing of non-EU hedge funds.
Why did Brussels indulge in such a great act of displacement activity? One hedge consultant received the explanation from a Belgian MEP. “It is simple,” he said. “If you are in a bar and a fight breaks out, you do not hit the person who started the fight but the person you have always wanted to hit.” This would be funny if it was not serious. Nobody feels sorry for hedge funds but the reason the EU’s institutions left banks alone for so long is more worrisome.
The EU’s financial system is bank-centric; the Anglo-Saxon system, in contrast, is “market-centric”. Bank lobbyists patrol the corridors of Brussels and Strasbourg. The French are particularly effective. In France, the banks are part of a power nexus which enables “enarques” to float unaccountably between politics and business. Look no further to understand why the French sought to sneak in to the recent negotiations between the UK and fellow EU member states a new clause that “a single rule book is to be applied by all credit institutions and other financial institutions”. They are very nervous of the new wave of financial sector disrupters.
The result is that while European bank leverage has come down from the heights of 2007-8, it is still on average higher than in the US, roughly 18 times bank equity capital versus 12. Some European banks, like Deutsche Bank and the big French institutions, are still on leverage ratios of 25-30 times, enough to put fear about their stability at the heart of the recent market sell-off.
This little regulatory episode is symbolic of some of the worst aspects of the EU. It is not a parliamentary democracy as we know it. Regulations are initiated by an unelected commission which is schmoozed on a daily basis by lobbyists.
Lobbyists work to defend the interests of incumbent corporates against entrepreneurs and disruptive technologies. An estimated €1.5bn is spent on corporate lobbying in the EU every year.
We can fully expect the lobbyists to work unstintingly for the status quo and against innovation — for the diesel industry and against electric cars, for banks and against financial sector innovators, for big pharma and against biotech innovation, for big appliance companies and against bagless vacuum cleaners — in summary, for big business and against entrepreneurs.
If Britain wants to be a home to innovators, disrupters and entrepreneurs, we will find little help and much hindrance from Brussels.
The writer is founding partner and CIO of Marshall Wace LLP. He writes in a personal capacity