Lonely Battle

Matéria do Herald Tribune

Germany fights lonely battle to rein in hedge funds
By G. Thomas Sims
Published: May 17, 2007

FRANKFURT: Germany will make a last-ditch effort Friday to persuade the world's top economic powers to tighten their grip on hedge funds and private equity firms.
But even before these countries' finance ministers convened at a Group of 8 meeting, the push was being written off as futile - illustrating Germany's isolation in its desire to rein in the booming industry.
In the run-up to a two-day meeting near Berlin that will begin Friday, the United States, Japan, Britain, and Canada - where the bulk of hedge funds and private equity firms are based - have signaled their desire for a hands-off approach toward regulation.
"Central banks and other regulators should resist the temptation to devise ad hoc rules for each new type of financial instrument or institution," Ben Bernanke, chairman of the U.S. Federal Reserve, said in a speech this week.
Henry Paulson Jr., the U.S. Treasury Secretary, has said he would skip the meeting this weekend altogether because of a heavy workload.
Other members of the club - France, Italy and Russia - have given little or no public support to Germany's effort.
Their stance is an embarrassment to Germany, which has made increased transparency of the industry a top priority in its role as the current president of the G-8.
Germany is particularly sensitized to the issue because an intricate system of corporate cross-shareholdings since World War II has long helped shield companies from outside predators. That cozy system is widely credited with helping Germany rise from the rubble to become the world's third largest economy after the United States and Japan.
Now, companies are gradually unwinding their intertwined shareholdings as they restructure amid the pressures of globalization. Although the country has recently recovered from an extended bout as the "sick man of Europe," unemployment still hovers close to 10 percent, and Germans are feeling especially vulnerable to an industry with its roots firmly in U.S.-British business culture.
The German government also has historically played a larger role in intervening in the economy than countries like the United States and Britain.
The rift within the G-8 illustrates the fierce emotions surrounding an industry that is increasingly in the news for buying publicly traded companies, and then sometimes sharply reducing the work force in an effort to increase profit.
In one prominent example, TCI, a hedge fund that invests in ABN AMRO, has called for a breakup of the Dutch bank, which within months rushed to merge with Barclays, a British bank. If successful, the merged bank would be one of the world's largest by assets, but the move has also caused angst among thousands of workers as they fear for their jobs.
On Thursday, funds that invest in Prudential PLC called for the breakup of the company, a British insurer, but the company's management said that it would pursue its current strategy. (Page 12)
Proponents of the role that hedge funds and private equity firms play say that they foster employment and innovation. Many such firms are focused on long-term growth and bring new capital and expertise into a company. At the same time they limit the power of self-serving managers and shareholders to the benefit of efficiency and the most sensible allocation of resources.
Opponents argue that these investors are only concerned with maximizing short-term profit and overburden takeover targets with debt. They also say they put jobs at risk, resulting in a lower tax intake by governments.
Germany, with its tradition of consensus politics and co-determination between labor and management, has come to symbolize this critical side. During the most recent federal election, politicians began to refer to such investors as "locusts" - for swarming in from great distances, like the United States or Britain, and stripping German companies of assets, costing jobs.
Last year, Blackstone, one of the largest private equity companies, bought a stake of nearly 5 percent in Deutsche Telekom and has been pressing for change ever since. During the past week, employees have been on strike because management of the former telephone monopoly wants to increase working hours and cut pay for 50,000 workers.
On Wednesday, Michael Frenzel, the chief executive of TUI, the German travel company, tried to soothe employee fears that the company was in "danger" of being taken over by a hedge fund after it posted steep losses.
Speculation is mounting that Siemens, the vast engineering and electronics company, is also ripe for a breakup bid by an activist investor. The company is suffering from a power vacuum after its top two executives stepped aside last month over a widening corruption scandal. Siemens has warned that it could face steep fines stemming from investigations like the one under way at the U.S. Securities and Exchange Commission.
On the other hand, there was little complaint from Germany this week when DaimlerChrysler announced that it would sell its Chrysler unit to Cerberus Capital Management, a private equity firm.
Peer Steinbrück, who as German finance minister has led the drive to rein in such investors, has argued that hedge funds and private equity firms need monitoring because of the risk they pose to the financial system. He often refers to Long-Term Capital Management, the New York hedge fund that nearly went belly up in 1998 and prompted the intervention of the Federal Reserve to control fallout in financial markets.
Steinbrück had hoped that this weekend he would persuade G-8 finance ministers to get hedge funds to agree to a voluntary code of conduct. Such a code could call on funds to disclose qualifications of staff and their methods for managing risk.
The United States and other opponents favor indirectly monitoring hedge funds through their dealings with banks, insurance companies and other lenders that are already subject to regulation.
The United States tried to play down differences Wednesday. Clay Lowery, the assistant Treasury secretary for international affairs, said that "there probably is not as much disagreement as people have made it out to be." But he also said that Germany's desire for a code of conduct for hedge funds was not necessary.
Last week, Steinbrück failed to get his counterparts in the European Union - which includes Britain - to back him in his effort ahead of the G-8 meeting. At that time Steinbrück began lowering expectations for striking a deal this weekend, though he vowed to try, and said he would try again at a later summit meeting of G-8 leaders.
Meanwhile, Germany is going it alone.
Last week, the government announced that it would soon propose a law to require investors who build up a stake of 10 percent in a German company to make their intentions clear. Steinbrück fears that some German companies might be vulnerable to a takeover or breakup if they do not know who their shareholders are.
As of earlier this year, investors with more than a 3 percent stake in a company are bound to announce their holding. But the government still fears that many investors conceal their identities behind a bank buying the shares on their behalf, and that numerous investors can band together to build up a common stake and hide in the cloak of anonymity.
Switzerland is in the process of closing legal loopholes that have allowed the raiders to sneak up on one Swiss company after another. Yet even the Swiss are not rallying to Germany's side.
Last week, Thomas Jordan, a member of the board of Swiss central bank, gave a speech in Berlin at an event sponsored by the Swiss embassy and Switzerland's influential banking organization.
While there might be individual cases in which private equity involvement might not be in the best interest of a specific company, "it would be premature and risky on the basis of individual cases to introduce disproportional regulation," he said.
Jordan warned that regulations in the name of transparency must not stifle investment.